Working out a charge-out rate for your trades business

Date: 11th June 2014

measuring your business costs to calculate chargeout rates

Working out, or reassessing, a charge out rate for your trades business is not just a matter of looking at what your competitors are charging and doing the same. Or charging what you think your customers will tolerate. Yes, you do need to consider your competitors’ rates and what the customer is willing to pay.  But there’s more to it.

Some tradespeople enter the market thinking that they will start out by pricing low and then price upward once desirable market penetration has been achieved so as to increase profit margins. This tactic has potential risks. Once you have introduced a product or service at a low price, it creates a low price/value relationship in the consumer’s mind. And this is a very difficult position to move from.

A better starting point is to to ask yourself: what are all the costs involved in delivering my service to the customer?

The following is from The Business of Building.  (Note that these calculations are relevant for trades other than building.)

What to consider

Charge-out rates recover costs beyond those that can be directly invoiced.

Charge-out rates for each category of employee need to cover:

  • working weeks – number of normal hours per working week
  • non-working weeks – annual leave, statutory leave, sick leave and bereavement leave
  • other costs such as KiwiSaver and ACC levies
  • non-productive time – travel time and breaks
  • a profit margin for the business
  • business overheads.

The business costs are:

  • office overheads such as power, phone, rent, office consumables and the wage for the administration person
  • accounting fees
  • vehicle running expenses
  • mobile phone costs
  • tools and equipment
  • personal protective equipment and clothing
  • association membership fees
  • training and CPD costs
  • licensing fees
  • insurance premiums.

Add up the costs and determine what needs to be applied to every chargeable hour so that these costs can be recovered. A good way to work out rates is to use a spreadsheet to do the calculations (see table below). Actual percentages and dollar amounts will depend on the costs of each particular business. The spreadsheet shows that an employee with a pay rate of $30 per hour, based on the figures chosen for this business, should have a charge-out rate of $49.60 per hour, plus GST. Review charge-out rates at least annu­ally to reflect current business costs or if competition is tough, being careful not to affect business.

Tradesperson charge out rate calculation

Premium pricing

It worth noting that in the market place there are many trades that charge a premium compared with their competitors, yet still run a very competitive and profitable business. These businesses charging the higher prices are sometimes the most successful. They have achieved this premium because of excellence in the other items which affect the buying decision of a customer, including:

  • reliability – being on time
  • reputation
  • back up service
  • technical knowledge
  • location
  • understanding the customer

Feel like you need some help?  We can help with your trades business.

More about working in the trades:

Managing health and safety in your business

Skilled trades most satisfying career path

Tradies nail the secret to life

Respect for re-builders in Christchurch

Why a smart phone or tablet is the best tool for your toolkit

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