How to work out your charge out rate - a guide for tradespeople
Figuring out how much to charge per hour when you're running your own trade business is one of those challenges that can feel like a big puzzle. But it doesn't have to be rocket science. The goal is to find a rate that not only matches what others are charging but also covers all your costs and leaves room for some profit too.
Here's the basic formula:
(Desired Annual Income ÷ Annual Chargeable Hours) + Business Expenses + Profit Margin = Charge-Out Rate
Before you start calculating your charge-out rate:
Figuring out your charge-out rate doesn't have to feel like solving a complex math problem. You don't have to be a numbers whiz to do it right. But it's worth taking a moment to sit down and go over your numbers carefully. The better you understand your costs and income goals, the more precise your charge-out rate will be.
Below are six key considerations for working out your charge-out rate. Before you crunch the numbers with our free charge-out rate calculator, you should be clear on the following points:
- Decide how much income you want to make a year
- Work out how many hours you can charge for
- Calculate your hourly rate
- Understand your overheads
- Calculate your break-even point
- Add your markup to create your profit margin
- Using ServCraft’s Charge-Out Rate Calculator
- Why getting your charge out rate right is important
1. Decide how much income you want to make a year
How much cash are you aiming to pocket in a year? Think about what kind of lifestyle you're shooting for and if you're expecting any extra cash from investments. Let's keep it simple for now and say you're aiming for a decent R1,000,000 a year.
2. Work out how many hours you can charge for
Using a typical work week (40 hours a week, 52 weeks a year) to guess how many hours you can bill isn't quite accurate. You need to factor in holidays (both personal and public), sick days, and all the hours you'll spend on things you can't charge for, like administrative tasks.
- Sales calls/meetings
- Odd jobs/supply runs
- Communicating with customers
- Generating quotes
- Sending invoices
- Managing jobs/employees/subcontractors
Here's a tip: Try tracking all the time you spend on tasks that you can't bill for in a week. It's eye-opening! Realistically, you might only be able to charge for around 1,350 hours a year, not the full 2,080 you'd expect from working a 40-hour week for 52 weeks straight.
3. Calculate your hourly rate
Once you figure out how many hours you can actually bill for, you can calculate the rate you'll need to cover your expenses and bring in your desired income. So, let's say you're aiming for that R1,000,000 and you've got around 1,350 billable hours in a year. That means you'd have to charge at least R740 per hour to hit your target.
4. Understand your overheads
Let's keep things simple and say we're looking at about R400,000 in overheads for the year. Your overheads should cover all sorts of expenses, like tools, rent, and other stuff you need to keep your business running smoothly.
- Tools and equipment
- Power/electricity
- Rent
- Vehicle expenses (payments/petrol)
- Payroll
- Internet
- Repairs and maintenance
- Taxes
5. Calculate your break-even point
So, if we divide that R400,000 by your 1,350 hours, you're adding an extra R296 to what you need to bring in. That bumps our initial rate of R740/hr up to R1036/hr. But hold on a sec! This is just what you need to break even. If you charge this, you won't be making any profit yet.
6. Add markup to create your profit margin
If you don't have a decent profit margin, there won't be any extra cash to put back into your business. That's why it's important to add on a markup to your charge-out rate. Let's say you add on a reasonable 15%. That means your final charge-out rate would be:
R1036/hr + 15% =
R1191.76 per hour
(rounded up).7. Using ServCraft’s Charge-Out Rate Calculator
With those points in mind, you can punch in the numbers using our calculator. It'll do the maths for you and inform your hourly rate. If you've got employees, run the numbers for yourself and each of them (unless they're all getting the same rate).
Once you know what you should be charging, it's time to check if it's realistic and matches up with what others in the market are charging. Keep in mind, you'll want to run this calculation regularly. Industries change, prices go up and down, and your team size might fluctuate.
If you need a hand, your accountant can lend their expertise to help you figure out the final numbers.
8. Why getting your charge out rate right is important
Follow those six key points, and you can plug the numbers into our online calculator. It'll crunch the numbers and tell you what your hourly rate should be. If you've got employees, run the calculation for yourself and each one of them (unless they're all on the same rate).
Once you've got your rate figured out, it's time to check if it makes sense and matches what others are charging in the market. Keep in mind, you should do this regularly because things change — industries evolve, prices fluctuate, and your team size might vary. If you need a hand, your accountant can lend their expertise to help nail down the final numbers.