How to Calculate Your Charge-Out Rate as a Tradesperson

The examples in this article use UK pounds and typical UK costs, but the method works for tradespeople in any country and any currency.

What Is a Charge-Out Rate?

Your charge-out rate is the amount you need to charge a customer for your labour so that your business covers all its costs and makes a worthwhile profit.

It is not the hourly wage you would like to earn. Understanding that difference is one of the most important things in running a trade business.

A tradesperson might decide: "I want to earn £25 an hour, so I will charge customers £30 or £35 an hour."

That calculation ignores most of the cost of running the business. Your charge-out rate has to pay for much more than your personal wage. It may also need to cover:

•       Vehicle costs and fuel

•       Insurance

•       Tools and equipment

•       Accountancy

•       Telephone and internet

•       Advertising and software

•       Workwear

•       Training, certification and professional memberships

•       Administration time

•       Holidays, sick days and bank holidays

•       Time spent preparing quotations

•       Time travelling between jobs

•       Unproductive time

•       Business profit

If these costs are not included somewhere in your pricing, they come out of your own pocket. That is why you need to know your true charge-out rate.

TradeProfitApp lets you enter these costs and shows you what your business needs to recover from every job.

Your Wage Is Not Your Charge-Out Rate

Say you want to earn the equivalent of £30 an hour. Charging a customer £30 an hour will not give you a £30-an-hour income, because you still have to pay the costs of running the business out of that money.

Even £40 an hour may not be enough if the business has significant overheads. This is where many self-employed tradespeople get caught out.

An employee does not personally pay for the van they drive, the business insurance, the advertising, the accountant, the tools, the software or the time spent finding the next job. A self-employed tradesperson pays for all of it.

Your charge-out rate therefore needs to be considerably higher than the hourly income you want to take from the business.

Step 1: Decide What You Want to Earn

Start by deciding what you reasonably want the business to pay you. For example, suppose you want an annual personal income of:

£40,000

You cannot simply divide £40,000 by 52 weeks and then by 40 hours. You will not have 52 full working weeks to charge customers. You need to allow for holidays, bank holidays, sickness and other time off. A realistic figure might be:

46 working weeks per year

If you work 40 hours a week:

46 × 40 = 1,840 working hours

At first glance:

£40,000 ÷ 1,840 = £21.74 per hour

That figure is nowhere near your correct charge-out rate. It does not yet include your business overheads or the hours you cannot bill.

Step 2: Work Out Your Annual Business Overheads

Every business has overheads. Some are obvious. Others are easily forgotten. Typical annual overheads for a trade business include:

•       Vehicle costs: finance, insurance, tax, servicing, repairs and fuel

•       Public liability insurance

•       Employers' liability insurance where it applies

•       Tool insurance

•       Accountancy and bookkeeping

•       Bank charges

•       Mobile phone and internet

•       Website costs and advertising

•       Trade association membership

•       Certification and training

•       Software subscriptions

•       Tools and replacement equipment

•       Workwear and PPE

•       Office costs

Suppose your total annual overheads come to:

£18,000

With a target income of £40,000, the business now needs to bring in at least:

£40,000 + £18,000 = £58,000

And that is before any profit.

For a closer look at this, read our guide on how overheads affect what you need to charge.

Step 3: Do Not Assume Every Working Hour Is Billable

This is another major pricing mistake. If you work 40 hours a week, you will not invoice customers for all 40. Some of your time goes on:

•       Driving

•       Preparing estimates

•       Buying, ordering and collecting materials

•       Phone calls and emails

•       Preparing invoices and chasing payment

•       Bookkeeping

•       Cleaning the van and maintaining tools

•       Dealing with suppliers

•       Marketing the business

•       Visiting jobs you do not win

All of this work is necessary, but customers are rarely invoiced directly for it. Your billable hours are lower than the hours you actually work.

Suppose you work 40 hours a week but on average charge customers for 30. Over 46 weeks:

30 × 46 = 1,380 billable hours

Your £58,000 has to be recovered from those 1,380 hours:

£58,000 ÷ 1,380 = £42.03 per billable hour

Your required rate has already gone up substantially, and there is still no profit in it.

