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Working out your hourly rate: the hours you cannot charge for

Most rates in the trades are set by looking sideways: what the firm down the road charges, plus or minus a bit of confidence. That tells you what the market will bear, which is useful. It tells you nothing about whether the number covers your costs, which is the part that decides whether a busy year leaves you with anything.

Start with the hours you can actually sell

This is where the arithmetic goes wrong. A working year looks like a lot of hours until you take out the ones nobody pays for: quoting, travel between jobs, chasing materials, paperwork, holidays, illness, training, the day the van is in for its MOT. What is left — the hours that end up on an invoice — is a good deal less than the hours you work, and the ratio differs enormously between a firm doing week-long installs and one doing four callouts a day.

You do not have to estimate this. If hours are booked against jobs, you can read it off last year.

Then the costs that exist whether or not you work

• Wages and your own drawings, including employer costs
• Vehicles: finance or lease, fuel, insurance, maintenance
• Tools, replacement, calibration and testing
• Insurance, certification, scheme memberships, training
• Premises or storage, phones, software, accountancy
• Bad debt — a real cost, and one most rates ignore

The sum

Total costs, divided by billable hours, gives you the rate at which you break even. Your actual rate is that plus the margin you intend to make. Two things usually surprise people the first time: how high break-even is, and how sensitive it is to the billable ratio. Losing half an hour a day to unpaid work moves the break-even rate more than a large rise in material costs.

Which is why the admin argument is a pricing argument

Every hour spent reconstructing a job from a pad is an hour that has to be carried by the hours you do bill. The case for recording work as it happens is usually made as convenience. It is really about the billable ratio, and the billable ratio is in the denominator of your rate.

Charging different rates for different work

One rate for everything is simple and usually wrong. Emergency work, out-of-hours, specialist work and long installs have different risk and different competition. What matters is that the difference is a decision you made rather than one that happened. And once the rates exist, they belong in a price list the quote pulls from — not in the head of whoever is writing it.

Check it against reality

A rate is a theory. The test is priced hours against worked hours, job by job — see what the job actually cost. If a kind of work is consistently over, the rate is not the problem: the estimate is.