How much do you actually need to charge per hour?

How the hourly rate is worked out

The sum runs backwards from what the business has to produce in a year. Add up what it costs to keep going, add what you want it to make on top, add a contingency if you want one, then divide by the hours you can genuinely put on an invoice. The hours are where most rates go wrong: a 45-hour week rarely contains 45 billable hours, and the gap is bigger than people expect.

What each input means

Annual business overhead

Everything the business spends in a year that is not your own pay: vehicle and fuel, tools, insurance, phone, software, accountant, premises, advertising. Not materials you charge on to a customer — those are priced into the job.

Owner pay and profit target

What you want the business to make on top of covering itself, before tax. For a sole trader that is what you draw out; for a company it is your salary plus what stays in.

Weeks worked per year

52 less holiday, bank holidays and the weeks you expect to lose to illness. Around 46 is a common answer for a one-van business.

Hours worked per week

Hours you are working, not hours you are billing. The utilisation figure handles the difference, and separating the two is what stops the rate being set on an assumption you never made explicit.

Utilisation

The share of worked hours that end up on an invoice. Quoting, invoicing, chasing payment, buying materials, travelling between jobs and the gaps nobody books are all real work and none of it is billable. Sixty to seventy-five per cent is typical.

Contingency

A percentage on top for the jobs that overrun and the ones that go wrong. Adding it here is more honest than assuming every job goes to plan and absorbing the difference out of profit.

What you charge now

Optional. Enter it and the calculator shows the gap per hour and what that gap is worth over a year at your utilisation.

A worked example

These are the figures the calculator opens with, so you can follow them on screen.

1. 1.£24,000 of annual overhead — van, fuel, insurance, tools, phone, software and an accountant.
2. 2.£40,000 owner pay and profit target, before tax.
3. 3.5% contingency on the £64,000, taking the requirement to £67,200.
4. 4.46 weeks at 45 hours is 2,070 hours worked.
5. 5.At 65% utilisation, 1,345.5 of those hours can be invoiced.

£67,200 ÷ 1,345.5 hours = £49.94 an hour, or about £449 for a nine-hour day. Of that hourly rate, £17.84 is covering overheads and £29.73 is profit. Push utilisation to 80% and the same targets need £40.58; drop it to 50% and they need £64.93. Nothing else on the page moves the number that far.

Where this stops

• —It works out revenue, not take-home. What you keep depends on your business structure and your total income.
• —It assumes every billable hour is invoiced and paid. Write-offs, discounts and bad debt come off the top.
• —VAT sits on top of the rate if you are registered — it is not part of what the business earns.
• —It produces a floor, not a market price. What customers in your area will pay is a different question, and the answer may be higher.

Where to go next

The rate is one input into pricing a job. These pick up the rest.

• →Day rate calculator — the same model for people who sell days
• →Job costing calculator — put this rate into a full job price
• →Sole trader vs limited company — what happens to the profit afterwards
• →Quoting in Cushty — the rate on every quote without retyping it