Step 4: Add Profit

Earning a wage and making a profit are two different things. You should be paid for the work you do. The business should then make a profit on top of that. Profit lets the business:

•       Build cash reserves

•       Replace vehicles and buy equipment

•       Survive quieter periods

•       Invest in marketing

•       Employ people and expand

•       Deal with unexpected bills

If the business only brings in enough to pay your wage and its bills, you have created a job for yourself, not a strong business.

Suppose you decide your pricing should include an extra 15% for profit:

£42.03 × 1.15 = £48.33 per hour

Rounded up, that gives a charge-out rate of around:

£50 per hour

Here is the whole calculation in one place:

Compare that with the £21.74 an hour you got by dividing £40,000 by your theoretical working hours. This is why copying someone else's hourly rate is so dangerous.

Step 5: Check Your Vehicle Costs Are Complete

For most tradespeople the vehicle is one of the biggest business expenses, and it is often underestimated. It is easy to think only about fuel. Your real vehicle costs may include:

•       Purchase or finance payments

•       Depreciation

•       Insurance and road tax

•       MOT, servicing and repairs

•       Tyres

•       Breakdown cover

•       Fuel

•       Parking

•       Cleaning

•       Saving towards a replacement

These all belong in the overheads figure from Step 2. Go back and check you have included every one of them, not just fuel and insurance.

To put it in perspective: if your vehicle costs £10,000 a year and you complete 500 jobs, the vehicle alone costs you:

£10,000 ÷ 500 = £20 per job

That is before you consider how far you travel to individual jobs.

You can include your vehicle costs in TradeProfitApp so they form part of every price you work out instead of being forgotten.

Administration is another hidden cost. A customer may see you working eight hours on site. They do not see:

•       30 minutes discussing the work beforehand

•       45 minutes preparing the quotation

•       30 minutes ordering materials

•       20 minutes producing the invoice

•       Time answering messages

•       Time collecting materials

An eight-hour job can easily take ten or eleven hours of your business time. If your price only covers the hours on site, the rest of your time is unpaid.

You can either build an allowance for administration into your charge-out rate or recover it in the price of each job. Either way works. What matters is that the cost is included somewhere.

Step 7: Price Materials Separately

Your charge-out rate covers your labour and business costs. Materials should normally be priced separately, with a mark-up.

If you buy £1,000 of materials and charge the customer £1,000, you have not been paid for:

•       Ordering them

•       Collecting them

•       Checking deliveries

•       Returning wrong items

•       Handling warranties

•       Paying for them before the customer pays you

•       The risk of price rises

A sensible mark-up pays the business for providing that service.

Our guide on how to price materials correctly covers mark-ups in more detail.

A common question among tradespeople is: "What is everyone else charging?"

It is useful to know local market prices, but competitor prices should not decide your charge-out rate. Two electricians in the same town can have completely different costs.

One might:

•       Own their van outright

•       Work from home

•       Have very few overheads

•       Work alone

The other might:

•       Have vehicle finance

•       Rent a workshop

•       Employ an apprentice

•       Pay for several software subscriptions

•       Spend heavily on advertising

They cannot charge the same rate and make the same profit. The same applies in plumbing, heating, carpentry, decorating, building, roofing and every other trade.

Your price has to work for your business. Copying competitors is one of the 20 common pricing mistakes tradespeople make.

Should You Tell Customers Your Hourly Rate?

Not necessarily. Having a charge-out rate does not mean every quotation has to say "Labour: 14 hours at £50 per hour." For many jobs a fixed price is better.

You might work out privately that the job needs:

14 hours × £50 = £700 labour

You then add:

•       Materials and your material mark-up

•       Specialist equipment hire

•       Subcontractors

•       Other expenses

•       A contingency where appropriate

The customer receives one total price. Your charge-out rate is an internal tool for building a profitable price. The customer does not need to see every calculation behind it.

Read more on how to quote like a professional, or use the free Quote & Scope of Works prompt builder from Trade Skills Hub Academy to draft clear, professional quotations.

What About Day Rates?

