Your True Hourly Rate: Why It Is Higher Than You Think

Why a Day Rate Copied from Someone Else is a Guess

Many tradespeople set their rates by borrowing figures. They listen to what others are charging, add a tenner for good measure, and think they've got it sorted. But that's like fitting a kitchen by eye without a tape measure. Every trade business is as unique as the person running it. The van you drive, the tools you use, your location, your mortgage – these are all factors in your true cost of doing business, and they vary widely from one person to the next.

Consider two electricians in the same postcode. One might be driving an old van that's been paid off for years, while the other is making monthly payments on a new model. The first may have a fully equipped workshop, while the second hires out space and incurs rental costs. No surprise, their true hourly rates could be £15 apart or more. Copying what others charge could be underselling yourself, leaving money on the table without even realising it.

Remember, the business costs of someone who lives in a rented flat and the costs of someone with a mortgage are very different. Factor in liabilities like a recent tool investment or professional development courses. Guessing your rate by benchmarking against someone else might feel simple, but it ignores these critical personal business details. Don't leave your price to chance; understand your true costs and set your rates with precision.

In an industry where reputation and quality are crucial, justifying your rates becomes easier when they're backed by real numbers. This not only helps in negotiations with clients but also reassures them that they're paying for top-notch service. So, while a mate's rate is a starting point, the real work begins by doing your own sums and figuring out what you need to charge to keep your business afloat – and hopefully, thriving.

Building the Number: Costs Over a Year

Think of your business costs as a cake you need to bake every year. You start with the basics: your own wage or drawings. Without this, you can't put bread on the table. Next, add the costs that keep the business moving – van finance, fuel, insurance, and perhaps parking permits if you're in an urban area. Then there are the tools of the trade. Whether you're kitting out a new apprentice or just replacing worn gear, these costs add up.

Don't forget the 'silent spenders': phone bills, accountancy fees, training, and PPE. You might not buy new safety boots every month, but planned replacements need budgeting. Think about slow weeks or off-seasons too. Have a buffer to cover these periods when work might not be constant. Some trades have busier seasons, and understanding your annual rhythm helps in setting aside enough to cover leaner months.

Your costs don't end with tangible items. Time is money, especially unbilled time. Consider the hours spent sourcing materials, planning jobs, running quotes, and doing paperwork. Without adding these into your calculations, you could be shortchanging yourself. This total annual cost doesn't just ensure you break even; it ensures your business can thrive beyond a single job, covering all it takes to stay afloat and hopefully, successful.

Always be mindful of increases over time – fuel costs rise, insurance premiums change, and your aspirations might require further investment. This foresight ensures your pricing covers not only the expected but the unexpected as well. It's wise to review and adjust annually or even semi-annually, keeping track of any changes in expenditure or unexpected economic factors affecting costs.

Billable Hours Are Lower Than You Think

You might feel as if you're working all hours under the sun, but not every minute sees a return. The typical 45-hour work week includes a fair bit of non-chargeable time. From drafting quotes in the evening to navigating your way through traffic for site visits, hours disappear quickly. In reality, you can expect to bill between 25 to 32 hours weekly once everything else is accounted for.

Understanding this breakdown is crucial. For many, it’s shocking to realise they’re only properly billing for 1,300 to 1,600 hours a year when the calendar shows over 2,000 working hours. Subtract the time you spend on annual leave, sick days, and off-peak periods. Are you tracking every hour accurately in your diary? Often, this exercise reveals where valuable pricing adjustments can be made.

To optimise this, practice smart scheduling. Cluster jobs geographically to reduce travel time between sites, and batch administrative tasks. As digital tools become more sophisticated, consider using project management apps designed specifically for trades. These can help streamline processes, making your non-billable hours as productive as possible.

Moreover, communication with clients can recognise and potentially reduce these hours. For example, explaining delivery windows and their impact on billable time might encourage customers to ensure materials are on-site ahead so you’re not clock-watching while waiting for suppliers. Each billable hour is precious – structuring your week efficiently maximizes this precious resource.

In summary, when you see your realistic yearly billable hours contrasted against those you anticipated, you can adjust your pricing to reflect this. While it's a hard truth, recognising that each second counts should transform your approach and ensure you're billing what you’re worth.

• –Count actual chargeable hours from the last 3 months of your diary, not what you hope for.
• –Deduct holiday, sickness, and slow weeks from the annual total before dividing.
• –Recalculate every 12 months as costs and workload change.
• –Consider dedicated software to manage and monitor work hours effectively.
• –Balance jobs geographically to cut down unbillable travel time.

The Pitfall of Undercharging

Undercharging is a silent killer in the trade industry. It happens more often than you'd think, usually out of a fear of losing work to competitors. But in reality, consistently undercharging leads to cash flow issues that can stifle growth. The symptoms creep in subtly at first: delayed payments on expenses, cutting corners on quality materials, or worse, forgoing your wage to keep things afloat.

Many tradespeople assume that securing a job by offering the lowest price is the way forward. However, committing to low rates that don't cover your base costs doesn't just impact you; it affects the entire trade community by setting unrealistic pricing expectations. Consider this: if you match a competitor’s suspiciously low price, are you compromising your standards and potentially tarnishing your reputation?

