As a general contractor, subcontractor, or handyman in construction, your hourly rate is an important factor in how much money you make. It’s what you need to consider when bidding on jobs and deciding how profitable you’ll be on any given project. Knowing how to determine and calculate how much you can charge is essential for the success of you and your construction business.
This article will walk you through each step of determining your hourly rate and increasing your profit.
Protip: If you’re ready to calculate your hourly rate, check out our free General Contractor Hourly Rate Calculator
There are a number of factors to consider when determining your hourly rate, including your cost of living, overhead, taxes, level of experience, competition and/or the speciality of your trade. Ultimately however, if you don’t charge enough to cover your basic costs, you won’t be able to stay in business, so it’s critical to first prioritize the following factors:
These are your personal costs that you’ll need to pay each month to maintain your standard of living. These items may include:
It’s important to be realistic about your costs of living - don’t underestimate or inflate these expenses, the goal is just to understand what they truly are.
Separate from your personal cost of living, what does it cost to run your business each month? These items may include things such as:
Similar as your personal expenses, you want to be thorough and as accurate as possible when listing all of your businesses expenses.
What is your tax rate, and which taxes are you going to be required to pay? Depending on which state you are based in, your tax requirements may be different. Some of the taxes to consider are:
As dedicated and hard working as you may be, every working hour in your day isn’t always billable. Not to mention, as a independent contractor, you’re not given the luxury of paid vacations or paid sick leave. Unfortunately, these are all hours throughout your year that you won’t be able to bill for.
To determine your billable hours, there are two things you need to consider:
Weeks away from work per year - Between vacations and other life activities, come up with a total number of weeks you may reasonably be unavailable to work.
Percentage of each day spend on non-billable activities - This would include driving to and from the job site, time spent meeting with potential clients, creating estimates, etc.
These are the basic and essential factors you’ll need to move to the next step of actually calculating your hourly rate.
With these factors now determined, you’re now able to calculate your hourly rate. To do this, you can use our free contractor hourly rate calculator, or use the following formula:
Cost of living / (Billable Hours * 1 - Taxes) + Business Expenses / Billable Hours = Hourly Rate
To provide you with an example, we'll calculate an hourly rate using the following numbers:
Monthly cost of living: $10,417
Billable hours per month: 147
Monthly business expenses: $1,610
Using these numbers, the formula would be:
10,417 / (147 * (1-.25)) + 1,610 / 147, or when simplified down, 94.49 + 10.95.
After rounding the result, we arrive at an hourly rate of $106 per hour.
This is the rate that you’ll need to charge per hour in order to maintain your business and stay afloat.
But, you didn’t get into this business just to make ends meet, right? Of course not, so let’s talk next about determining how much you can charge to make a profit.
The first stop on the road to riches is setting a target income that you’d like achieve. And, now that you already know what you need to generate in order to survive, all that’s left is figuring out what you need to generate in order to thrive.
There really isn’t any magic behind this, it’s truly as simple as coming up with a number that you’d like to achieve. Maybe it’s $100,000 a year, or maybe it’s $300,000 … it’s completely up to you to decide.
Once you have that number in mind, use the same formula above and replace your cost of living expense with your target income.
In the example, we said that our cost of living was $10,417 per month, which equates to roughly $125,000 per year. Well, let’s say your target income is $200,000 per year, your new cost of living number would be $16,666 (which is $200,000 / 12).
When we run the formula again, we now end up with an hourly rate of $163.
Ok, so you now have a rate that brings you a profit, but there is a question that still remains — will anyone be willing to pay it?
The reality is that you won’t know that answer until you try, but there are a few things you can do ahead of time:
It’s helpful to educate yourself on average contractor salaries and compare your rates with other local contractors to ensure that your rate is competitive within the market. You may even find it beneficial to adjust yours slightly if necessary in order to attract more business or stay competitive with other contractors in the area. Paying attention to what other contractors are charging can give you valuable insight into what customers are willing to pay and allow you to adjust accordingly in order to maintain a steady stream work.
Reputation is the name of the game in construction. If you haven’t built a reputation yet or are working on strengthening it, you may find it difficult to charge a premium until it is established.
Contractors that have special skills, do exceptional work, are always early, and rarely make mistakes will always be in high demand. These top level contractors can often name their own price.
What can you offer that increases your intrinsic value and separates you from your competition? It could be something as simple as a unique style of craftsmanship, but most often it’s tied to things that dramatically improve the client experience.
Along with boosting your rate, you can increase your profits even more by finding ways to save time and improve your margins.
Utilizing construction management software has quickly become the most popular way for residential contractors to gain an advantage in the market while improving their efficiency and increasing their profits.
With more modern, simple, and affordable construction software now available like BuildBook, the learning curve and barrier to entry has been eliminated, allowing independent contractors and subcontractors to modernize their business without spending $1,000’s or hours of training.
BuildBook construction management software has become a favorite among residential contractors due to its speed and simplicity — and it’s 100% free to try for 10 days.
Following these steps and tips, any general contractor, subcontract, or handyman in construction can determine how much they can charge and boost their profitability starting today!