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Establishing Hourly Rates

To establish an hourly rate, a contractor needs to know they are charging enough to cover the bills. Establishing hourly rates is quite complicated with employees. The bottom line is, whether you prefer to use a fixed price contract or a time and materials contract, it is critical to make enough to cover expenses.

Researching local hourly rates by talking to other contractors is the primary way hourly rates are established. There isn’t a set of rules for establishing hourly rates, and there are many methods and reasons behind how an hourly rate is determined. Many factors go into establishing hourly rates. The type of jobs, experience level, and local market conditions are just a few.

Let’s dig a bit deeper to see if your hourly rate is adequate. The break-even point is the minimum amount needed to avoid losing money. We look at living expenses, operating expenses, and company labor costs to find the break-even point, which can help establish an hourly rate.

Living Expenses

Simply put, living expenses are the costs for day-to-day living. The easiest way to calculate these expenses is to make a list of everything you pay throughout a month, then add them up: rent, utilities, food, credit card, etc. Include business vehicle expenses with business operating expenses. Don’t forget property tax and insurance that are paid less often.

Finding your monthly living cost is a good starting place to determine the break-even point for the hourly rate.

Example: What is the hourly if living expenses are $2,000 a month?

1. Find the weekly living cost. Divide the monthly living expenses by four to find the weekly living cost. For simplification, we are using four weeks in a month.

$2,000 ÷ 4 = $500/week

Living expenses are $500 a week.

There are 51.142 weeks in a year. Use 13 months (52 weeks) to convert to yearly figures.

$500 x 52 = $26,000/year

$2,000 x 13 = $26,000/year

Living expenses are $26,000 a year.

2. Reduce living expenses to an hourly rate. Divide the weekly living cost by the weekly billable hours to find a break-even point for living expenses. If 30 hours are billed, what is the hourly amount?

$500 ÷ 30 = $16.67/hour

The break-even point for living expenses is $16.67.

Operating Expenses

Costs unrelated to a project are called operating or indirect expenses. These expenses include insurance, office expenses, licensing, office employees, rent and utilities, vehicle expenses, tools, etc.

An Income Statement, also known as a Profit and Loss Statement, shows monthly operating expenses. If an accounting system hasn’t been established, start by making a list of all your operating expenses.

Example: A contractor bills 30 hours a week, and the monthly operating expenses are $1,000. What is the hourly cost for operating expenses?

1. Find the weekly operating cost. Divide the monthly operating expenses by four to determine the weekly operating costs.

$1,000 ÷ 4 = $250/week

Operating expenses are $250 a week.

$250 x 52 = $13,000/year

Operating expenses are $13,000 a year.

2. Reduce operating expenses to find an hourly rate. Divide the weekly operating cost by the weekly number of billable hours. If 30 hours are billed, what is the hourly amount?

$250 ÷ 30 = $8.33/hour

The break-even point for operating expenses is $8.33.

Break-even Point Before Taxes

Add the hourly break-even points for living and operating expenses together to find the hourly rate before taxes.

$16.67 + $8.33 = $25.00/hour

The combined hourly living expenses and operating expenses are $25.00 per hour.

 Billable HoursHourly Break-Even PointWeekly Expenses
Living Expenses30$16.67$500.10
Operating Expenses30$8.33$249.90
Total Expenses $25.00$750.00
  • Weekly living expenses are $500 a week.
  • Weekly operating expenses are $250 a week.
  • Total living expenses and operating expenses are $750 a week.

Recheck by dividing the weekly hours billed by the total weekly expenses.

$750 ÷ 30 = $25.00/hour.

To recap: Billing 30 hours a week, the hourly rate is $16.67 to cover living expenses plus $8.33 to cover operating expenses; the hourly rate is $25.00 per hour.

Break-even Point with Taxes

Using the hourly rate of $25.00 per hour and 30 billable hours, find the hourly rate after taxes.

1. Find the weekly income to cover expenses.

$25 x 30 = $750/week

The weekly amount is $750 before taxes.

2. Calculate the weekly self-employment taxes. Determine tax costs by multiplying the weekly amount by 15.3% (12.4% for social security and 2.9% for Medicare) for self-employment taxes.

$750 x .153 = $114.75.

Weekly self-employment taxes are $114.75.

