Labor Rate Calculator
Pricing can make or break your service company. By knowing your bottom line and how much an employee costs the company, you can maximize profitability and streamline your business operations.
Pricing can make or break your service company. When building a pricebook and pricing your services, you must first run some employee cost calculations to figure out your true cost of doing business (CODB) and billable labor rates. By knowing your bottom line and how much an employee costs the company, you can maximize profitability and streamline your business operations.
We know most electricians, plumbers, HVAC professionals, and other types of service companies use math daily, but converting to flat-rate pricing and figuring out how to calculate direct labor cost can confound the most-seasoned contractors. And who has time to crunch numbers in a complicated labor cost formula when that time could be spent bringing in more money? After all, profit all comes down to efficiency and billable work.
Use this ServiceTitan Labor Rate Calculator to tabulate a billable hourly labor rate that covers your CODB just enough to break even, and then calculate the ideal billable labor rate you should charge to yield your net profit goals. Based on that calculated labor rate, you can build a flat-rate pricebook that clearly shows customers how much your labor charge figures into the final price.
Labor Rate to Cover Overhead Costs
First, you need to know what your company spends on overhead each year. This total does not include any costs related to materials or equipment, and should not include technician payroll (we’ll tackle how to calculate labor cost for techs next).
How to Calculate Overhead
Average annual overhead costs take into account all fixed and variable assets required to operate the business, including:
Office staff payroll
Number of Technicians on Payroll
Next, figure out how many revenue-generating techs you plan to employ over the next 12 months. Be sure to include any expansions planned for your tech team, as well as any foreseeable job reductions. Enter that number into the labor cost calculator.
Projected Billable Hours
Before you calculate a billable labor rate, determine how many billable hours each technician works each year. Read on to learn how to project billable hours per technician.
Calculate Billable Hours
Totaling billable hours takes into account how many paid holidays and vacation or sick days each tech gets in a calendar year, so grab your PTO calendar and start counting.
Once you know those days aren’t billable, you subtract that time from the 40 hours the technician clocks each week multiplied by the 52 weeks in a year, which equals 2,080 total work hours to start.
Say your service company takes seven days off each year for federal holidays and every technician gets 10 paid vacation days, here’s how you would calculate the available working hours per year for each technician:
Cost of an employee: Paid time off
(Holidays + Paid Time Off) x 8 hours per day = Hours per year spent not working on business days
17 days x 8 hours = 136 hours
Then, subtract that total from the 2,080 hours available for work each year, and enter the total available working hours per year into the employment costs calculator above.
Avg. working hours annually
2,080 - 136 = 1,944 hours per technician
Labor Cost Definition
Just because a technician clocks 1,944 hours per year, it doesn’t mean he or she produces profit that entire time, so you can’t use that total in your billable labor calculation. To determine projected billable hours per tech, you must calculate what percentage of a technician’s workday results in billable hours on average.
It’s important to be realistic about your billable hour labor cost percentage, because most company leaders like to think their technicians bring in more profit than what’s truly doable in a day, especially when you figure in non-billable time spent doing general and administrative tasks, such as:
Traveling and fuel stops
Delivering free job estimates
Warranty services and callbacks
Stocking work vehicles and tool maintenance
Logging job details like mileage and parts used
Generating paperwork, such as invoices and estimates
Billable Hour Efficiency Rate: How to Calculate Labor Cost Percentage
Projecting how many billable hours each technician works on average requires knowing your average billable hour labor percentage, also known as utilization rate. Out of an 8-hour workday, what percentage of your technicians’ time gets spent on billable tasks, where they’re actually on a job site performing repairs, doing maintenance for customers, or installing equipment?
What is a good labor cost percentage? Utilization rates vary by industry, but for the skilled trades it tends to be lower than other professional services because you must be onsite to actually perform billable work—while an office-based worker at a consulting agency, for example, can do billable work all hours of the day or night.
For most service companies, 30 percent is considered a good efficiency rate, while 50 percent would deliver extremely efficient employee costing. That means out of eight hours, if a technician does approximately 2.4 hours of billable work per day, the billable hour percentage averages 30 percent. At a 50 percent billable hour efficiency rate, a technician does four hours of billable work, spending half a workday inside a customer’s home or on a commercial job site performing services.
Remember, while a half-day HVAC or electrical system install may mean 50 percent billable efficiency for that day, you need to figure the average total of every work day throughout the year and it’s unlikely all of your technicians work daily on large install jobs.
Projecting Billable Hours Per Technician
Once you estimate that average billable efficiency rate, convert the percentage into a decimal (30 percent = 0.30) and multiply it by the total available working hours per year you figured above.
So, using the total of 1,944 available work hours at a 30 percent utilization rate, you're left with 583.2 billable hours per technician annually. You’ll enter that total for projected annual billable hours into the labor calculator to help calculate your direct labor cost.
