Most owners pick their hourly rate by looking at what the competition charges, rounding up to a number that feels right, and getting on with the work. It feels practical. It's also a recipe for working flat-out at a margin you cannot afford to sustain, because the competitor's rate isn't built to cover your business. It's built to cover theirs, if it's built on anything at all.
The math you need isn't complicated, but it actually has to be done. Once. Then revisited annually, or any time a major cost changes. What follows is the formula and a worked example for a hypothetical two-truck plumbing shop. The same logic applies to electrical, HVAC, and any other service trade. Plug in your own numbers as you read.
Why "competitor pricing" gets you killed.
Two businesses can charge the same hourly rate and one of them is making money while the other is going broke. The difference is everything that sits behind the rate: the cost of wages, the burden on top of those wages, the building, the trucks, the software, the insurance, the office time, the profit target. None of that is visible from outside, and none of it is the same shop to shop.
If you set your rate by matching what someone else is charging, you're inheriting their cost structure assumptions whether they apply to you or not. The right starting point is the math, not the market. Once you know your real number, then you can compare it to the market and decide whether you have a pricing problem, a positioning problem, or a cost problem. But the math comes first.
The four things your rate has to cover.
Every billable hour your technician works has to carry four costs. Miss any one and you're under-charging without realizing it.
The wage you pay the technician, plus the burden costs that ride on top: CPP, EI, vacation pay, statutory holidays, WSIB, group benefits, any bonus structure, employer pension contributions if you offer them.
Everything that has to be paid whether the tech is on a job or not: shop or office rent, truck payments and insurance, software subscriptions, owner's salary, admin staff, marketing, accounting, professional fees, utilities. Total it monthly, divide by the number of billable hours you expect to produce.
Profit is not what's left over. It's a line item you build in. Decide what net margin you need the business to produce. Ten percent is a common floor, twenty percent is healthy, anything below ten and you have nothing to reinvest, retain, or pay yourself a real owner's return on.
The killer most rate calculations miss. Your technician is paid for 40 hours but doesn't bill for 40. Drive time, parts pickup, callbacks, training, paperwork, vacation, sick days, statutory holidays, the random hour spent looking for the right fitting. Every non-billable hour has to be recovered in the rate on the billable ones.
The formula, with a worked example.
Here's the math for the two-truck plumbing shop. The numbers are illustrative (yours will be different) but the structure is the same:
That's the rate at which the shop hits its fifteen percent profit target. Anything billed below $137/hr is leaving margin on the table. Anything above is improving the business. The market for plumbing in Durham Region is often in the $135 to $185 range for service work, so this shop is positioned just at the floor. It has pricing room above this number if it can earn it through speed, quality, or reputation.
What to do with the number you get.
Most shops who run this calculation for the first time find that their actual rate is below their breakeven rate. That's normal. It also explains a lot about why a "busy" year ended up with no money in the bank.
You have three levers, and you almost always need a combination of all three:
Raise the rate. If your calculated rate is meaningfully higher than what you charge, you have an immediate pricing decision. The fear is always "customers will leave." In practice, a five to ten percent increase moves almost no one in the trades. A thirty percent jump moves some, and that's the customers most likely to be unprofitable for you anyway.
Lower the overhead. Look at the biggest line items in your overhead and ask whether they're earning their cost. The truck nobody really needs, the software with three logins for one user, the office space that could be smaller. Cutting $1,000/month of overhead lowers your required rate by several dollars an hour at typical utilization.
Improve utilization. If your techs are billable 55 percent of paid hours instead of 65, your effective rate has to go up by 18 percent to compensate. Scheduling tighter, reducing drive time, sending parts ahead instead of mid-job pickups. These are operations moves, but they're also pricing moves, because every percentage point of utilization recovered lets you keep the rate where it is.
The annual review.
Run the math every January, and any time something material changes: a wage increase, a new truck, a software upgrade, a major insurance hike. The rate should drift up over time as costs do. If you're holding the same hourly rate you charged three years ago, inflation alone has already made you unprofitable.
Run your number.
- Pull the inputs: your average tech wage, last year's overhead total, current billable utilization (or use 65% if you don't track it yet).
- Run the three steps: fully-loaded wage, divide by utilization, divide by 1 minus your profit target. The whole thing takes ten minutes once you have the inputs.
- Compare to what you charge: if the calculated number is higher, you have a pricing decision. If lower, you have room to be more competitive on the next big quote.
- Lock in the review date: next January 1st, do it again.
Skip the spreadsheet. The Labour Rate Calculator does this math automatically once you plug in your inputs.
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