Most contractors price by guessing or copying competitors. The ones who know their real number are the ones still in business.
Here's a uncomfortable truth about the trades: most contractors set their hourly rate by looking at what the guy down the street charges, then knocking off a few bucks to "stay competitive." It feels pragmatic. It works — until it doesn't. The contractors who survive their first five years all share one habit: they know their break-even rate to the dollar, and they never price below it.
Your break-even rate is the hourly billing rate that covers every single cost of running your business with zero profit left over. Charge below it and you're paying to work. Charge above it and every hour builds equity. It sounds simple, but almost no one calculates it correctly because the real cost of an hour of labor is buried under three layers that most contractors never unwrap.
Break-even is the floor. It's the rate at which total revenue equals total cost. At break-even, you earn nothing, but you lose nothing. Every dollar above break-even is profit. Every dollar below it is a slow bleed that most owners don't notice until the bank account is empty at the end of the quarter.
The reason contractors underprice isn't arrogance or generosity — it's that the true cost of an hour is much higher than the wage they see on the paycheck. Three layers of hidden cost sit between the wage and the real number.
Labor burden is everything you pay on top of the base wage. It includes:
In the skilled trades, total labor burden commonly runs 25% to 40% of base wages. A tech earning $28/hour doesn't cost you $28 — they cost you $36 to $39 per paid hour.
You pay your techs for 8 hours a day. You bill customers for far fewer. The gap is called utilization, and it's where most contractors lose money without realizing it.
Non-billable time includes:
Real-world utilization in the trades typically runs 55% to 75%. A 65% utilization rate means for every 8 hours you pay a tech, you bill 5.2 hours. The other 2.8 hours still cost you — but no one invoices for them.
Overhead is everything you spend that isn't directly tied to a specific job: rent, truck payments, liability insurance, software, phone, office staff, marketing, and your own salary if you manage rather than swing a hammer. These costs exist whether you bill one hour or forty.
The key question: how many billable hours do you actually generate per year? Overhead divided by billable hours gives you the overhead recovery per hour — and this number is often larger than the labor cost itself.
Let's calculate the true break-even rate for a small electrical shop with three technicians. Here are the assumptions:
Step 1 — Burdened wage:
$28 × 1.30 = $36.40 per paid hour
Step 2 — Cost per billable hour:
$36.40 ÷ 0.65 = $56.00 per billable hour
At 65% utilization, each billable hour has to carry 35% of unpaid time. That's why the cost jumps from $36.40 to $56.
Step 3 — Billable hours per year:
2,080 hrs × 0.65 × 3 techs = 4,056 billable hours
Step 4 — Overhead per billable hour:
$120,000 ÷ 4,056 = $29.58 per billable hour
Step 5 — Break-even rate:
$56.00 + $29.58 = $85.58/hour
Step 6 — Add profit (target 18% net margin):
$85.58 ÷ (1 − 0.18) = $104.36/hour
That's the rate. Not a guess, not a competitor's price — your actual number, derived from your actual costs. If you charge $75/hour because "that's what everyone charges around here," you're losing $10.58 on every single hour you bill. Over 4,000 billable hours a year, that's $42,000 in losses disguised as revenue.
One of the most expensive mistakes in contractor pricing is confusing markup with margin. They look similar but produce very different numbers.
If you want a 20% net margin — which you should, because overhead and surprise costs will eat into it — you must use the margin formula: price = cost ÷ (1 − margin). Using "cost plus 20%" silently underprices every hour by about 3 percentage points of actual margin.
If your tech spends 90 minutes driving to and from a job, that's paid time with zero billable revenue. It must be absorbed into your utilization rate. Many contractors bill "portal-to-portal" but still quote rates based on 8 billable hours. The real billable day is closer to 5–6 hours.
$28/hour is not your labor cost. $36.40/hour is. If you price off the base wage, you're silently eating 30% of labor cost on every job. This is the single most common error, and it compounds across an entire year.
If you manage the shop, estimate jobs, handle scheduling, and chase receivables — that's overhead labor. Your salary belongs in the overhead number. Owners who "don't pay themselves a salary" until the end of the year are actually subsidizing the business with free labor, and their break-even rate is artificially low.
65% utilization sounds pessimistic, but it's realistic. New contractors often assume 85–90% because they plan for "every hour on a job." Then come callbacks, weather, parts runs, no-shows, and the thousand small interruptions of a real business. Use your actual time-tracking data if you have it. If you don't, start tracking today.
Once you know your break-even rate, three things become clear:
First, you know your floor — the absolute minimum you can charge without losing money. Any discount below this rate is a donation. Second, you can calculate a target billing rate with real profit built in. Third, you can evaluate jobs: if a customer wants a price that's below break-even, you walk away knowing the math — not the gut — told you to.
The contractors who stay profitable aren't the ones with the lowest prices. They're the ones who know their costs and price accordingly. Your break-even rate is the most important number in your business. Calculate it. Write it down. Never price below it.
For trip-specific pricing — single service calls, diagnostics, and minimum charges — see the Service Call Minimum & Trip Charge Calculator.