What Does an Hour of Your Labor Actually Cost?
You had a great year. Revenue’s up, the calendar’s full, and by every measure you should be in better shape than last year. So why doesn’t the bank account look like it?
If you’ve sat there running the numbers over and over trying to find where you went wrong, you’re not alone, and you probably didn’t do anything wrong. For a lot of owners, the answer starts with one number that almost nobody sits down and calculates: what an hour of labor really costs.
Most owners price off the wage. If a tech makes $20 an hour, that’s the number that goes into the math, sometimes with a little padding for “taxes” or “burden.” The wage is only the starting point, though, and the real cost is a lot higher. If you’ve been pricing based solely on this cost, you’re in good company, since almost nobody gets taught this part.
What Goes Into an Hour of Labor
Once you add in the pieces that don’t show up on the paycheck, the number climbs fast:
- Payroll taxes (FICA, FUTA, and state unemployment tax, which varies quite a bit depending on where you’re located)
- Benefits (health insurance, retirement contributions, anything else you offer)
- Workers’ comp and general liability insurance
- Bonuses or commissions tied to that role
Add those up and a $20 an hour tech can easily cost $24, $26, sometimes more, before you’ve covered a single truck, a single tool, or a single hour of your own time running the business.
Then There Are the Hours You’re Not Billing
Even once you know the real cost, there’s a second gap that’s easy to miss. You’re paying for 40 hours a week, but you’re not billing 40 hours a week. Drive time, prep, loading the truck, slow mornings, and callbacks all have to happen, but nobody is paying for them directly.
If a tech is paid for 40 hours but only bills 30, that’s 75% utilization, and it changes the math a lot. The real cost of each billable hour is the loaded labor cost divided by that utilization percentage. At 75%, every billable hour has to carry the cost of an hour and a third of pay.
You can find your own utilization by comparing the hours on the timesheets to the hours billed (or clocked in at job sites) in your field software for the same week.
A Real Example, Step by Step
Here’s a scenario that shows how much this moves the number. Let’s say a company pays its techs $20 an hour with a $500 annual bonus, pays a 5% sales commission, and has fuel and supply costs that run about 15% of the job. Payroll taxes and insurance add about 18% on top of pay, techs bill about 30 of their 40 hours, and the company wants a 60% gross profit margin.
Take a guess at what they should charge per hour before you keep reading. Most owners guess a lot lower than the answer.
| Step | What happens | Cost per hour |
|---|---|---|
| 1. Start with pay | $20 wage plus the $500 bonus spread across the year | About $20.24 |
| 2. Load it | Add about 18% for payroll taxes and insurance | About $23.88 |
| 3. Adjust for utilization | Divide by 75%, since only 30 of 40 paid hours get billed | About $31.84 per billable hour |
| 4. Price for everything else | After a 60% margin, 5% commission, and 15% for supplies, labor can only be 20% of the price, so divide by 20% | About $159 an hour |
That number stops people every time they see it, and it feels too high right up until you walk through the steps. The biggest jump is the last one, since once the margin, commission, and supplies each take their share, labor is only a small slice of what the customer pays. Many owners will guess around $80-$100/hour based on doubling or tripling the labor cost with taxes, but you can see mathematically that’s not even close to enough.
Utilization Moves the Number More Than Almost Anything
Using the same example, here’s what happens to the rate you need to charge when techs bill more of their paid hours:
| Billable hours out of 40 | Utilization | Rate needed |
|---|---|---|
| 30 | 75% | About $159 |
| 32 | 80% | About $149 |
| 35 | 88% | About $136 |
Getting each tech just two more billable hours a week drops the rate you need by about $10 an hour. So there are two ways to close the gap: raise the price, or raise utilization with tighter routes, better scheduling, and less time spent waiting on parts. Most businesses need a little of both.
If you price by the job instead of by the hour, the same math still applies. Multiply the estimated hours by the rate you need, add materials, and that’s the floor for the flat-rate price.
Why This Matters More Than It Seems
Being off by even a few dollars an hour doesn’t look like much on a single job. But multiply that gap across every job, every tech, and every week of the year, and it’s often the biggest reason a business can have a great year in revenue and still feel broke. Let’s say you’re $15 an hour under and your techs bill a combined 6,000 hours a year. That’s about $90k that should have been profit.
That gap between how hard you’re working and what’s sitting in the account is exhausting, and it can make you second-guess decisions that were never the problem in the first place. This one number is usually a big part of it, and the good news is that it’s a formula you can run, with no guessing involved. It’s worth re-running every year, or any time wages, insurance, or commissions change.
Run Your Own Numbers
We built a free Labor Rate Calculator that does this exact math for you. Enter your real wages, benefits, hours, and costs, and it gives you the rate you should be charging to hit your target profit. It only takes about two minutes, and it’s a lot faster than doing the table above by hand.
