Calculating your hourly rate: step by step to your own number
The number is in no industry table. How your own hourly charge-out rate is calculated step by step – and where most businesses get it wrong.
The hourly rate is not a market figure to copy. It is a fraction: all costs of the business divided by the productive hours. Whoever does not know the denominator calculates their margin away and often only notices at the annual accounts.
For solo businesses the same applies, with one important addition: your own salary as the owner belongs in the calculation. Without it, the owner works for free on paper.
The business next door does not know your rate
“What do you charge an hour?” is an understandable question among trades bosses. For your own calculation the answer is still useless.
A joinery with its own workshop, several machines and an office clerk has different costs from a carpenter who fits alone. A metalwork business with a lot of installation, transport and measuring sells different hours from a business that mostly fabricates in the shop.
The hourly rate therefore has to fit your own business. It does not answer the question of what the market accepts. It shows first of all what a sold hour must bring in at minimum so that costs, owner’s salary, risk and profit are covered.
The price in the quote can then sit higher or lower. On a simple, well-planned job a business can calculate differently from an installation with unclear site conditions. But without your own floor, price negotiation quickly turns into a loss-maker.
The numerator holds all costs of the business
The numerator does not only contain the journeyman’s hourly wage. Whoever merely scales up the wage forgets exactly the costs that leave the account at the end of the month anyway.
That includes wage costs plus the employer’s on-costs. Depending on the country these cover pension contributions, health and accident insurance, and other statutory levies. The rates depend on law and agreements – take the figures from your own payroll or your accountant, not from a table.
The numerator also holds the overheads: rent, energy, vehicles, insurance, software, tools, phone, office, and working time that cannot be billed directly. The owner’s salary belongs in it as well. The business must not pay its owner only when money happens to be left over at the end.
Risk and profit also stand in the numerator. Risk absorbs warranty work, rework and bad debts. Profit creates room for investment and makes the business worth something in the long run.
Productive hours decide the whole calculation
The denominator is the heart of the whole calculation. Not every paid hour is an hour that can land on an invoice or in a bill of quantities.
The calendar staircase starts simply:
| Step | Days |
|---|---|
| Calendar days | 365 |
| Weekdays Monday to Friday | 261 |
| minus public holidays on weekdays | depends on the year |
| Working days before leave and sickness | depends on the year |
| minus leave and sickness | specific to the business |
| Attendance days | specific to the business |
| minus unproductive time | specific to the business |
| Productive hours | specific to the business |
Count the public holidays falling on weekdays in your own calendar – it changes from year to year. The length of leave follows the law and any collective agreement; what counts is the arrangement in your own business.
For sickness, no statistic gives you your number. Use your own years’ actual figures if they are recorded – and if they are not, that is the first thing to fix.
Then come the times that land in no job: loading the van, fetching material, preparing measurements, meetings, tidying the workshop, rework, training, or idle time between two appointments. They are not worthless. They are just not directly sellable.
This is exactly where time tracking becomes the data basis of the calculation. A business that collects hours on slips of paper but never post-calculates them against the job is only guessing its productive hours. Only the job costing shows how many of the calendar’s hours actually became billable.
An example with open assumptions
The following example shows the calculation logic for a metalwork business with three productive tradespeople. The numbers are explicitly open assumptions, not industry figures and not statistics. Every one of them must be replaced with your own business’s values.
The example assumes:
three tradespeople at 25 euros gross hourly wage each
eight paid hours per weekday
254 working days after public holidays
25 days of leave per tradesperson
10 sick days per tradesperson
employer on-costs of 25 per cent of gross pay in total
25 per cent unproductive time within the attendance days
90,000 euros overheads per year
60,000 euros owner’s salary per year
30,000 euros for risk and profit per year
First the wage costs. With 261 weekdays and eight hours, each tradesperson accounts for 2,088 paid hours; with three, that is 6,264 hours.
The assumed gross pay is thus 156,600 euros. On top come 25 per cent employer on-costs: 39,150 euros. Together that is 195,750 euros in staff costs.
Now the denominator. From 254 working days we deduct 25 days of leave and 10 sick days in the example. That leaves 219 attendance days per tradesperson.
Multiplied by eight hours, that is 1,752 attendance hours per tradesperson. Of those, 25 per cent are unproductive in the example. What remains is 1,314 productive hours per tradesperson – with three, 3,942 productive hours.
The complete numerator:
195,750 euros staff costs
90,000 euros overheads
60,000 euros owner’s salary
30,000 euros risk and profit
That adds up to 375,750 euros. Divided by 3,942 productive hours, it yields an hourly rate of 95.32 euros.
That is no recommendation for metalwork or joinery. It is a transparent worked example. Change just one assumption about the productive hours and the rate shifts noticeably.
Where the calculation goes expensively wrong
The most common mistake is a denominator that is too big. Whoever counts all attendance hours as billable spreads the costs across hours that are never paid.
In a joinery that happens fast: a journeyman builds a staircase, loads material, drives to the site, talks to the site manager and fixes a small blemish after installation. Only part of that time sits cleanly in the job. The remaining time still has to be financed through the calculation.
The second mistake is considering only the wage on-costs and talking the overheads small. A machine standing idle, an office writing quotes and a van driving to the customer do not vanish from the calculation because they are not attached to a line item right now.
The third mistake: the owner’s salary is missing. That is particularly widespread in smaller businesses, because the owner works on site himself. The business then looks profitable on paper although the boss is not paid for his own effort.
A car workshop can serve as a contrast to show why caution is needed: there, workshop hours and materials can often be separated differently from an individual installation in metalwork. So adopt neither someone else’s rates nor someone else’s productivity assumptions.
The calculation scheme for your own number
This scheme can be transferred straight into a costing or a spreadsheet:
Gross wage costs:
[gross pay of all productive employees]Employer on-costs:
[gross wage costs × rate from your own payroll] + [insurances]Total costs:
[gross wage costs] + [employer on-costs] + [overheads] + [owner's salary] + [risk and profit]Attendance hours:
[working days after public holidays] − [days of leave] − [sick days], then× [working hours per day]Productive hours:
[attendance hours] − [unproductive hours]Hourly rate:
[total costs] ÷ [productive hours]
Frequently asked questions
Add up gross wages, employer on-costs, overheads, the owner's salary, plus risk and profit. Divide that sum by the business's productive hours. You get the productive hours from recorded and post-calculated job times, not from the paid calendar hours.
The hourly wage is an employee's gross pay for one hour of work. The hourly rate must additionally cover employer on-costs, overheads, the owner's salary, plus risk and profit. That is why it sits well above a journeyman's hourly wage.
365 calendar days lead to 261 weekdays, from which public holidays, leave, sickness and other absences are deducted. How many of the remaining hours are productive is specific to the business and must be shown by the job costing.
A sold hour has to pay not only the wage but also on-costs, insurance, vehicles, workshop, office and unproductive time. On top come the owner's salary, risk and profit. The hourly rate finances the whole business, not just one person's work.