What you should actually charge for a service call

Ask most contractors how they arrived at their hourly rate and the answer is some version of "it's about what everyone around here charges."

That is not pricing. It is copying, and it assumes the competition did the arithmetic. Often they copied someone too.

Start with what an hour actually costs you

Take a tech on $30 an hour. That is not what he costs.

Add payroll taxes. Add workers compensation, which in the trades is a serious number. Add any benefits, holiday and sick pay. The loaded cost typically lands somewhere around $40 an hour — the exact figure depends on your state and your trade, and it is worth working out properly rather than guessing.

If your pricing is built on $30, every job is quietly 25% worse than you think on its largest cost line.

Then face the billable-hour problem

Here is the part that catches almost everybody.

You pay for a full day. You do not get to bill a full day.

Out of eight paid hours, subtract drive time between calls, the trip back to the supply house for the part nobody loaded, the warranty callback, and the time spent quoting work you did not win. What is left — the hours you can actually put on an invoice — is often five or six.

So if you pay $40 an hour loaded and bill five and a half hours out of eight, your cost per billable hour is closer to $58. Price against $40 and you are underwater before overhead is even mentioned.

This is the single most common pricing error in the trades, and it is invisible unless someone measures billable versus paid hours. Most contractors have never seen that ratio for their own business.

Add overhead

Overhead is everything that runs whether or not the phone rings: rent, insurance, vehicle payments, office wages, software, advertising, your own pay.

Work out your total annual overhead, divide by the billable hours you expect to sell in a year, and you have overhead per billable hour. Add that to the cost per billable hour above.

That total is your break-even rate. Charge exactly that and you make nothing.

Then add profit — deliberately

Profit is not what happens to be left. It is a number you decide on and price for.

Pick the net margin you want, and mark up from break-even to reach it. And be careful here, because this is where the second most common error lives:

• Markup is added to cost. $100 cost plus 40% markup bills at $140.
• Margin is the share of the price that is not cost. On that job, $40 of $140 is about 29%.

Wanting a 30% margin means marking up roughly 43%, not 30%. Contractors who price at "30% markup" believing they are earning a 30% margin are short on every single job, forever. There is more on this in why profitable jobs still lose money.

Flat rate or hourly?

Once you know your true cost per billable hour, flat-rate pricing gets much easier — and it is generally better for both sides.

The customer knows the price before you start, which removes the anxiety of watching a clock. You stop being punished for being fast, which hourly billing does to your best techs. And you can price by the value of the task rather than the time it happens to take.

Flat rate only works if it is built on real cost data. Built on a guess it just makes the guess harder to notice.

The diagnostic

If you are busy all year and there is nothing in the bank, it is nearly always one of three things:

1. Your rate is built on unloaded labour cost
2. Your rate assumes more billable hours than you actually sell
3. Overhead has grown while pricing stayed put

All three are arithmetic problems, and all three are visible the moment your books track job costs and billable hours properly.

Related

• Why jobs that look profitable still lose you money
• Working out your break-even number
• Job costing for contractors