Working out your hourly charge-out rate is one of the first things you think about when starting your own trade business. How can you make sure you get it right? The trick is coming up with a rate that’s in line with the rest of the market, will cover you and your team's costs, and above all — improve your profitability.
Click the button below to access our Charge-Out Rate Calculator:
Calculating an accurate charge-out rate doesn’t have to be a daunting task, and you don’t need to be a mathematical whiz. However, it’s important that you take the time to sit down and work out your figures properly. The better these calculations are, the more accurate your charge-out rate will be.
Below are six key considerations for working out your charge-out rate. Before you crunch the numbers with our free charge-out rate calculator, you should be clear on the following points:
- Desired annual income
- Chargeable hours per year
- Income requirements
- Break-even point
- Profit margin
1. Desired annual income
Take into account the standard of living you’d like, and what gains you might make from an investment. For the sake of this article, we’ll assume an annual salary of (£/$) 80,000.
2. Chargeable hours per year
Using a standard work week (40 hours a week, 52 weeks a year) to estimate the number of chargeable hours isn’t really realistic. You also need to take into account holidays (personal and public), sick days, and all the hours you’ll spend on tasks you might not be able to charge for such as:
- Communicating with customers
- Generating quotes
- Sending invoices
- Managing jobs/employees
Try keeping a running tab of non-chargeable time for a week and see how much time you spend on tasks you don't get paid for. Realistically, you might only be able to charge for 1,350 hours a year — not the full 2,080 that 40 hours a week for 52 weeks would get you.
3. Income requirements
Once you know how many hours you can realistically invoice for, you can work out what rate you’ll need to charge to cover your income and costs. Using our hypothetical (£/$) 80,000 figure and dividing by 1,350 (your billable hours available in the year), you’d need to charge at least (£/$) 59.26 per hour.
For the sake of this article we’ll assume a figure of (£/$) 50,000 of overheads for the year. Whatever the figure looks like for you, it should cover costs including (but not limited to):
- Tools and equipment
5. Break-even point
(£/$) 50,000 divided by your 1,350 hours means you need to add another (£/$) 37.04 to your income requirements. This brings our initial rate of (£/$) 59.26/hr up to (£/$) 96.30/hr. But we aren't done yet! This is just your break-even rate, so if you charge this you won't be making any profit.
6. Profit margin
Without a profit margin, your business won’t be able to grow. By adding a profit margin, you can spend the extra cash on things like marketing, equipment, staff, etc. So let's assume a profit margin of 15% and establish your final charge-out rate:
(£/$) 96.30/hr + 15% = $110.76 per hour (rounded up).
Using Tradify’s charge-out rate calculator
Using the six key considerations above, you should be able to plug the numbers into our online calculator. The calculator will then automatically calculate what your hourly rate should be. If you employ staff, run this calculation for yourself, and then for each one of your employees (unless you intend to charge them out at the same hourly rate).
Now that you know what you should be charging, the next step is to decide if this is realistic and in line with market rates. This calculation should be run regularly because industries change, prices fluctuate and the number of people you employ may go up and down. You could also enlist your accountant’s help each time you do it, so they can help decide on your final figures.
Why charge-out rate is important to get it right
What you charge for your services can have a dramatic effect on your bottom line, but also how your customers view and respond to you. In other words, your reputation is on the line. People want to be sure they’re getting the best bang for their buck, and sometimes tradespeople are unfairly perceived to be fleecing customers with their hourly rate.
Don’t forget the competition
Unless you’re lucky enough to have captured a rare niche in the market, your hourly rate needs to be competitive with others providing the same service. Don’t be fooled into thinking you have to be the cheapest. In fact, most customers are willing to pay more if they know they’re getting a superior service. Trying to gain a competitive edge by offering the cheapest hourly rate in town doesn’t always work, since a lot of your customers will be thinking “you get what you pay for”.
It’s essential to work out an hourly rate that takes all factors into account, including your profits, market rates, and what your competition is doing. If you’re charging more than your competitors, you need to be able to justify your pricing and provide a service that’s worth what your customers are paying. Word spreads fast in trade industries. If the quality of your work doesn’t live up to what you’re charging for it, word-of-mouth will ensure - pretty quickly - a damaged reputation that may be very difficult to overcome.
What does the market say about your charge-out rate?
Once you’ve used our charge-out rate calculator, it’s important to get a sense if it is competitive in your local market. When you’re deciding how much your service is worth, it’s important to get a feel for the market of similar services.
Buyers’ perceptions of risk can be one of the most important factors in getting a higher price. Think about what you can do to reduce or reverse the risks a customer might see in your services to validate the higher price.
For example, you could offer a better guarantee than your competitors. Then if they ever question the price, you can tell them the exact reason why you're worth it.
When deciding on your charge-out rate, it could be useful to ask yourself:
- Which services do customers see as offering the best value?
- What do customers expect to pay for my services?
- Which services are likely to be the most successful?
- What are my competitors charging?
- Who your competitors are and what they offer.
- What the key features and benefits of their services are.
- How their prices compare with yours..
- If your rate is lower than the average, you don’t have a problem, you have an opportunity. You can look at increasing your charge-out rate and improving your income.
- If your rate is higher than average, it could be that you need to review your figures. Have you been honest and realistic about everything? Can you justify the higher rate with value such as guarantees, superior quality, and customer experience?
- Does your business have a clear point of difference?
- Is there anything that sets you apart from the competition - something you do better than anyone else?
Remember, unless you’re planning to seriously disrupt the market (which most tradespeople aren’t), you should be aiming to charge as much as you can.
Multiple charge-out rates
It’s likely your business will have more than one hourly rate. We took a look at the different rates being charged by Tradify customers, and most of them have more than one charge-out rate including:
- Standard rate
- Apprentice rates (these differ based on whether the apprentice is in their 1st, 2nd, 3rd or 4th year)
- After hours rates
- Callout rate
- Same day and emergency callout
- Statutory Holiday, Sundays and Public Holidays
- Custom rates for different customer types (loyalty discounts)
Some generous Tradify clients even include pre-set billing rate categories such as 'Mates Rates', 'Family' or 'No Charge' in order to charge out jobs at discounted rates. The rate our calculator generates is just a guideline — a way to check that the rate you’re charging will cover your costs and provide the income and profit you’re aiming for.
The bottom line
You can see why it’s essential to look at a number of different factors when you’re deciding what your hourly charge rate should be. It can seem a bit daunting, but it’s a crucial exercise that will benefit your business. It’s also something that should be conducted on a regular basis, to make sure that your prices remain competitive, that they align with market rates, and are helping to increase your profit margin.
We’ve made this task easier with our charge-out rate calculator, so get all your details together and start crunching the numbers. If you’ve got any questions about our charge-out rate calculator, get in touch.
If you’d like to find out how Tradify can help boost your business’s bottom line, try it free for 14 days.