A labor rate is the hourly price a field service company charges for a technician's time. It is used directly in time and materials billing and as the building block for flat rate prices.
Don't confuse it with labor cost, which is what you pay per hour. The labor rate has to cover labor cost, overhead, unbilled time and profit.
How to calculate a labor rate
Start from what you need to recover. For one technician over a year, with fully loaded labor cost, L, that technician's share of overhead, O, target profit, P, and billable hours, B:
Labor rate = (L + O + P) ÷ B
Say a technician's loaded cost is $75,000 a year, their share of overhead (truck, insurance, office, software, rent) is $55,000, and you want $30,000 of profit from their work. They are paid for 2,000 hours and bill 1,200. The rate is ($75,000 + $55,000 + $30,000) ÷ 1,200, or about $133 an hour.
Set P to zero and you get the break-even rate: $130,000 ÷ 1,200, or about $108 an hour. The break-even labor rate calculator runs this on your numbers.
Why it matters
The denominator is where most labor rates go wrong. B is billable hours, not paid hours. If you divide by 2,000 paid hours instead of 1,200 billable ones, the rate comes out at $80 and every hour billed loses money.
Billable hours depend heavily on the schedule. Every hour a technician spends driving between jobs is paid but not billed, unless you charge for it. If you cut drive time and raise billable hours from 1,200 to 1,400, the break-even rate in the example drops from about $108 to about $93. The windshield time post shows how to measure that drive time, and the field service pricing guide covers turning a rate into a price book.
A common mistake
Copying a competitor's labor rate. Their costs, overhead and billable hours are different from yours. A rate that is profitable for them can lose money for you. Build it from your own numbers, then check where it sits in your market.
Related terms
- Billable hours are the hours the rate is spread across.
- Flat rate pricing uses the labor rate to price tasks.
- Job costing checks whether the rate is holding up job by job.
- Overtime cost raises labor cost per hour when it runs high.
Common questions
What is the difference between labor rate and labor cost?
Labor cost is what you pay per hour, including wages, taxes and benefits. Labor rate is what you charge per hour. The rate must be higher to cover overhead, unbilled time and profit.
Should after-hours work have a different labor rate?
Most companies charge more for nights, weekends and holidays because overtime raises labor cost and those hours displace time off. State the rates before the job.
How often should I update my labor rate?
At least once a year, and whenever wages, overhead or billable hours change noticeably.