Your hourly shop rate is one division problem, and almost every guide gets the divisor wrong.
The short answer
Your shop rate is the burdened cost of an hour of labor, plus that hour's share of overhead, divided by one minus the gross margin you want.
Shop rate = (burdened labor per billable hour + overhead per billable hour) ÷ (1 - target gross margin)
Run it with real numbers. Burdened labor of $47 per billable hour, overhead of $38 per billable hour, target gross margin of 40%:
$47 + $38 = $85. Then $85 ÷ 0.60 = $142 per hour.
Notice what did not happen. Nobody added 40%. Adding 40% to $85 gives $119, and $119 with $85 of cost inside it is a 28.6% margin, not 40%. That single decision is worth $23 an hour, which on 1,800 billable hours is $41,400 a year per field employee.
An operator in r/Contractor laid out the same structure in a post titled Basic Job Costing, ending with the instruction almost no shop rate calculator includes: "then take that number and divide it by 1 - your desired gross margin." We covered the same trap on the pricing side in how to price a job as a contractor, where a 30% markup turns out to be a 23% margin.
What real shops charge against what they pay
Here is evidence the ranking calculators do not have. In an August 2025 r/electricians thread, Hourly pay VS hourly rate?, working electricians posted their own wage next to the rate their employer charges for their hour. That is the ratio every shop rate article talks around and none of them measure.
| Who and where | Wage | Charge rate | Multiplier |
|---|---|---|---|
| Central WA, 2025 | $37 | $140 | 3.78x |
| West Michigan, non-union journeyman | $25 | $90 | 3.60x |
| Central WA, same shop, 2015 | $25 | $80 | 3.20x |
| Central TX, commercial service journeyman | $38 | $120 | 3.16x |
| Winnipeg MB, 4th year apprentice | $34 | $85 | 2.50x |
| Superintendent | $53 | $132 | 2.49x |
| West Michigan, union journeyman | $40 | $91 | 2.28x |
The median is 3.16x. That is the number to sanity-check yourself against: if you pay $30 and bill $65, you are not running a lean shop, you are running an under-recovered one.
By the numbers
The West Michigan union line is the instructive one. That electrician reported a wage just under $40 but a total package of $65 including benefits, against a $91 charge rate. That is 1.4x on fully loaded labor cost. There is almost nothing in that gap for rent, insurance, trucks, software, the office or profit.
The multiplier drifts up, and yours has too
The most useful line in that thread is not any single pair. It is the same shop measured twice, ten years apart.
In 2015 the rate was $80 against a $25 wage, so wages were 31.25% of the rate. In 2025 the rate was $140 against a $37 wage, so wages were 26.4%. The wage rose 48%. The rate rose 75%.
That is not gouging. It is what happens when the non-wage half of your cost structure inflates faster than wages do. General liability premiums, vehicle costs, software subscriptions and admin wages all climbed through that decade, and every one of them lives in overhead rather than in the wage.
The practical consequence: a multiplier you set once is wrong within about two years. If you calculated a 2.8x rule in 2023 and have applied it since, you are recovering 2026 overhead on 2023 arithmetic.
The divisor everyone guesses
Every input in the formula is knowable from your books except one, and that one decides the answer.
Overhead per billable hour is total overhead divided by billable hours. Contractors get the numerator roughly right, because it is on the P&L. Then they divide it by hours worked, or by 2,080, or by whatever number makes the answer feel reasonable.
Hours worked and billable hours are not close. Travel between calls, stocking the truck, warranty callbacks, free estimates, safety meetings, waiting on materials and paperwork all consume overhead and generate no invoice. We worked through the utilization side of this in detail in what should my labor burden rate be, including ServiceTitan's own position that 30% is considered a good efficiency rate for service companies while project crews plan on roughly 1,800 billable hours a year. Same trade, same wage, three times the sellable hours.
Get the divisor wrong and nothing downstream can save you. A $28,000 monthly overhead across 560 billable hours is $50 an hour. Across 900 hours it is $31. You will quote two completely different businesses depending on which one you believe.
The death spiral hiding in the denominator
Now the part that makes this genuinely dangerous, and that no ranking page resolves.
