What your hour actually costs

Utilization: the hours you cannot invoice

You pay for 2,080 hours. You cannot bill 2,080 hours, and the difference is larger than almost anyone guesses before measuring it.

• Paid time off and holidays: 120 hours
• Drive time between jobs: 310 hours — roughly 1.5 hours a day
• Loading, unloading, shop time, restocking: 180 hours
• Estimates and site visits that did not convert: 140 hours
• Callbacks, warranty work, rework: 70 hours
• Weather, cancellations, gaps in the schedule: 110 hours

That is 930 hours gone. Billable hours: 1,150 — a utilization rate of 55%, which is normal and which almost every owner overestimates as 80%.

Now recompute. $79,180 of burdened cost spread over 1,150 billable hours is $68.85 per billable hour, before a single dollar of office cost. The wage said $26. The truth is $68.85, and everything you priced off the wage was priced off a number that was 62% too low.

Measuring utilization honestly takes two weeks, not a system. Have every technician write down, at the end of each day, the hours a customer was invoiced for. Not hours worked — hours billed. Total both columns at the end of the fortnight and divide. The result is usually ten to twenty points below what the office believed, and the surprise is the point: you cannot price around a leak you have never measured.

Overhead per billable hour

Overhead is everything that exists whether or not a truck rolls: your own salary, an office manager or dispatcher, rent or shop space, software, accounting and legal, marketing, insurance that is not employee-specific, bank and processing fees.

For a small company with four field employees, a realistic annual figure:

• Owner compensation: $85,000
• Office and dispatch: $48,000
• Rent, shop, utilities: $21,000
• Software, phones, subscriptions: $7,200
• Accounting, legal, licensing: $6,500
• Marketing and lead generation: $36,000
• Company insurance and fees: $9,000

Total overhead: $212,700. Four field employees at 1,150 billable hours each gives 4,600 billable hours a year. Overhead per billable hour: $46.24.

Two things follow immediately, and both are counterintuitive. Overhead per hour falls as billable hours rise, which is why a fifth technician who is genuinely busy can improve margins on every existing job. And your own salary belongs in this calculation — an owner who leaves it out is subsidizing every customer personally and calling the result profit.

How you spread overhead matters less than doing it consistently. Per billable hour is the cleanest method for service work because it matches the way you sell. Allocating by revenue instead makes large jobs absorb overhead they never caused, and allocating by headcount hides the fact that an underutilized employee carries the same office cost as a busy one.

The loaded hourly cost

Add the two halves:

• Burdened labor per billable hour: $68.85
• Overhead per billable hour: $46.24
• Loaded hourly cost: $115.09

Every hour a technician spends on a customer's property costs your company $115.09 before profit and before materials. If you are billing $95 an hour, you are not running a thin margin — you are losing $20 an hour and covering it with volume, which is why the busiest month of the year can also be the month you cannot make payroll.

This is the number to write on the wall. Not the wage. Not the burdened wage. The loaded hourly cost, recalculated every time you hire, buy a vehicle, raise your own salary or change your marketing spend.

From cost to price

Cost is not price. Price is cost plus the profit you intend to earn, and the arithmetic here has a trap that costs contractors real money.

To earn a 20% net margin, you do not add 20% to $115.09. You divide:

$115.09 ÷ (1 − 0.20) = $143.86 per billable hour.

Adding 20% gives $138.11, which is a 16.7% margin — you would be 3.3 points short on every hour you sell, all year, without ever knowing why. This is the same markup-versus-margin confusion that decides the year in construction estimating, and it is just as expensive in service work.

Round to $145 an hour, or convert to whatever unit your customers actually buy: per visit, per square foot, per unit, per month. The internal number stays hourly even when the price the customer sees is not.

Materials sit outside this number and need their own markup. Loaded hourly cost covers time; parts, chemicals and disposal are separate, and marking them up 25% to 40% is not opportunism — it pays for sourcing, stocking, hauling, warranty exposure and the cash you float between purchase and payment. Companies that pass materials through at cost are donating that entire function to the customer.