3. Find the hourly self-employment tax rate. Divide the self-employment taxes by the billable hours to find the hourly self-employment tax rate.

$114.75 ÷ 30 = $3.83

The self-employment taxes are $3.83 per hour.

4. Find the hourly breakeven point. Add the hourly self-employment tax rate to the hourly rate.

$25.00 + $3.82 = $28.83.

The hourly breakeven point after taxes is $28.83.

Labor Rate

The employee labor rate includes base pay, overtime, taxes, benefits, and paid time off and allowances. If the weekly hours worked are inconsistent, a more accurate picture would be to look back historically and average a more extended period. For instance, look at three months to find a weekly average.

Let’s use this simplified example to illustrate how the total hourly rate for employees is found.


  • A construction company has two full-time employees; one is paid $16 per hour, and the other is paid $18 per hour.
  • The state unemployment rate is 3.7%.
  • Workers’ compensation insurance rate is $3.00/hour.
  • The company offers a Simple IRA, matching the employee’s 3%.
  • The insurance premium is $400 for each employee, and the company pays 50% of the cost.

Hourly health insurance calculation: The employer portion is $200 per month, $50 per week. A full-time employee works 40 hours per week. Divide the monthly amount by 4 to get the weekly insurance cost. Then reduce the weekly cost to an hourly rate.

$200 ÷ 4 = $50.00/week

$50 ÷ 40 = $1.25/hour

Insurance would cost the employer $1.25 per hour per employee.

Add together the base pay rate, the tax amounts, and the benefits to determine the total hourly wage rate.

Base Pay RateFICA 7.65%FUTA .06%SUTA 3.7%Workers’ CompRetirement Plan 3%Health InsuranceTotal Hourly Rate

The Hourly Rate with Employees

Calculations with employees can quickly become complicated. Many variables must be taken into consideration. As employees are added, the contractor’s labor shifts from the job site to providing management and oversite. As the company grows and wages are raised, the cost for some positions may be higher than the hourly rate.

The math is pretty straightforward for a contractor who works on the job site and has one or two crew members. We determined the breakeven point is $28.82.

We can see we have a breakeven point of $28.82 and two hourly rates of $22.55 and $24.85. Let’s see what happens when we round up slightly using $30.00 for the hourly rate

Employee #1$30.00$22.55$7.45
Employee #2$30.00$24.85$5.15
Hourly Profit$13.77
Daily Profit  $110.16

The hourly labor profit is $13.77 per hour.

What happens when employee #1 takes the day off?

Employee #2$30.00$24.85$5.15
Hourly Profit $6.32
Daily Profit  $50.56

The hourly labor profit is $6.32 per hour.

$110.16 – $50.56 = $59.60

The daily labor profit drops by $59.60.

Non-Billable Hours

Consider that the actual employee billable hours each day does not always equal the hours worked. Productive work time and payroll will fluctuate due to several variables. Some can be planned for, and others are unknown.


  • Downtime.
    • Power outages
    • Broken tools
    • Material shortage, wrong materials
  • Warranty work
  • Training time
  • Travel time
  • Company and safety meetings
  • Paid time off


Understanding costs is the best guide to establishing the hourly rate. Finding the hourly rate for a business owned and run by one person is pretty straightforward. The formulas used to determine an hourly rate can become quite complicated with employees. Finding the minimum rate helps to establish a break-even point. Any less would result in a loss to the business.

Ultimately the hourly rate needs to be competitive and high enough to provide a living for the owner; with planning, the hourly rate will allow the company to be profitable and grow. An accountant can provide better information to help establish hourly rates.

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What is Your Time Worth?

Contractor showing his worth

With every estimate, there is a debate and a decision to be made about where the numbers need to land. It’s a juggling act. “If I charge too much for the time, I might not get the job. If I don’t charge for enough, I won’t make a profit.”

When clients ask about pricing, you need to justify the amount confidently. Confidence comes with experience. There isn’t a contractor that hasn’t learned the painful lesson of underestimating the cost of a job. It’s a difficult position to be in.

You wear many hats. Estimating and selling is a part of the project as much as building the project. Calculating an estimate is based on knowledge but often includes unknowns and is not an exact science. Sometimes you are right on the money; other times, you count your losses and move on.