Overhead is mostly fixed. Rent does not fall in a slow month. Insurance does not care that a job pushed two weeks. But billable hours move constantly. So when work slows, your arithmetically correct shop rate goes up. Drop from 560 billable hours to 420 and that same $28,000 of overhead goes from $50 to $66.67 an hour without you spending a dollar more.
Follow the formula obediently and you raise your price in the exact month demand fell. You lose a few more bids. Billable hours drop again. The formula demands another increase.
Watch out
A shrinking divisor is a demand problem wearing a pricing problem's clothes. Solve it with price and you accelerate it. The shop rate formula tells you what an hour must earn; it cannot tell you where the hours come from, and it will happily walk you off a cliff if you let it set price in a slow quarter.
The fix is to set the divisor from the billable hours you can realistically sell and staff, not from last quarter's actual. Then treat the gap between that plan and reality as a marketing number rather than a pricing one. Unrecovered overhead in a slow month is the cost of an empty calendar, and empty calendars are not repaired by charging the customers you still have more money.
Once you know your true cost per billable hour, you know what a booked job has to be worth, which means you finally know what a lead is worth and what an empty week actually costs you. Pavado builds lead generation for local service businesses with lead-to-sale tracking attached, so the denominator in this formula stops being the thing you hope about and starts being the thing you plan.
The double recovery trap
Here is the question that decides whether your rate is competitive or fantasy, and it is missing from nearly every shop rate guide: how much of your overhead is the labor rate supposed to carry?
If you load 100% of overhead into the labor rate and also mark materials up 30%, you are recovering the same overhead twice. Your rate comes out high, you lose bids, and you conclude the market is irrational.
That is the shape of the problem an electrician described in r/electricians in Contractor charge out rate: $130 an hour per man plus 15% on materials in Saskatchewan, quote after quote coming back with complaints. Dropping to $100 an hour and 10% materials still landed "way higher than everyone else."
Michael Stone at Markup and Profit gives the mechanism directly in Recover Overhead and Profit in your Labor Rate. His worked example puts $120,150 of annual overhead and $35,600 of target net profit across 5,400 billable hours to get $28.84 an hour on top of an $18 wage, for a $46.84 rate. Then the part everyone skips: "Now if we wanted a lower rate per hour, transfer some of the overhead and profit to the material cost." Mark materials up, deduct that recovery from the overhead pool, recalculate the rate.
The two pools are not even the same kind of cost. As former Casamia operator Belkis Cruz argues in The Material Markup Mistake That Kills Contractor Margins, labor overhead covers management time, insurance, vehicles, equipment and downtime, while material overhead covers sourcing, receiving, storage, waste and shortage risk. She breaks a material markup into waste of about 8%, sourcing overhead of 2% to 3% and a risk buffer of 4% to 5%, and reports running labor at 85% to 90% all-in against material markup of 30% to 35% at her own company.
Tip
There is a clean test for whether you have over-leaned on material markup. Ask what happens when a customer supplies their own materials. One contractor in r/Contractor puts it plainly: "If you rely too much on marking up material, you will have to increase your labor rate in the case that a customer is providing materials." If a customer-supplied job destroys your margin, your labor rate was never carrying its share.
The allocation is a trade-shape decision. A material-heavy trade like roofing or HVAC replacement can move real overhead recovery onto materials and quote a labor rate that survives comparison. A labor-only trade has nowhere to put it, and every dollar of overhead has to ride on the hour.
Where your own hours go
The most common arithmetic mistake after the divisor is the owner counting themselves twice, or not at all.
Your hours split into two buckets and they behave differently. Field hours you can invoice belong in cost of goods sold and in the denominator, exactly like any other technician. Admin hours spent quoting, chasing suppliers, invoicing and doing payroll belong in overhead, and they must not appear in the denominator, because you cannot sell them.
Owners who put all their hours in the denominator manufacture billable capacity that does not exist and produce a rate that is too low. Owners who leave their salary out of overhead entirely produce a rate that looks affordable right up until they notice they have no income.