Awareness is key. Understanding that every undercut tack as a race to the bottom means your business can never thrive on the 'cheap' ticket. It's about justifying why you're worth your quote – whether it’s your expertise, reliability, or the quality of the work delivered. Most clients are happy to pay more for peace of mind knowing the job's done right the first time. Strong client relationships are built on transparency, quality, and trust, not the allure of a discounted price.

Moreover, pricing correctly builds confidence. It enables you to invest back into the business, whether it’s upgrading tools, undertaking further training, or simply saving for future security. A job with a healthy margin doesn't just pay for today, but it acts as a secure foundation for tomorrow. Every quote you set is a step towards sustainability and prosperity.

Margin Isn't a Dirty Word

Profit margin often gets a bad rap as though it’s a display of greed. In truth, a healthy margin distinguishes a surviving business from a thriving one. Margin fuels growth, pays for unforeseen circumstances (like a worldwide pandemic), and gives you breathing room to take on opportunities or deal with challenges head-on. A reasonable margin ensures that your business has room to manoeuvre.

Many tradespeople focus solely on breaking even, which is akin to treading water. If you’re only charging enough to cover your costs, where's the money for new tools, training, or an unexpected council bill? A margin is the safety net that means you won’t be driven into panic mode by an unexpected expense. It’s also the fund from which bonuses and pay rises come.

Don’t apologise for adding margin to your quotes. It’s a standard business practice across all industries. When the painter quotes for the cost of materials plus their time, they’re doing nothing different from what supermarkets do when pricing their goods. Show your clients how this practice benefits them. A company that can afford the occasional warranty repair or callback says a lot about its commitment to quality and longevity.

Always review your margin periodically. As costs change – perhaps supplier prices fluctuate or new regulations bring additional compliance expenses – adjust your margin to keep pace. It’s a fluid number, reacting to the environment you operate within.

Consider each job a chance to fine-tune your margins and quote accurately. Seek feedback and understand which jobs delivered the best value for both you and the client. Over time, this practice solidifies your business standing and helps to predict future cash flow and profitability more accurately.

Communicating Value to Clients

It’s one thing to know your worth, another to communicate it effectively to your clients. Clear communication not only justifies your rates but enhances your professional image. Clients need reassurance that what they’re paying covers all the safety, quality, and reliability they expect. This transparency builds trust and eliminates any guesswork about where their money goes.

Start by explaining your quote clearly. Break down the costs into understandable chunks. Let’s say, for example, you’re a plumber offering a breakdown that includes parts, labour, call-out charges, and a margin for aftercare services. Showing clients this level of detail assures them that you've considered every aspect of the job and are providing comprehensive service. It’s about more than just installing a boiler; it’s about adding value through expertise.

Furthermore, highlight what sets you apart. Maybe it’s your industry accreditations, exceptional customer service, or warranties. Clients are often willing to pay more for a premium service that promises peace of mind. Comparatively, individuals looking for the cheapest options may not always be the ideal clients you want for building long-term relationships.

Take this a step forward by sharing client testimonials or case studies. Positive feedback from past projects adds credibility. To many clients, it's worth shelling out a bit extra if they know others have had exceptional experiences with you. A detailed portfolio or simple photo album showcasing your work can also speak volumes.

Ultimately, well-communicated value justifies your pricing while setting clear expectations for all parties involved. When clients see the tangible benefits of your rates, you’re more than just another option; you become their preferred choice for future projects.

Regular Review and Adjustment

Your pricing strategy isn't something to set and forget. Regular review is essential for staying competitive and ensuring your business remains profitable. Cost variables change all the time, from material expenses to your own evolving experience and efficiency. This should reflect in your pricing strategy.

Consider setting aside time every few months to review your figures. Take into account any shocks to the system – maybe there's been an increase in fuel costs or a new regulatory compliance that affects your day-to-day operations. These alterations should feed back into your costs and, by extension, your quotes.

Don’t be afraid to incrementally adjust your rates. Small changes over time are less likely to affect your client base negatively compared to sudden, drastic hikes. Inform clients about any necessary increases, detailing the reasons behind them. Most will appreciate your transparency and the foresight you’ve demonstrated by maintaining service quality. They’re often more understanding if you anchor your reasoning in rising expenses and not merely greed.

This exercise ensures you never get complacent. Even the most skilled tradespeople risk losing their edge if they don’t adapt. Remain informed about industry trends and philosophies while continuing to grow and attend skill development courses if required. If others in your area are attending renewable energy training, consider how such an offering might bolster your business and enable you to adjust accordingly.

Ultimately, periodic review acts as quality assurance, ensuring you're not only covering your costs but providing a buffer for growth. It serves as a protective measure against unexpected external impacts and aligns your business goals with market realities.

Common mistakes

• –Dividing annual costs by 2,000 hours instead of realistic billable hours
• –Forgetting to include your own wage as a real cost, not 'whatever is left over'
• –Never recalculating after buying a new van or taking on an employee
• –Confusing the rate you charge with the rate you need — they should be the same number, but rarely are

Questions people ask

How often should I recalculate my true hourly rate?

At least once a year, and immediately after any significant cost change — new van finance, a new employee, or a jump in insurance or fuel. Costs creep up quietly and a rate set two years ago is usually stale.

Should my quoted rate exactly match my true hourly rate?

It should be at least your true hourly rate, ideally a bit above to build in profit and a buffer for quiet periods. If your quoted rate is below your true hourly rate, every hour you work is costing the business money.