The more you work, the less you make.
Does this sound like you?
To help you see why this is the case for a lot of contractors let’s walk through an example of what it’s like to break even on an hourly business model.
Break-Even Labor Scenario
Owner/operator with a 5 man crew
Commercial jobs per year:
12 jobs × $75,000 = $900,000
Residential jobs per year:
10 jobs × $50,000 = $500,000
Let’s assume overhead is 25% of the revenue ($350,000)
Here’s what that overhead might look like as line items to get you comfortable thinking about where your own overhead costs are attributed:
The First Mistake
Most contractors wouldn’t make it as far outlining their overhead expenses. But if you want to see what categories should be considered check out my post on that below:
But for this example the first mistake is assuming an unrealistic amount of billable hours for the crew.
If there are 2,080 billable hours in a year, only ~65-70% of those hours may be billable after:
Holidays
Vacations
Sick days
Training
Weather delays
Inefficiency
Non-billable job tasks
As you can imagine what you assume here will shift your break even rate by $10+/hr.
Let’s assume 1,400 billable hours a year from 5 workers for a total of 7,000 billable hours to cover overhead and profit.
The Second Mistake
A lot of contractors ignore profit entirely. So when we ask the question:
“What do I need to charge to break even?”
The next question should be, “How much net profit do you want to make?”
The average is ~5%. In my minimum pricing system I recommend at least 8% to stay in business long-term.
But for the sake of speaking broadly let’s use 5% net profit as an example.
That would be $70,000 in addition to the $350,000 in overhead expenses.
Should profit really be included?
Break-even labor rate includes profit because profit is not optional in a real business.
If your labor rate only covers wages and overhead, the business:
Cannot grow
Cannot survive downturns
Cannot replace equipment
Cannot compensate the owner for risk
Revenue vs. “Breaking-Even”
If you know the business is bringing in $1,400,000 in revenue with 7,000 billable hours, that’s $200/hr. But that’s not your break-even labor rate.
The break-even labor rate is the minimum hourly rate your business must recover from billable labor just to cover overhead and profit.
In this scenario that number would be:
$350,000 in overhead
$70,000 in profit
$420,000 / 7,000-billable hours = $60/hour
But wait there’s more…
You’re assuming:
perfect estimating
no callbacks
no rework
no inefficiency
full utilization
In reality you likely need to be charging even more than that.
How much more?
Find out by following my Minimum Pricing System for contractors.
Stop Underpricing in 1-Hour. Guaranteed.
