Originally published: 10.01.06 by Ruth King

## How to calculate an hourly rate that's profitable.

What should my hourly rate be? Contractors often answer this question using the "dart board" method. The contractor has no idea what to charge, so he has someone call five competitors and ask, "What is your hourly rate?" Based on the answers, the contractor picks a rate that isn't the highest and isn't the lowest. He wonders why the service department isn't profitable. After all, if his competitor can charge that price, he should be able to also — not necessarily.

A more scientific and professional method to calculate your hourly rate considers the direct wages of the technician, the associated labor expenses, a truck, the associated truck expenses, non-productive time, and overhead. The only thing left to "chance" is the profit you desire to earn. That is totally up to you.

In the "old days," you estimated a gross margin. The tricky part was determining the gross margin you wanted to attain in the service department. That depended upon what you included in direct costs. A better way to calculate what you should charge is to know what your overhead cost per hour is for the service department. (I've covered this calculation in previous columns.) Add this to the total cost, and you'll know the break-even cost of labor. Then the only variable is the desired level of profit you want the service department to earn. And, remember, profits are necessary to grow and continue to pay all of the expenses to keep great technicians!

Using the form at the end of this article, you can calculate what your hourly rate should be. Some things to watch out for:

1. Use the highest labor wage for your technicians. Don't do this calculation on the average wage. Why? Because if you use an average wage, you'll have half the technicians who will cost the department dollars and half the technicians who will earn profits for the department.

2. For the labor calculations, the hourly rate is defined as "A". If your highest technician earns \$20 per hour, then the FICA charge is 20 x .062 or \$1.24/hour.

3. Union contractors have a different pricing because many of the items are included in the dues paid to the union. For example, you won't have additional health costs. However, you will have union dues that must be a part of the calculations.

4. Some contractors have lumped sick days, holidays, and vacation days into personal time off days.

5. Why include a truck? I know of no technician who can function without a truck. It is one of his tools and is a required cost. If you are doing this calculation for a helper, and he doesn't have a truck, then don't include the truck calculations for the helper's hourly rate.

6. Include inventory and tool costs. You have tool maintenance, tool loss, and inventory shrinkage/loss that must be considered. In addition, you have a sunk expense for the inventory on a truck. What the technicians do is replace inventory on their truck when they use a part. You have to account for this sunk cost.

7. If you lease your trucks, use the lease payment and don't include the depreciation/ replacement or monthly interest cost in your calculation.

8. You must add on a productivity factor unless you can bill all 2,080 hours per year. You can only generate revenues when the technician is at a customer's location. If he is there only 75% of the time, you have to cover all of your costs in 75% of his hours.

You may be shocked at the hourly rate you need to charge. However, if your calculations are correct, and you want a desired profit level, this is what the customer must pay. Provide the quality work to justify the rates. In addition, flat rate pricing is a good way to ensure that you are earning what you need to earn. It might be the only way to generate the hourly rate you need to keep good technicians and a profitable service department.

Highest service technician wages:

\$ _________ per hour (A)

FICA (0.062 X A)

\$ _________

Medicare (0.0145 X A)

\$ _________

Federal Unemployment (0.008 X A)

\$ _________

State Unemployment (Your State Rate X A)

\$ _________

Sick days (# of days X 8 X A)/2080

\$ _________

Vacation days (# of days X 8 X A)/2080

\$ _________

Holidays (# of days X 8 X A)/2080

\$ _________

Training/meetings (# of days X 8 X A)/2080

\$ _________

Retirement (yearly maximum match/2080)

\$ _________

Uniforms (price per week/40)

\$ _________

Worker's Comp (% X A)

\$ _________

Health insurance (monthly cost X 12)/2080

\$ _________

Union dues per hour

\$ _________

Total benefits cost per hour:

\$ _________ per hour (B)

Truck costs:

Monthly truck payments (monthly interest or lease cost X 12)/2,080

\$ _________

gas, oil and maintenance (monthly cost X 12)/2,080

\$ _________

repairs annual cost/2,080

\$ _________

inventory amount on truck/2,080

\$ _________

tools amount on truck/2,080

\$ _________

depreciation/replacement yearly cost/2,080

\$ _________*

insurance (monthly cost X 12)/2,080

\$ _________

\$ _________

\$ _________

Parking fees-tolls yearly cost/2,080

\$ _________

Taxes yearly cost/2,080

\$ _________

* If leasing, this cost is included in the lease so put 0 here

Total Truck cost per hour

\$ _________ (C)

Hourly cost before productivity add on (A + B + C)

\$ _________ (D)

Number of billable hours per year

_________ (E)

Billable percentage (E)/2,080

_________ (F)

Hourly cost including Productivity factor (D/F)

\$ _________ (G)

Service Department Overhead Cost per hour

\$ _________ (H)

TOTAL HOURLY COST (G + H)

\$ _________ (I)

Hourly PROFIT DESIRED

\$ _________ (J)

HOURLY RATE

\$ _______

FEEDBACK?

## Articles by Ruth King

### Your Acid Test - Do You Have Too Much Inventory?

Your Acid Test - Do You Have Too Much Inventory? Track This Indicator to Get a Clearer Financial Picture
View article.

View article.

### Why I Hate KPIs

Comparing KPI ratios to industry standards alone can be a risky move.
View article.