Many tradespeople prefer to quote a day rate. That is fine, but the day rate should come from your calculated hourly rate, not from a guess.

If your charge-out rate is £50 an hour and you expect seven productive hours in a working day:

£50 × 7 = £350 per day

You may need to charge more depending on travel time, the type of job and other circumstances. A day rate makes pricing simpler, but you still need to understand the figures behind it.

Once you know what an hour needs to earn, the next step is working out how many hours a job will really take. Our guide on how to estimate labour times accurately explains how.

If someone works with you, their cost to the business is more than their hourly wage. An employee can also cost you:

•       Employer National Insurance

•       Workplace pension contributions

•       Holiday pay

•       Sick pay

•       Training

•       PPE and tools

•       Insurance

•       Administration

You need to know their true cost to the business. If a mate costs you £18 an hour in total and you charge the customer £18 an hour for them, you make nothing.

Their charge-out rate must cover their full employment cost plus a share of the overheads and profit.

Review Your Charge-Out Rate Regularly

Your charge-out rate is not something you work out once and forget for five years. Costs change. Fuel goes up. Insurance goes up. Vehicles cost more. Software subscriptions change. Wages rise. Materials get dearer. Your own financial needs change too.

Review your pricing at least once a year, and again whenever something major changes in the business, such as:

•       Buying a new van

•       Taking on premises

•       Employing someone

•       Spending more on advertising

•       Buying expensive equipment

A rate that made a profit two years ago may not make one today.

What If the Calculated Rate Seems Too High?

You might calculate that you need £55 an hour but believe competitors are charging £40. Do not automatically drop your figure to £40. First, find out why there is a gap:

•       Are your overheads too high?

•       Are you losing too many hours to administration?

•       Are you travelling too far?

•       Are you undercharging for call-outs?

•       Could you buy materials more efficiently?

•       Are competitors actually charging more than you think?

•       Are they adding margin elsewhere in the price?

•       Or are some competitors simply underpricing?

Being cheaper than a competitor who is losing money is not a sensible strategy. Sometimes the calculation shows a problem with your business model that needs fixing. That is useful to know.

Your Charge-Out Rate Is Only the Starting Point

Knowing your charge-out rate does not mean every job gets priced with exactly the same formula. Some work carries more risk. Some needs specialist skills or expensive equipment. Some has difficult access or happens outside normal hours. Some customers need a lot of administration.

Your standard charge-out rate is the foundation. You then adjust the final price to suit the job.

Calculate Instead of Guessing

Many tradespeople are excellent at their trade but have never been shown how to work out what their business needs to charge. Their pricing ends up based on:

•       Guesswork

•       Competitor prices

•       Old hourly rates

•       What feels reasonable

•       What they think the customer will accept

That can work for a while, but it leaves you not knowing whether the business is really making money.

A better approach is to start from your actual business costs. Enter the costs you know. Use sensible estimates where you have to. Update them as you get better information. Then calculate what the business needs to recover from its jobs.

That is how TradeProfitApp works. Instead of asking "What should I charge?", it starts from the costs of running your business. You can enter your own figures, or start with national-average figures for your country. You can enter your own figures (if known)and edit them as you build a clearer picture of your real expenses.

Try TradeProfitApp

Your charge-out rate: the summary

Your charge-out rate is one of the most important numbers in your trade business. Get it wrong and you can be busy every day and still struggle to make money. Get it right and every job contributes towards:

•       Your income

•       Your overheads

•       Your future business costs

•       Your profit

Stop thinking of your charge-out rate as "what I want to earn per hour". Think of it as:

The amount your business needs to recover for each billable hour to pay all its costs, pay you properly and make a profit.

Once you know that figure, quoting becomes far easier, and your pricing decisions are based on numbers instead of guesswork.

If you want to go further, The Complete Guide to Running a Profitable Trade Business from Trade Skills Hub Academy covers pricing, overheads and profit in full.

TradeProfitApp helps tradespeople understand their real business costs and build realistic, profitable prices. Enter the costs you already know, use editable average figures where you don't have exact numbers yet, and adjust them as your business grows.

Try TradeProfitApp free for three months. No credit card required.