Start with the money you want to keep
Not revenue. The amount you want to pay yourself in a year, after the business has paid for itself. Write it down before you look at any other number, because every step after this is just dividing it up.
If you have never set a figure, use what you would have to be paid to do this job for somebody else, plus something for the risk of it being your name on the invoice. A number that is lower than you could earn working for another shop is a number that will make you resent the business in about eighteen months.
Add up what the business costs before you do any work at all
This is overhead: everything you pay for whether or not the phone rings. It is almost always larger than people expect, because it arrives in small pieces across the year rather than in one bill.
Go through twelve months of bank statements rather than working from memory. Memory leaves out the annual ones.
- The van: payment or depreciation, insurance, fuel, tyres, servicing
- Liability insurance, bonding, and any license or registration renewal
- Phone, internet, and the software you pay for monthly
- Advertising, your website, and anything you pay a lead service
- Accounting, legal, bank and card processing fees
- Tools and equipment replaced during the year, and the loan on any big one
- Rent on a shop or yard, if you have one
- Training, certifications and the time spent on them
Work out how many hours you can actually bill
This is the step that wrecks most rates. There are 2,080 hours in a 40-hour working year, and you will not bill anything close to that. Driving between jobs is not billable. Quoting is not billable. Ordering parts, chasing invoices, doing the books, warranty call-backs, training, holidays, the week you are ill — none of it is billable.
Take the weeks you intend to work, multiply by the hours you intend to work, then take off the share that goes on everything other than being on a job. If you have no idea what that share is, run a time clock for a month and find out rather than guessing; guessing low here is how a rate ends up 30% short.
A one-person shop that works 48 weeks at 45 hours is putting in 2,160 hours. If six hours in every ten are actually on a job, there are about 1,296 billable hours in the year. That is the number the money gets divided by — not 2,160.
Do the division
Add what you want to earn to what the business costs, and divide by the billable hours. That gives you the rate at which you break even on the year and pay yourself what you decided to pay yourself.
Using the figures above: $70,000 for yourself plus $24,000 of overhead is $94,000, divided by 1,296 billable hours, is about $73 an hour. That is break-even for the year — it includes your wage but makes no profit beyond it. Those numbers are an example to show the shape of the arithmetic, not a recommendation.
The hourly rate calculator on this site does exactly this division, and the overhead recovery calculator works out the overhead portion on its own if you would rather see the two parts separately.
Add profit on top, and know why
Break-even is not a business, it is a job with extra paperwork. Profit on top of your own wage is what pays for the slow month, the van that dies in February, and eventually a second truck.
What you add is a decision, not a formula. What matters is that you add it deliberately and know the number, rather than discovering at the end of the year that there was nothing left.
Then sanity-check it against the market — second, not first
Now go and find out what other shops charge. If your number is well above the going rate, the answer is usually not to drop it. It is to work out which input is off: overhead that is too high for the work you do, too few billable hours, or a wage expectation the work cannot carry yet.
If your number is below the going rate, you have just found money. People charging the local rate without doing this arithmetic are often the ones who cannot explain why a busy year left them with nothing.
Charge by the job, quote from the rate
Most customers would rather hear a price than an hourly rate, and most trades quote jobs rather than hours. That does not make the hourly rate pointless — it makes it the thing you build quotes from.
Work out how long a job type actually takes you, multiply by the rate, add materials with your markup, and you have a price you can stand behind when somebody pushes back. Save it as a line on a price list and you only do the arithmetic once.
Go through it once a year
Insurance goes up, fuel goes up, the van gets older. A rate set three years ago is being quietly eroded by every one of those, and the erosion is invisible until a good year somehow produces no money.
Pick a month, redo the four steps with last year's real numbers, and change the rate if it needs changing. It takes an afternoon.