Pricing can make or break your service business. When you create a price book and price your services, you first need to do some labor cost calculations to determine your actual cost of business (CODB) and billable labor rates. By knowing your bottom line and how much an employee is costing the company, you can maximize profitability and streamline your business operations.

We know that most electricians, plumbers, HVAC professionals, and other types of service businesses use math on a daily basis, but the shift to flat-rate pricing and calculating direct labor costs can confuse the most seasoned contractors. And who has time to add up numbers in a complicated labor formula when that time could be used to make more money? After all, profit depends on efficiency and billable work.

Use this ServiceTitan labor rate calculator to tabulate a billable hourly labor rate that covers your CODB just enough to break even, then calculate the ideal billable labor rate you should be charging to meet your net profit goals. Based on this calculated working rate, you canCreate a flat rate bookwhich clearly shows customers how much your labor costs factor into the final price.

**Wage rate to cover overheads**

First, you need to know what your company spends in overhead each year. This total does not include costs for materials or equipment, and should not include Technician payroll (we'll look at how Technician labor costs are calculated next).

## How to calculate overhead

The average annual overhead takes into account all fixed and variable assets required for business operations, including:

To rent

Insurance

Office staff payroll

Utilities

## Number of technicians on the payroll

Next, determine how many revenue-generating technicians you want to employ over the next 12 months. Be sure to include any additions planned for your tech team, as well as any foreseeable job cuts. Enter this number into the labor cost calculator.

## Projected billable hours

Before calculating a billable labor rate, determine how many billable hours each technician works per year. Read on to learn how to extrapolate billable hours per technician.

**Calculate billable hours**

Total billable hours takes into account how many paid holidays and vacation or sick days each technician gets in a calendar year, so grab your PTO calendar and start counting.

Once you know these days are non-billable, subtract that time from the 40 hours the technician records each week multiplied by the 52 weeks of a year, which equals 2,080 total hours worked to begin with.

Suppose your service company takes seven days off on public holidays each year and each technician gets 10 paid vacation days. Here's how you would calculate the hours available per year for each technician:

**Cost of an employee: Paid time off**

(vacation + paid time off) x 8 hours per day = hours spent per year__ it does not work__on workdays

17 days x 8 hours = 136 hours

Then subtract that total from the 2,080 hours available to work each year and enter the total hours available to work each year in the Employment Cost Calculator above.

**avg working hours annually**

2,080 - 136 = 1,944 hours per technician

## Definition of labor costs

Just because a technician works 1,944 hours a year doesn't mean he or she is making a profit for all that time, so you can't use that total in your billable work calculation. To determine the projected billable hours per technician, you must calculate what percentage of a technician's work day results in billable hours on average.

It's important to be realistic about the labor cost percentage per hour, as most business leaders like to think that their technicians are bringing in more profit than is actually feasible in a day, especially when you factor in non-billable time spent on general and administrative tasks is expended. such as:

Travel and refueling stops

Providing free job estimates

Warranty Services and Recalls

Stocking of work vehicles and tool maintenance

Log job details like mileage and parts used

(Video) Mobile check capturing for Service Titan paymentsPreparation of documents such as invoices and cost estimates

## Billable Hourly Efficiency Rate: How to Calculate Labor Cost Percentage

To predict how many billable hours each technician will work on average, you need to know your average billable hours percentage, also known as the utilization rate. In an 8-hour workday, what percentage of your technicians' time is spent on billable tasks when they're actually on a jobsite making repairs, performing customer maintenance, or installing equipment?

What is a good labor cost percentage?usage ratesvary by industry, but for trades it tends to be lower than other professional services because you need to be on-site to actually perform billable work — whereas, say, a clerk at a consulting agency might do billable work 24 hours a day or 24 hours a day the night.

For most service companies, 30 percent is considered a good efficiency rate, while 50 percent would provide extremely efficient payroll accounting. That means that out of eight hours, if a technician does approximately 2.4 hours of billable work per day, the percentage of billable hours averages 30 percent. At a 50 percent billable hour efficiency rate, a technician performs four hours of billable work and spends half a day at a customer's home or commercial job site performing services.