That second failure is quietly common. A rural contractor in r/Contractor described billing about $50 an hour while his own breakdowns said $65 to $75, and named the mechanism himself: "I've been able to keep rates low by being 100% debt free and paying myself too low." A commenter did the follow-through: "If you're charging $50/hr, I bet your take home after taxes is in the low $20's." The rate was not competitive. It was subsidised by the owner's wage.
One rate, or a rate per person
A single blended shop rate is easier to quote and easier to defend on the phone. It also assumes a labor mix.
Larger shops usually tier. One electrician who moved into the office reported the company charging $137 for a journeyman 1, with five further pay levels behind it and checks running $41 to $51 an hour. If you quote one blended rate but staff a job entirely with your two most expensive people, you under-recover on every hour of it.
Work type matters as much as person. Another electrician in the same thread charges $60 to $80 an hour when pricing a large job with 2,000 hours of labor, and $90 to $100 for a troubleshooting call, while paying journeymen $40 to $45. That is 1.5x on volume work and over 2x on service. Both can be right, because a 2,000 hour job carries far less unbillable travel, dispatch and estimating overhead per billable hour than a stream of service calls does.
If you run both kinds of work, you need both numbers. Quoting service work off a project rate is one of the cleaner ways to lose money while staying busy.
When your number lands above your market
Sooner or later the formula produces a rate your market visibly will not pay. Markup and Profit's advice is uncompromising: your rate "should be based on your company's numbers and not be influenced by anything outside your company," because if you copy competitors who price badly, "what does that make your numbers?"
That is right about the input and incomplete about the decision. The ceiling is real. An electrician in California's Central Valley reported that most contractors he knows "can only charge $60-$80 per hour and expect to win any bids," including light commercial, and that he loses panel upgrades over $2,500.
So treat the calculation as a diagnostic. If your number lands far above what your market clears, exactly one of three things is true, and none of them is fixed by quoting it anyway:
- Overhead is too heavy for your revenue. The rate is telling you the business is carrying costs your volume cannot support.
- Utilization is too low. The numerator is fine and the divisor is starved. This is the most common answer and the most fixable.
- Your target margin assumes positioning you have not built. A 50% gross margin is available to a shop customers seek out by name. It is not available to a shop competing in a list of five quotes.
The only test that confirms your rate
Arithmetic can tell you what your rate must be. Only your loss rate can tell you whether it is right.
The signal is unambiguous and appears repeatedly among experienced bidders. From r/Contractor: "If you are getting every job you bid your prices are too low." Another operator relayed a bidder's rule that losing a third of his jobs meant his prices were right. And a third gave the condition that makes holding the number possible at all: "The best way to have confidence in your price is to have money in the bank and not be in the position of needing to get every job you bid."
A 100% win rate is not a sales achievement. It is a receipt showing the market would have paid more.
Build your number in thirty minutes
- Pull twelve months of overhead. Everything not traceable to a specific job: rent, insurance other than workers compensation, admin wages, your own admin time, software, non-job vehicles, professional fees, advertising.
- Decide the split. How much of that overhead will materials and subcontractor markup carry? Subtract it. The remainder is what labor must recover.
- Count real billable hours. Per field person, per year, invoiced hours only. If you have never measured this, track two weeks before you guess.
- Get burdened labor per billable hour. Wage plus burden, annualised, divided by billable hours rather than hours worked.
- Add the two per-hour figures. That is your break-even hour. Never quote below it.
- Divide by (1 - target margin). Not multiply. Not add.
- Sanity-check the multiplier. Divide the result by the wage. Under about 2.3x, recheck your overhead. Over about 4x, recheck your utilization.
- Diarise it. Recalculate annually, and after any insurance renewal, hire or lease change.
The bottom line
The formula is not the hard part. Burdened labor plus overhead, divided by one minus your margin, is arithmetic anyone can do in a spreadsheet in half an hour.
What separates shops that make money from shops that stay busy is the discipline around the two numbers the formula assumes: an honest count of hours you can actually invoice, and an explicit decision about how much of your overhead rides on labor versus materials. Guess either one and you will produce a confident, precise, wrong number, then defend it to customers for a year.
Once the rate is real, the next decision is how to present it, and hourly is not always the right container for it. We compared the two models in flat rate vs hourly pricing for contractors.