Working out your charge-out rate from your own numbers

The question gets asked constantly and answered badly. Somebody posts a number in a forum, half the replies say it's too low, the other half say the market won't wear it, and nobody involved knows anything about the business asking. It's 1 of the 5 constraints in the guide to growing a trade business in Adelaide, and it's the one with an actual answer.

The answer isn't a figure. It's a calculation, and it produces a different number for every business, because 2 businesses in the same trade can have wildly different overheads and wildly different amounts of billable time.

Why there's no Adelaide rate to copy

There's no published, sourced hourly rate table for South Australian trades that would be honest to reproduce here, so this post doesn't invent one. The numbers that circulate online are mostly scraped from job-listing sites, mixed across trades and states, or converted from overseas figures without saying so.

More to the point, copying somebody else's rate copies their cost structure, and you don't have it. A sole operator working out of a home garage and a 4-van business with a leased yard cannot charge the same number and both survive. Whoever posted the rate you're about to copy has a different vehicle bill, a different insurance bill, a different amount of unpaid quoting time and a different tolerance for working Saturdays.

Your rate comes out of your numbers. Here's the arithmetic.

The mistake: a charge-out rate is not a wage

The single most common error is reasoning from what you'd earn as an employee. "I'd get $45 an hour on the tools, so $80 an hour as a contractor is good money."

It isn't, and the reason is that the employed version of you was being carried. Somebody else paid for the vehicle, the insurances, the phone, the software, the accountant, the tools, the training, the quoting time, the driving between sites, the annual leave and the day you were sick. As a business owner you pay for all of it, out of the hours you actually manage to bill, which are far fewer than the hours you work.

So the calculation runs in this order: count the hours you can bill, add up everything the business has to cover in a year, divide the second by the first, then add the margin you intend to keep.

Step 1: count your productive hours

This is where most rates go wrong, and it's worth being brutal about.

Start with the weeks. 52 in a year, minus 4 for annual leave, minus a couple for public holidays and sick days. Call it 46 working weeks.

Then the hours. 40 a week gives you 1,840 hours. Now take out everything that isn't chargeable: quoting and site visits, driving between jobs where the travel isn't billed, ordering materials, invoicing, chasing payment, servicing the vehicle, tidying the shed, and the hours you spent on jobs you didn't win.

For most owner-operators the honestly billable share lands somewhere in the 55% to 70% range of the working week. In this illustration, use 60%, which gives roughly 1,100 productive hours in a year.

That number is the denominator for everything below, and it's the one worth measuring rather than guessing. If your job costing is running, you already know it.

Step 2: add up what the year costs

2 buckets. All figures below are ex GST, and the whole example is an illustration with round numbers rather than a benchmark for any real business.

Bucket 1, what you have to earn for yourself. Not what's left over. Ask what the business would have to pay someone else to do your job, then add the on-costs an employer carries. Say $110,000.

Bucket 2, what the business costs to keep open, whether or not you work a single hour:

Total for the year: $160,000.

Step 3: recover it across the hours you can actually bill

$160,000 divided by 1,100 productive hours is $145 an hour, ex GST, rounded.

That's break-even. At exactly $145 the business covers its costs and pays you the wage in bucket 1, and there is nothing left over for a quiet quarter, a bad debt, a new vehicle or a mistake.

Notice what happens to the number when the denominator moves. Drop from 1,100 productive hours to 900, which is what a season of heavy quoting and light conversion looks like, and break-even goes from $145 to $178 an hour. You didn't get more expensive. You just billed less of your week, and the same fixed costs had fewer hours to sit on.

This is why the productive-hours count matters more than the overhead list. Owners obsess over cutting a $60 subscription and ignore the 200 hours a year they're giving away.

Step 4: add the margin you intend to hold, and know which one you're adding. Margin and markup are not the same thing, and mixing them up is how a business that thinks it's making 20% makes 16%.

Markup is added to cost. $145 plus 20% is $174. Margin is a share of the sell price. To hold a 20% margin you divide by 0.8, which gives $181.

For the illustration above, a 20% margin puts the charge-out rate at $181 an hour, ex GST. What margin you should target isn't something a website can tell you, because it depends on how much risk the work carries, how lumpy the pipeline is and what the business needs to fund next. What is fair to say is that a trade business with no margin has no capacity to absorb a single bad job, and bad jobs are not rare.

Materials are a separate decision. A margin on materials covers the ordering, the collection, the storage, the handling and the risk of being the one who warrants them. Charging materials at cost is a choice to do all of that for nothing.

When the number is higher than you're charging

It usually is, and the reaction is nearly always the same: the market won't pay that.

Sometimes that's true and the answer isn't the rate, it's the cost structure or the type of work. More often it's untested, because the owner has never presented the price with any structure around it. The same number lands very differently inside a quote that explains inclusions, exclusions and how variations get handled, which is why quoting properly and pricing properly are the same project.

A few things worth sitting with before you decide the market won't wear it:

• You don't have to move every price at once. New quotes only, from a date, is the lowest-risk way to test it.
• Losing some jobs at a higher rate is the intended outcome, not a failure. The question is whether the remaining work covers more than the old work did.
• The customers most likely to leave over a rate rise are usually the ones the job costing already flagged as thin.
• Undercharging isn't just a profit problem. It's the direct cause of the cash squeeze described in why builders run out of cash on a full order book, because underpriced work still has to be funded while it's being done.

What the tools on this site do and don't do

Worth saying plainly, because it comes up: none of the 4 tools on this site calculates a trade charge-out rate. There's a cost calculator for coaching fees, a readiness quiz, a selector that sorts out whether you want a coach, a consultant or a mentor, and a calculator that derives a rough value for an owner's hour from turnover and hours worked. That last one takes no charge-out rate, produces no quoting figure, and should never be used as one.

The calculation in this post belongs in your own spreadsheet, with your own overhead list, revisited once a year and any time the vehicle, the insurances or the wage bill move.

If working through it with someone would help, that's an ordinary thing for a business coach to sit down with an owner over. The coach doesn't set your price. They make you produce the numbers, and then they ask why you're still quoting the old rate.