Remember that a half-day HVAC or electrical system installation can mean 50 percent billable efficiency*this day*, you need to calculate the average total of all workdays throughout the year, and it's unlikely that all of your technicians are working on large installation jobs every day.

## Projected billable hours per technician

Once you've estimated this average billable efficiency rate, convert the percentage to a decimal (30 percent = 0.30) and multiply it by the total available work hour per year that you calculated above.

So if you use the total of 1,944 available man-hours at 30 percent utilization, you're left with 583.2 billable hours per technician annually. You enter this total for the projected annual billable hours into the labor calculator to calculate your direct labor cost.

**Formula for direct labor costs:**

1,944 x 0.30 = 583.2 estimated billable hours per technician per year

**Hourly rate just to cover overhead**

Now that you know approximately how many billable hours each technician works, multiply that total by the number of technicians you plan to hire in the coming year to get the total billable hours for the company as a whole.

**Labor cost formula:**

583.2 annual billable hours x 5 technicians = 2,916 billable hours for the technician team

Next, divide your total overhead by the team's total billable hours in a year to get the hourly rate that would only cover the overhead.

**Overhead formula:**

$100,000 overhead ÷ 2,916 total billable hours = $34.29 per hour just to cover overhead

**Break-even rate per hour sold**

Take it a step further and see how much you would need to charge per hour to cover both overhead and labor costs for all your technicians working during billable hours. This work calculation gives your bottom line break even for billable time.

## Personnel cost calculator: Determination of the hourly rate to cover the tech costs

How much does an employee cost your company in total? You need to start by calculating the average hourly rate you pay your technicians, which includes:

Taxes, including FICA and income

health care and benefits

All other direct labor costs related to employment in the technical field, such as B. Commission or special payments

## How to calculate labor costs

If technicians cost you an average hourly rate of $28 - including all taxes, benefits, and other costs - and you employ 5 technicians totaling 2,916 billable hours per year, multiply your average hourly rate per technician ($28) by the total billable hours (2,916) to get your technician's billable labor costs. Add this number to your overhead for total expenses incurred during billable hours.

**Direct working formula:**

(Annual billable hours per technician) X (number of technicians) = (total billable hours for company) X (average hourly rate per technician)

**Personnel cost calculator:**

583.2 billable hours x 5 technicians = 2,916 total billable hours

2,916 total billable hours x $28 per hour = $81,648 billable technician labor costs + overhead

**Employee wages plus overheads:**

$81,648 for technicians + $100,000 for overhead = $181,648 total cost

Divide that total spend by the total number of billable hours for your engineering team to get your break-even labor rate.

**Results in the labor cost calculator: break-even rate per billable hour**

$181,648 ÷ 2,916 hours = $62.29 per hour sold

**Desired Net Profit**

Now you know what the rate needs to be to keep you from losing money, but how much should you charge for the work for your business to make a profit? Finding this direct pay rate starts with determining your desired net profit.

Net profit is your profit divided by total sales. For service companies, 25 percent is considered a good starting point. You can expect 30 percent or more as you continue to grow the business. Enter this percentage into the labor cost calculator to calculate your ideal billable labor rate.

**Billable working rate for profitability**

To find your profitable working rate, divide the break-even working rate by the percentage of expenses in your projected budget -- that's the equivalent of your desired net profit percentage. So if your net profit target is 30 percent, divide by 70 percent or 0.70 to bring your billable working rate to your desired profitability.

**Business mathematics tip:**Don't multiply the break-even hourly rate by 30 percent, as you'll end up with a lower labor rate overall. You divide by 70 percent to add a premium to the calculation*Percentage of Cost*that's gain, vs. that*percent of the price*this is profit – aka theprofit margin.

**To calculate the direct wage rate for profitability:**

(Break-Even Rate per Billable Hour) ÷ (1 - Desired Net Profit expressed in decimal places) = Profitable Billable Labor Rate

$62.29 per hour ÷ (1 - 0.30)

$62.29 ÷ 0.70 = $88.99 billable hourly rate to achieve 30 percent net profit

**How ServiceTitan can improve efficiency and profitability**

Understanding your CODB and your ideal working set will ultimately help you increase your profits and identify where you are lacking in efficiency or need to add staff to increase billable productivity. If you are implementing flat rate pricing and want to transition from hourly wagesperformance-related payment, knowing what each hour of labor really costs the company is a crucial factor in this process.

