More contracting businesses die from underpricing than from lack of work. Busy-but-broke is the default outcome when you price by gut feel or by copying the guy down the street. Here’s the math that fixes it.
The three numbers that make up a price
Every job price is made of:
- Direct costs — labor on this job, materials, subs, equipment rental, permits, dump fees.
- Overhead — everything you pay whether or not you’re on a job: truck, insurance, phone, software, tools, marketing, bookkeeping, your office time.
- Profit — what the business earns after paying all of the above, including your own wage.
The classic mistake: treating your own pay as “the profit.” Your wage for swinging the hammer is a direct cost. Profit is on top — it’s what funds slow months, truck replacements, and eventually hiring. If your price only covers costs and your wage, you own a job, not a business.
Step 1: Your fully-loaded labor cost
Say you want to pay yourself $35/hour. Your real cost per hour is higher:
| Item | Cost |
|---|---|
| Wage | $35.00 |
| Payroll taxes (~10%) | $3.50 |
| Workers’ comp / liability tied to payroll (~8%) | $2.80 |
| Fully-loaded labor cost | ~$41.30/hr |
Step 2: Your overhead per billable hour
Add up a year of overhead. A realistic solo-operator example:
- Truck payment, fuel, maintenance: $12,000
- Insurance (GL, auto, tools): $4,800
- Phone, software, website: $2,400
- Tools & small equipment: $3,000
- Marketing: $3,600
- Accounting, licenses, misc: $2,200
- Total overhead: $28,000/year
Now the part everyone gets wrong: you can’t spread that across 2,080 hours, because you don’t bill 2,080 hours. Between estimates, driving, quoting, callbacks, and admin, a solo contractor typically bills 1,100–1,300 hours a year.
$28,000 ÷ 1,200 billable hours = $23.30/hour of overhead.
Step 3: Add profit
Break-even rate = $41.30 (labor) + $23.30 (overhead) = $64.60/hour. Charge that and you make zero.
Add a real profit margin — 10% net is a healthy floor, and here’s the part most people botch: margin is not markup. To get a 10% margin you divide by 0.90, not multiply by 1.10:
$64.60 ÷ 0.90 = $71.78 → charge $75/hour.
For a 15% margin: $64.60 ÷ 0.85 = $76 → charge $80/hour.
Worked example: a $4,000-looking job
Deck repair, estimated at 32 labor hours and $1,100 in materials:
| Line | Amount |
|---|---|
| Labor: 32 hrs × $41.30 | $1,322 |
| Materials + 15% handling markup | $1,265 |
| Overhead: 32 hrs × $23.30 | $746 |
| Break-even | $3,333 |
| ÷ 0.85 for 15% net margin | $3,921 |
| Quote | $3,950 |
If you’d quoted the “feels right” $3,200, you’d have paid yourself a wage and lost money as a business — invisibly, until tax time.
Rules that protect you
- Never quote on the spot for anything over a day’s work. “I’ll have your written estimate tomorrow” is professional, not slow.
- Mark up materials 10–20%. Sourcing, hauling, and warrantying materials is work.
- Put a validity window on quotes (15–30 days) so material price swings don’t eat you.
- Track your actuals. After each job, compare estimated vs. actual hours. Your estimating error rate is the most valuable number in your business.
- Raise prices when you’re booked out 4+ weeks. A full calendar at low rates is a pricing error, not success.
Handling “you’re too expensive”
Some price shoppers should say no to you — that’s the system working. Respond with confidence, not discounts: “I understand — my price includes being licensed, insured, and standing behind the work. If price is the top priority, I may not be the right fit.” You’ll be surprised how often they call back.
This week: run your own numbers through the three steps above. Most contractors discover their current rate is $15–$30/hour below where it needs to be.