Worth Taking the Job?

When a new contractor starts, they can easily find themselves struggling with the value of their time. It can be difficult to establish consistent work in the first few years. It takes patience and time to build a client base.

Although there is value to accepting anything you can get your hands on, it is not sustainable if you lose money on every job.  Sometimes you have a gut feeling about taking a project. Trust your gut. If you have reservations, stop and reconsider taking the job. When things feel off, it most likely was not a good fit. The job with the picky homeowner may result in a nightmare. Focus on getting better jobs.

Sometimes there is a good reason for taking a job and not making a profit. An example would be a small repair job that takes under an hour and involves 2 or 3 trips to a hardware store. It’s not the type of job you would typically take. You would charge a minimum trip charge, but you’ve been asked to help someone out and decide to waive the trip charge. In this situation, it’s about goodwill, which can go a long way. It may not be a profitable job, but it may pay off down the line with referrals that lead to better jobs.

Another example is when an unprofitable job may lead to a more profitable, more significant job. This may be a step towards becoming a homeowner’s go-to person or a result of submitting a lowball bid to get more work from a large contractor. While profits need to sustain your company, you also ride a fine line to establish future jobs.

Communicate what you are Worth

Clients only see the time physically spent on a project. You may need to educate clients on what goes into a project for the client to understand what your time is worth and the costs involved.  Very few clients have an open checkbook, and most are looking for “the best price.”  One skill needed is the ability to communicate the cost and the reason the client should choose you for the job.

Being the lowest bidder doesn’t guarantee getting the job. Be upfront; let the potential client know that you may not be the cheapest. Follow that up with the reasons that you aren’t the most inexpensive. Present yourself as knowledgeable and trustworthy. Building trust makes money less of a determining factor for clients deciding who to hire.

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5 Best Contractor Do’s and Don’ts

The Five Best Contractor Do’s and Don’ts for Running a Successful Construction Company.

#1 Do honest work and don’t hide problems.

It’s easiest if everything is done right the first time; however, even when you think you’ve done things right, things can go wrong. When this happens, the best option is to be upfront, discuss the problem and come up with a satisfactory solution.

#2 Do listen to an accountant and tax preparer for advice, and don’t ask an accountant or tax preparer to act “unethical.” 

Treat all business partners with respect and learn from them. You are hiring professionals to help guide you and make sound business decisions. This partnership should aim to meet the goals of complying with all applicable laws.

#3 Do pay your subcontractors promptly and don’t make your subcontractors have to ask for payment.

A well-written contract will help maintain a cash flow to pay subcontractors within a reasonable time frame. If work is satisfactory, pay promptly, or that relationship will be lost.

#4 Do keep business transactions separate from personal financial dealings, don’t pierce the corporate veil.

Moving money from one bank account to another may seem pretty benign; however, this may create a liability to the company. Always have checks written to your business and deposit the funds into a business account. Pay only business expenses from the business account, not personal expenses.

#5 Do comply with all regulations and don’t conduct business without being properly licensed and insured.

The construction industry is regulated at the federal, state, and local levels. Noncompliance can cause fines or, worse yet, shut down your business. The best practice is to follow applicable laws.

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Become a Successful Contractor

The path to becoming a successful contractor is having a passion for working with your hands in all conditions and learning the trade.

Some will learn skills from a family member, while others will know the trade through on-the-job training or a high school, technical school, or college program.

The construction industry is an outstanding career. According to the U.S. Bureau of Labor Statistics, the median pay for 2020 was $49,520.

The construction industry offers opportunities to work independently or with teams.

Construction companies may offer a range of services or specialize in a particular type of project.

On top of learning the craft, an understanding of the business is needed to operate a construction company. Search for a mentor. That person can be another contractor, a trade association, or someone from Score.

The amount of knowledge needed to run a business can be overwhelming, let alone a construction company. Build a team that includes people filling in where your weaknesses are. Accurate recordkeeping is a necessary part of business, so find a competent person to handle your financial information. Look for advice and form relationships with an accountant, tax preparer, and banker.

Each state has its own set of rules for licensing requirements. Some states only require a fee, while others require education and testing. Your state department of licensing determines what will be required. After you have your name, registered your business with your Secretary of State, and obtained any required licenses, the hard work of being a business owner begins.

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