Direct labor cost formula:
1,944 X 0.30 = 583.2 projected billable hours per technician each year
Hourly Rate to Cover Overhead Only
Now that you know approximately how many billable hours each technician works, multiply that total by the number of technicians you plan to employ in the coming year to give you the total billable hours for the company overall.
Labor costing formula:
583.2 annual billable hours X 5 technicians = 2,916 billable hours for technician team
Next, divide your total overhead cost by the team’s total billable hours in a year to get the hourly rate that would cover overhead only.
Overhead cost formula:
$100,000 overhead costs ÷ 2,916 total billable hours = $34.29 per hour to cover overhead costs only
Break-Even Rate Per Sold Hour
Go a step further and see how much you’d need to charge per hour to cover both overhead and the cost of labor for all of your technicians working during billable hours. This labor calculation will give your bottom line to break even for billable time.
Employee Cost Calculator: Determining Hourly Rate to Cover Tech Costs
How much does an employee cost your business overall? You must begin by calculating the average hourly rate you pay your technicians, which encompasses:
Taxes, including FICA and income
Health care and additional benefits
Any other direct labor costs related to tech employment, such as commission or spiff payments
How to Figure Labor Cost
If technicians cost you an average hourly rate of $28—including all taxes, benefits, and other costs–and you employ 5 techs who work a total of 2,916 billable hours per year, you multiply your average hourly rate per tech ($28) by the total billable hours (2,916) to get your technician billable payroll cost. Add that number to your overhead cost for the grand total of expenses accrued during billable hours.
Direct labor formula:
(Annual billable hours per tech) X (no. of techs) = (Total billable hours for company) X (avg. hourly rate per tech)
Employees cost calculator:
583.2 billable hours X 5 techs = 2,916 total billable hours
2,916 total billable hours X $28 per hour = $81,648 technicians billable payroll cost + overhead cost
Cost of employee payroll plus overhead:
$81,648 for technicians + $100,000 for overhead = $181,648 total expenses
Divide that expense total by the total number of billable hours for your tech team to get your break-even labor rate.
Results in labor costs calculator: Break-even rate per billable hour
$181,648 ÷ 2,916 hours = $62.29 per sold hour
Desired Net Profit
Now, you know what rate it takes so you don’t lose money, but how much should you charge for labor so your company makes a profit? Figuring out that direct labor rate begins with determining your desired net profit.
Net profit equals your profit divided by total sales. For service companies, 25 percent is considered a good starting point. You can adjust to 30 percent or higher as you continue to grow the business. Enter that percentage into the employee costs calculator to tabulate your ideal billable labor rate.
Billable Labor Rate for Profitability
To find your profitable labor rate, you divide the break-even billable labor rate by the percentage of cost in your projected budget—which is the counterpart to your desired net profit percentage. So, if your net profit goal is 30 percent, you divide by 70 percent or 0.70 to get your billable labor rate to reach desired profitability.
Business Math Tip: Don’t multiply the break-even hourly rate by 30 percent as you’ll get a lower labor rate total. You divide by 70 percent to take into account a markup to calculate the percentage of cost that is profit, versus the percentage of the price that is profit—also known as the profit margin.
How to calculate direct labor rate for profitability:
(Break-even rate per billable hour) ÷ (1 - desired net profit expressed in decimals) = Profitable billable labor rate
$62.29 per hour ÷ (1 - 0.30)
$62.29 ÷ 0.70 = $88.99 billable hour rate to reach 30 percent net profit
How ServiceTitan Can Improve Efficiency and Profitability
Understanding your CODB and ideal labor rate will ultimately help you increase profits, and see where you’re lacking efficiency or need to add staff to increase billable productivity. If you’re looking to implement flat-rate pricing and move from hourly pay to performance-based pay, knowing what each hour of labor truly costs the company is a critical factor in the process.
Plug your optimal billable labor rate into your pricebook to easily calculate appropriate flat-rate pricing for all jobs. As the numbers clearly show, efficiency directly impacts your profitability. Field service management offers a multitude of ways to drive higher profitability and improve efficiency across the company.
Here’s a list of key functions our ServiceTitan field management software provides contractors, so they can boost their bottom line:
Real-time reporting: Track each employee’s timesheet by task and sort jobs by transaction, so you can easily calculate average billable service rates and see where you may improve utilization rates. Run detailed analytics and payroll reports to figure out the average hourly cost of an employee and overall overhead costs.
Pricebook Pro: Use your profitable billable labor rate in the ServiceTitan Price Setup Wizard to calculate pricing for your custom pricebook. An integrated, flat-rate pricebook will save the entire team valuable time and protect your profit margin, because you know the calculated billable labor rate covers all related expenses and comprises your ideal net profit.
Minimize non-billable time: While every company must build into the schedule some non-billable time, ServiceTitan field management software greatly reduces the amount of time technicians waste filling out paper forms or manually entering job details when they could be providing additional billable labor.
*The recommended values are in good faith and are solely meant for generic, informative purposes. We do not guarantee the accuracy of this information. Please note that other external factors may affect or falsify the recommendations. For accurate results, consult a professional.