Why “Market Rate” is a Fast Track to Bankruptcy
Most contractors set their prices using a flawed method: “The Guessing Game.”
They call three competitors, find out the average rate is $95/hour, and set their price at $90/hour to remain competitive.
This is financial suicide.
By copying your competitor’s price, you are copying their hidden mistakes. They might own their building (low overhead), or they might be one month away from insolvency.
To survive, you must ignore the market initially and calculate your “Burdened Labor Rate.”
What is a Burdened Labor Rate?
It is the total cost to employ a technician for one hour, including their wages, taxes, insurance, benefits, vehicle costs, and a share of the company’s overhead. It is the amount you burn before you make $1 of profit.
Use the calculator below to find your True Break-Even Point, accounting for the hidden killer of service businesses: Unbillable Efficiency Loss.
🧮 The “Burden Rate” Calculator
Don’t guess. Input your annual fixed costs and technician count to see your required hourly rate.
⏱️ True Hourly Rate Calculator
Find the profitable rate, not just the break-even rate.
📉 The Math Behind This:
- Total Revenue Needed: $0
- Actual Billable Hours: 0 hrs/year
Warning: If you charge less than this, you are eating into your salary or profit.
Learn How to Build a Flat Rate Price Book ➔The 3 “Invisible Costs” That Eat Your Profit
If the calculator above gave you a number like $185/hr or $225/hr, and you are currently charging $100/hr, do not panic. The calculator isn’t broken. Your pricing model is.
Here is the deep-dive into the math (Burden Rate Formula) that justifies high hourly rates.
1. The Efficiency Factor (The 55% Rule)
This is the single most misunderstood metric in the trades.
You pay your technician for 8 hours a day. But you cannot sell 8 hours a day.
You must account for Non-Billable Time:
- Windshield Time: Driving between jobs (unpaid).
- Supply House Runs: Waiting at the counter for parts.
- Shop Time: Restocking the truck, team meetings, training.
The Benchmark:
A highly efficient Residential Service Technician is only billable for 55% to 60% of their clocked-in hours.
| Metric | Calculation | Result |
|---|---|---|
| Total Paid Hours | 40 hours/week x 52 weeks | 2,080 Hours |
| Efficiency Rate | Industry Average | 55% |
| Actual Sellable Hours | 2,080 x 0.55 | 1,144 Hours |
Insight: If you divide your annual costs by 2,080 hours, you will undercharge by nearly 50%. You must divide by your Sellable Hours (1,144).
2. Overhead Absorption (Fixed Costs)
Many owner-operators calculate price based on “Labor + Parts.” They forget that every billable hour must “absorb” a portion of the company’s fixed costs.
Your hourly rate effectively pays for:
- Non-Revenue Staff: Dispatchers, Bookkeepers.
- Technology: Software (ServiceTitan, Jobber), GPS tracking.
- Marketing: Google LSA ads, website hosting.
- Assets: Truck payments, liability insurance, rent.
3. Net Profit vs. Owner’s Salary
A common mistake is thinking, “If I pay myself a salary, that’s the profit.” False.
- Salary: What you get paid for the work you do.
- Net Profit: The cash left over after everyone is paid. This is for reinvestment and emergency funds.
- Target: Your rate should include a 15% – 20% Net Profit Margin.
Comparison: Time & Materials vs. Flat Rate
Once you know your rate (e.g., $180/hr), how do you sell it without scaring the customer?
| Feature | Time & Materials (T&M) | Flat Rate Pricing |
|---|---|---|
| Pricing Model | “$180/hr + Parts” | “$485 for the Repair” |
| Customer Anxiety | High (Watches the clock) | Low (Knows price upfront) |
| Profit Potential | Capped (Paid for time) | Unlimited (Paid for efficiency) |
| Best For | Commercial / Long Projects | Residential Service / Repair |
The Verdict: Profitable residential companies use their calculated hourly rate to build a Flat Rate Pricebook. They don’t sell the hour; they sell the result.
How to Automate Your Pricing
Calculating your rate is only Step 1. Step 2 is enforcing it in the field so your technicians don’t accidentally discount your services.
You need FSM Software with dynamic Pricebook Management.
Top Tools for Flat Rate Pricebooks:
1. ServiceTitan (Best for Enterprise)
ServiceTitan has the most advanced “Dynamic Pricing” engine. As your material costs go up, it automatically updates your pricebook so you never lose margin.
- Read Review: ServiceTitan Review
2. Housecall Pro (Best for Visual Sales)
Allows you to build “Good, Better, Best” option boards. You can hide your hourly rate inside visually appealing packages, increasing your average ticket size.
- Read Review: Housecall Pro Review
3. FieldEdge (Best for QuickBooks Users)
If you build your prices in QuickBooks, FieldEdge syncs them directly to the tech’s mobile app, ensuring financial consistency.
- Read Review: FieldEdge Review
Frequently Asked Questions (FAQ)
What is a good profit margin for a service business?
For residential HVAC, Plumbing, or Electrical businesses, a 15% to 20% Net Profit (after owner salary) is considered healthy. If you are below 10%, you are vulnerable to cash flow issues.
Should I charge for travel time?
In a “Time & Materials” model, yes. However, in a “Flat Rate” model, your travel time should be averaged into your overhead calculation (Efficiency Factor) so it is baked into every job price, regardless of distance.
How do I calculate my technician’s “Billable Efficiency”?
Take the total “Billable Hours” (hours actually invoiced to customers) and divide it by “Total Payroll Hours.” If the result is under 40%, you likely have a dispatching or routing problem.