The Billing Rate Is the Last Number

Last week I wrote that the way out of the wage earner mindset isn’t a new metric. It’s a different question. Stop asking what you charge and what you get to keep. Start asking what the business needs to make, separate from what you want to take home.

A few readers wrote back with the fair, obvious follow-up: okay, but how do I actually turn that into a number I can put on an invoice?

So here’s the math. It’s not complicated. It just runs in the opposite direction from how most of us set a price.

The wage earner sets a rate the way you’d read a thermometer. You look around at what the other guys charge, you land on a number that feels defensible, and you bill it. The owner does the reverse. You don’t start at the rate. You start at the life the business has to fund, and you build outward, one honest cost at a time, until a rate falls out the far end. The rate is the last number you calculate, not the first.

Start with what you want to take home. Not revenue, take-home. The money that hits your bank account every week whether or not there’s a job on the schedule, out of a business savings account, like the steadiest paycheck that you have ever had. Say that’s $2,000 a week. Across the year that’s $104,000. That’s your take-home. It is not the company’s profit. It’s your wage, and we’re going to make the business carry it.

Now, a wage costs more than the wage. When you were self-employed you paid the employer’s half of everything and never felt it, because it came out of the same pile your paycheck did — self-employment tax, workers comp, etc. Loading for all of it runs the number up by roughly a third, though this varies place to place. Multiple it by 1.3 and your $104,000 becomes about $135,000.

Then benefits. If you want to fund a retirement account — a Simple IRA, say, maxed out — add it in. Call it another $17,000. Now you’re at about $152,000. That’s the fully loaded cost of employing one person. That person is you.

Then overhead. The cost of being in business, whether or not you framed a wall this week: the truck, the tools, the phone, the software, the accountant, the lawyer, the insurance that isn’t tied to a single job. For a one-person shop, put a real number on it. Fifty thousand is an average of per person overhead that I have seen in other company number. Now the number is $202,000.

That’s your cost of being in business for a year. Call it $202,000.

Here’s the step that stings. That $202,000 has to come back to you across the hours you actually bill a paying customer — not the hours you work. You do not bill forty hours a week. Nobody does. The rest is estimating, driving, invoicing, tool maintenance, the callback. So the math depends entirely on that fraction:

• 1,000 billable hours a year → $202 an hour

• 1,250 hours → $161 an hour

• 1,500 hours → $135 an hour

Most one-person shops land somewhere between 1,250 and 1,500. Pick the honest number, not the flattering one.

One move can bring it down. As a business you don’t only sell your hours. You buy materials and hire subcontractors, and an owner puts a margin on those too. Say you run $120,000 a year of subs and materials through the business and mark it up 30%. That’s $36,000 of gross profit that has nothing to do with your labor, so subtract it from what your hours have to carry. Now the hours only need to recoup $166,000:

• 1,000 hours → $166 an hour

• 1,250 hours → $133 an hour

• 1,500 hours → $110 an hour

For reference: our time-and-materials rate at in Madison is $137 an hour, plus 30% on subs and materials. That’s our number — a company with a crew, a shop, and overhead a one-person operation doesn’t carry. Yours will land somewhere else. The point was never the number. The point is that I can tell you exactly where our number came from, line by line, and you can too.

And here’s the thing the wage earner does with a number like $133 an hour: you flinch. It feels like gouging, because you are comparing it to the $40 you used to “make.” But $40 was never what you made. It was what was charged before the business took its cut in the dark, out of the retirement never funded, the truck ran into the ground, the taxes that ambushed every April.

Run it with your own numbers tonight. A wage earner names a rate and hopes it’s enough. An owner builds one and knows what it’s carrying. In my next newsletter I will show how this math scales to work for a small contractor that employs a small crew.

The Fine Homebuilding Summit

I will be speaking about the evolution of my career and how business owners can provide a nails to numbers career path for their people at the Fine Homebuilding Summit at Endicott College in Beverly MA on August 20th. SCHWANDT50 is a discount code for readers of this newsletter to get $50 off the ticket. Last year’s event was a great time and I enjoyed meeting many readers at the event.