Your labour rate is not something that should be guessed, and you should take time to calculate the rate, so your business remains strong and viable.
Most contractors set their labour rate by looking around at the competition and picking a number that they think they can get away with. This method is fraught with danger, it’s a good way to go broke fast!
I don’t disagree with looking at the competition, it’s a good way to gauge what the market can take, but I do whole heartedly disagree with using it to set your labour sell rate.
To set your labour sell rate you must first look at your costs. Always start with the costs to work out the sell price.
Step 1 – Billable hours
Calculate the BILLABLE hour for each staff member. You may pay your staff for 52 weeks a year, but you charge them out for far less time. The general rule is to minus the sick and holiday entitlements and then minus 20 per cent for inefficiencies.
Step 2 – Labour costs
Calculate the cost per billable hour of each staff member. The costs should include wages, superannuation, workers compensation, uniforms, training, tool allowance, etc. Any expenses you incur because of hiring that individual.
Repeat this formula for each staff member and combine them to calculate the cost of your team per billable hour.
Step 3 – Overheads
You need to recoup the cost of your overheads. You can do this is one of two ways. You can either spread the overhead over your total billable hours (the total number of billable hours for all staff combined) OR you can choose to recoup them as a percentage of your turnover.
• Option 1 – Recoup the overheads on your Billable Hours – Estimate the total overhead costs for the financial year. Divide this number by the total amount of billable hours for the year. This will show you how much your overheads cost per billable hour
• Option 2 – Spread the overheads over your turnover – with this option you need to calculate what percentage of your turnover is overheads (speak with your accountant, they should be able to give you this number). This number fluctuates wildly between businesses, but usually sits between 10-30 per cent. Once you know that number you need to add on that percentage to break even, and of course extra to make a profit.
NOTE: Be aware that with this option you need to recoup the overheads on all cost of sale costs, not just labour.
Once you have run the costs and applied a healthy profit margin, then you can look around and see what the competition is charging. You may be able to squeeze a little more profit out because the market can handle you charging a little more than you need. What you absolutely cannot do is charge less than the number you calculate.