How to set your hourly rate as a contractor (and not under price)

Your contractor hourly rate should be calculated from four numbers: your annual overheads, your target profit, your true billable hours (not total working hours), and your tax and insurance obligations. Divide your total required income by your realistic billable hours, and you get a rate that actually covers the business - not just your time on site. Most contractors skip this step entirely and copy a number from a competitor or a forum post, which is the single biggest reason margins disappear by December.

Why "what everyone else charges" is a bad starting point

Asking around for a "normal" rate feels safer than doing the maths, but it tells you nothing about your own costs. A one-person operation running from a van with hand tools has a completely different cost base to a small firm with two apprentices, a workshop lease and a fleet of vehicles. If you copy someone else's rate, you're really copying their overheads, their debt, and their tolerance for risk - none of which apply to you.

The other problem with copying a market rate is that it ignores utilisation. Two contractors can charge the same hourly rate and end the year in completely different financial positions, simply because one of them only bills for 55% of their working hours and the other bills for 75%. The rate is only half the equation.

The real formula: overheads, profit and billable hours

Start with your annual overheads: van, fuel, insurance, tools, materials storage, software, marketing, accountant fees, and any wages you pay. Add your own target income - what you need to pay yourself, not what's left over after everything else. Add a profit margin on top, typically 10-20% depending on your trade and risk level, so the business can grow and absorb a bad month.

Then comes the part almost everyone gets wrong: billable hours. A full-time contractor works roughly 1,800-2,000 hours a year, but a realistic share of that is spent quoting, driving, ordering materials, doing admin and dealing with call-backs. Many trades find only 60-75% of their hours are actually billable to a customer. If you divide your target income by total working hours instead of billable hours, your rate will be too low to survive the gaps.

A simplified example:

• Overheads: €35,000/year
• Target personal income: €45,000/year
• Profit margin (15%): €12,000/year
• Total required: €92,000/year
• Realistic billable hours: 1,300/year
• Hourly rate needed: €92,000 ÷ 1,300 ≈ €71/hour

That number will look high compared to a rate you might have guessed - which is exactly the point. Guessed rates are almost always too low because they're based on "what feels fair to charge" rather than what the business actually needs to survive.

Common ways contractors quietly undercharge

Undercharging rarely happens through one obvious mistake. It's usually a stack of small habits that each shave a little off the true cost of the job:

• Charging for job time, not total time. Driving, loading the van, and picking up materials are real hours that need to be in the rate or billed separately.
• Ignoring non-billable admin. Quoting, invoicing and phone calls with customers who never book eat hours every week that still need to be funded somehow.
• Forgetting seasonal gaps. A rate that works in a busy month often fails to cover a quiet one, unless it's built on a realistic annual average.
• Discounting under pressure without adjusting scope. A lower price should mean a smaller job, not the same job for less.
• Never revisiting the number. Material costs, fuel and insurance premiums typically rise every year; a rate set in 2023 rarely still covers 2026 costs.

If you want a broader look at pricing a full job rather than just an hourly figure, our guide on how to quote a construction job covers how to turn a rate into a complete, defensible quote.

Hourly rate vs day rate vs fixed price

An hourly rate suits work where scope is genuinely unpredictable - repairs, diagnostics, or jobs where you can't know what you'll find until you open something up. A day rate works well for larger, more continuous jobs where both sides want cost certainty without pricing every single task. A fixed price suits well-defined jobs with a clear scope, and it's usually what customers prefer because it removes the fear of an open-ended bill.

None of these are mutually exclusive. Many contractors quote fixed prices for standard jobs, but fall back to an hourly rate for anything opened up on-site that wasn't part of the original scope - as long as that's stated clearly in the quote before work starts.

Reviewing and raising your rate without losing customers

A rate should typically be reviewed at least once a year, ideally against your actual overhead figures rather than a gut feeling. When you do raise it, existing customers rarely object as much as contractors fear, especially if the increase is modest, explained briefly, and doesn't come with a drop in reliability or quality. New enquiries are the easiest place to introduce a new rate immediately, since there's no comparison to a previous invoice.

If missed calls or slow quote turnaround are costing you jobs regardless of your rate, that's worth fixing first - a well-calculated rate does nothing if half your enquiries never get followed up. Our post on how contractors lose jobs to missed calls covers that side of the problem.

Frequently asked questions

What's a reasonable hourly rate for a contractor?

There's no single reasonable figure across trades and countries - it depends on your overheads, skill level, region and target income. The formula (overheads + income + profit, divided by realistic billable hours) will give you a number specific to your business rather than a market guess.

Should I include materials in my hourly rate?

No, materials are typically billed separately with a markup, while the hourly rate should cover labour, overheads and profit only. Mixing the two makes it harder to see whether your labour pricing is actually sustainable.

How many hours a year are actually billable?

Most contractors can realistically bill 60-75% of their total working hours once driving, quoting, admin and quiet periods are accounted for. Using total hours instead of billable hours is one of the most common reasons rates end up too low.

Is it better to charge hourly or a fixed price?

Fixed prices work well for clearly scoped jobs and are usually preferred by customers, while hourly rates suit unpredictable or diagnostic work. Many contractors use both depending on the job.

How often should I update my hourly rate?

At least once a year, checked against your current overheads, fuel and material costs rather than left unchanged out of habit. Costs typically rise annually, so a static rate quietly erodes your margin over time.

Getting your rate right on paper is only useful if it makes it into every quote consistently. Håndværker AI's quoting tools help you build that rate into fast, accurate quotes without redoing the maths every time - try a free demo at Håndværker AI.

This article was written with AI assistance and quality-checked by Carl & Martin. Questions? Reach us at cs@tilbudsgenerator.dk.