Include your optimal billable labor rate in your price book to easily calculate reasonable flat rates for all jobs. As the numbers clearly show, efficiency has a direct impact on your profitability.Field Service Managementoffers a variety of opportunities to increase profitability and improve efficiency across the organization.

Here is a list of the key features our ServiceTitan field management software offers contractors to help them increase their bottom line:

**Real Time Reports**: Track the of each employeetimesheetsort by task and sort jobs by transaction so you can easily calculate average billable service rates and see where you can improve usage rates. Rundetailed analytics and payroll reportsto determine the average hourly cost of an employee and the total overhead.**Price Book Pro**: Leverage your profitable billable work rate inServiceTitan Price setup wizardto calculate the prices for your custom price book. An integrated, flat-rate price book saves valuable time for the entire team and protects your profit margin, because you know that the calculated billable work rate covers all costs involved and includes your ideal net profit.**Minimize non-billable time**: While every business needs to fit some non-billable time into the schedule,ServiceTitan Feldmanagement-SoftwareSignificantly reduces the time technicians waste filling out paper forms or manually entering job details when they could be doing additional billable work.(Video) Service Titan - Adding and Searching Customer Database

### Disclaimer

*Recommended values are in good faith and for general informational purposes only. We do not guarantee the accuracy of this information. Please note that other external factors can influence or falsify the recommendations. Consult a professional for accurate results.

## FAQs

### What is the formula to calculate labor cost? ›

Direct labor cost per unit = **direct labor hourly rate X time** for producing one unit. First, you need to determine the direct labor hourly rate by dividing the labor cost by the number of hours worked.

**How much should I charge for labor? ›**

Calculate Your Hourly Rate

Business schools teach a standard formula for determining an hourly rate: **Add up your labor and overhead costs, add the profit you want to earn, then divide the total by your hours worked**. This is the minimum you must charge to pay your expenses, pay yourself a salary, and earn a profit.

**How do you calculate cost of services provided? ›**

Divide your total annual cost by your billable hours to find out how much you need to charge per hour to cover expenses. Now multiply the above number by your profit margin to get your hourly service rate.

**How do you calculate labor cost in a restaurant? ›**

**Divide your restaurant's labor cost by its annual revenue**. For example, if the restaurant paid $300,000 a year to its employees and brought in $1,000,000 a year in sales, divide $300,000 by $1,000,000 to get 0.3. Multiply by 100. This final number is your restaurant's labor cost percentage.

**How do you calculate labor cost per serving? ›**

To calculate the number, **multiply the direct labor hourly rate by the number of direct labor hours required to complete one unit**. As a labor cost example, if the direct labor hourly rate is $10 and it takes five hours to complete one unit, the direct labor cost per unit is $10 multiplied by five hours, or $50.

**What is a labor cost example? ›**

Examples of direct labor costs include: **The hourly salary of a quality assurance inspector is adjusted to include health care benefits and short-term disability**. The annual salary of a welder who works on the production line of a steel parts manufacturing company.

**What is standard labor rate? ›**

The price basis standard labor rate is **the price per hour that is charged to a customer for services rendered**. This price is comprised of a standard profit margin, as well as the provider's cost of labor and all labor-related overhead costs (such as benefits).

**How should I charge for my services? ›**

**Price = Costs + Profit Margin.**

- Add up all your business costs, from advertising and software to subscriptions and training, be sure to include every single expense.
- Determine your profit margin. How much profit do you want to make?
- Add them together, and you have your price.

**How do you calculate cost per service unit? ›**

Cost per unit = **(Electricity + Rent + Labor + Raw materials) / Number of units**.

**What is an example of cost of service? ›**

Examples of service cost components include **equipment, staff labor, professional fees, software, license fees, and data center charges**, to name just a few.

### What is labor equation? ›

The simple labor cost per hour formula looks like this: **Labor cost per hour = (gross pay + all annual costs) / actual worked hours per year**.

**What is total labor cost? ›**

What is Total Labor Cost? Total labor cost is **the aggregate cost of the hours worked by all employees, plus all related payroll taxes and benefits**. This amount is used in the budgeting of financial results for a business.