Most small-shop labor rates come from one of two places: what the shop across town charges, or what the owner charged at his last job plus a little. Neither number knows anything about your overhead, your truck payment, or whether you're actually making money. Copying someone else's rate means copying their costs — and you don't have their costs.
The good news: the math is short. Four steps — billable hours, overhead, wage burden, profit. Every number below is a round example, not an industry average. The method is the point. Pull your own figures from last year's books and plug them in.
Step 1: Count your real billable hours
A tech on the clock 40 hours a week does not bill 40 hours. Driving, restocking, quoting, callbacks, training, and slow Tuesdays all eat time that no customer pays for. Say a tech is paid for 40 hours and, being honest, bills 25 of them. Over 50 working weeks that's 1,250 billable hours a year. That's the divisor for everything that follows — and it's the number owners most often flatter. Count it from real invoices, not from hope. If you overstate billable hours, every result downstream comes out too low, and you'll wonder why busy months still feel broke.
Step 2: Spread your overhead across those hours
Overhead is everything you pay whether or not anyone books a call: truck payments and fuel, insurance, tools, phone, software, shop rent, marketing, licenses, the bookkeeper, and the owner's unbilled office hours. Total it for a full year — last year's tax return is the honest source. For the example, call it $100,000 a year.
Divide by billable hours: $100,000 ÷ 1,250 = $80 of overhead riding on every billable hour. This is the number that shocks people, and it's why the shop across town charging $95 an hour is either much leaner than you or quietly going broke. Your rate has to carry your overhead. Nobody else's rate knows what that is.
Step 3: Load the wage
A tech's cost isn't his wage. Payroll taxes, workers' comp, health insurance, PTO, and retirement matching ride on top — the wage burden. In the example: a $30/hour wage with a 25% burden costs you $30 × 1.25 = $37.50 per hour. Your burden is knowable from your payroll reports; solo owner-operators should burden their own target wage the same way. Add it to overhead: $80 + $37.50 = $117.50. That is your break-even cost per billable hour — bill less than that and you are paying customers to fix their AC.
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Start 14-day free trialStep 4: Add profit on purpose
Profit is not what's left over — it's a line you set. It funds the next truck, the slow season, and the reason you took the risk of owning a shop. To target a 20% margin, divide the cost by 0.8 (don't just add 20% on top — that yields less than a 20% margin): $117.50 ÷ 0.8 = $146.88. Round to a clean $150/hour for the example shop.
| Step | Example math | Result |
|---|---|---|
| Billable hours | 25 hrs/week × 50 weeks | 1,250 hrs/yr |
| Overhead per hour | $100,000 ÷ 1,250 | $80.00 |
| Loaded wage | $30 × 1.25 burden | $37.50 |
| Break-even | $80.00 + $37.50 | $117.50 |
| 20% margin | $117.50 ÷ 0.8 | $146.88 → $150 |
Again: example numbers. A one-truck shop in a cheap market and a 5-person shop in a metro will land in very different places, and both can be right. The method is what transfers, not the $150.
Sanity checks before you publish it
- Recount billable hours from invoices, not memory. It's the most-flattered number in the formula.
- Check overhead against your actual tax return. Owners forget insurance renewals, software, and their own unpaid office time.
- Divide for margin, don't multiply. Adding 20% to cost gives you less than a 20% margin.
- Rerun the math every year, and any quarter where fuel, insurance, or wages move on you.
What to do with the number
If your new rate is well above what you charge today, don't panic and don't jump in one move. Raise in steps, starting with new customers, and let the math give you a spine when someone calls it expensive — you now know exactly what an hour costs you. Then put the rate to work: it's the labor line inside every price in a flat-rate price book, and it's the backbone of every tier in a good-better-best quote. A rate you can defend, in a book you can quote from, beats a guess every single day.