How to Calculate Your Contractor Hourly Rate
By Trade Software USA Editorial · Published October 26, 2026 · Updated October 26, 2026
Quick answer
Add your target owner pay, overhead, and employee costs to get your total annual cost, divide by your realistic billable hours to get a break-even rate, then divide that by (1 − your target profit margin) to get the rate you should charge. Billable hours — not total hours — are the number that trips most contractors up.
Key takeaways
- Total annual cost = owner pay + overhead + employee costs.
- Break-even rate = total annual cost ÷ realistic billable hours.
- Charge rate = break-even rate ÷ (1 − target profit margin).
- Use billable hours, not total working hours — admin and drive time aren't billable.
Step 1: Add up your true annual costs
Start with what the business must cover in a year: the salary you want to pay yourself, your overhead (insurance, vehicle, tools, software, rent, phone), and the fully loaded cost of any employees. This total is what every billable hour has to carry.
Step 2: Use realistic billable hours
This is where most contractors go wrong. You don't bill 40 hours a week. Subtract vacation, admin, driving, quoting, and downtime. A full-time tradesperson often bills far fewer hours than they work. Be honest — overestimating billable hours produces a rate that's too low to survive on.
Step 3: Find your break-even rate
Divide total annual cost by realistic billable hours. If your costs are $120,000 and you bill 1,200 hours, your break-even rate is $100/hour. At that rate you cover costs but make zero profit — so it's a floor, not a target.
Step 4: Add profit (margin, not markup)
To build in profit, divide the break-even rate by (1 − your target margin). For a 20% margin: $100 ÷ 0.8 = $125/hour. Note this is margin (profit as a share of price), not markup (profit as a share of cost) — confusing the two is a classic pricing mistake. Our Hourly Rate Calculator does this math for you and shows the annual revenue you'd need to hit.
Frequently Asked Questions
What's the difference between margin and markup?
Markup is profit as a percentage of cost; margin is profit as a percentage of price. A 50% markup equals about a 33% margin. Price = cost ÷ (1 − margin), while price = cost × (1 + markup).
How many billable hours should I assume?
There's no universal number — it depends on your trade, admin load, and drive time. The safe approach is to track your own billable hours for a few weeks rather than assuming a full 40-hour week is billable.
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