Drive time is the silent killer

Of the 930 unbillable hours above, 310 were drive time — the single largest block, and the one most within your control.

At a loaded cost of $115.09, those 310 hours cost $35,678 per technician per year. Four technicians: $142,712 spent driving. That is not a line item anyone sees on a P&L, which is precisely why it goes unexamined for years.

Cutting drive time from 1.5 hours a day to 1.0 recovers 100 hours per technician — 400 hours across the company, worth roughly $58,000 in recoverable capacity without hiring anyone. Three things move that number: tightening the service area rather than chasing every call, clustering jobs by geography instead of by the order they were booked, and charging a trip fee outside the core radius so distance becomes a pricing decision instead of a hidden loss.

Saying no to a job forty minutes away is not turning down work. It is refusing to pay $115 an hour for the privilege of driving.

What this changes about what you sell

Once the loaded hourly cost is real, the pricing conversation stops being about competitors and starts being about structure.

Minimums stop being rude. A one-hour job with 50 minutes of drive time costs $115 plus $96 in travel. A $150 minimum is not aggressive; it is survival, and customers accept it when it is stated as policy rather than negotiated per call.

Recurring work becomes visibly better. A monthly account on a fixed route has near-zero acquisition cost and predictable drive time. At the same billed rate it can carry ten points more margin than one-off work, which is a stronger argument for building recurring plans than any sales theory.

Discounts get a price tag. "Ten percent off" on a $1,450 job is $145 — one full billable hour of a technician's day, given away. Owners who know that number give away fewer of them and hold the line more calmly when asked, because they are defending an amount rather than a principle.

Some customers get fired. Every service business has an account that is slow to pay, far away and endlessly demanding. Run the loaded cost against it and the decision usually makes itself.

Capacity questions get an answer. "Should I hire another technician?" stops being a feeling. A new hire adds roughly $79,000 of burdened cost and 1,150 billable hours. At $145 an hour that is $166,750 of capacity against $79,000 of cost — profitable the moment the schedule is genuinely full, and a fast way to lose $40,000 if it is not.

Five mistakes

1. Pricing off the wage. The most common and the most expensive. Every quote built on $26 instead of $115 is a quote built on a number that was never real.

2. Leaving the owner's salary out of overhead. If you did not pay yourself a market wage for the work you do, your company is not profitable — you are.

3. Assuming 80% utilization. Measure one month honestly. Nearly everyone lands between 50% and 65%, and pricing built on 80% is short by a quarter before anything else goes wrong.

4. Adding the margin instead of dividing. Adding 20% yields 16.7%. Over a year, those 3.3 points are usually the difference between the profit you planned and the profit you got.

5. Never recalculating. A new truck, a raise, a jump in workers' comp or a bigger marketing budget all move the loaded cost. Recompute quarterly, and always before quoting a large contract.

The five numbers

Burden rate. Total employment cost divided by gross wages. Know it as a percentage and expect 35% to 50%.

Utilization rate. Billable hours divided by paid hours, per employee. Track it monthly; it is the fastest lever you own.

Loaded hourly cost. Burdened labor plus overhead per billable hour. One number, on the wall, current.

Realized rate. Total revenue divided by total billable hours. When it sits below your quoted rate, discounts and unbilled work are leaking somewhere between the estimate and the invoice.

Drive hours per technician per day. The largest recoverable block of unbillable time, and the one that responds fastest to a tighter service area.

Frequently asked questions

How do you calculate labor burden for a service business?

Take the gross wage and add every cost the wage drags behind it: employer payroll taxes at roughly 7.65% FICA plus federal and state unemployment, workers' compensation at anywhere from 4% in light cleaning to 12% or more in high-risk trades, allocated general liability, the vehicle the employee drives with fuel and maintenance, phone and uniforms and tools, paid time off and holidays, and training or licensing. For a technician at $26.00 an hour on 2,080 hours — $54,080 in wages — that stack commonly adds about $25,100, giving a fully burdened cost near $79,180 a year, or a burden rate of 46%. Burden rates between 35% and 50% are ordinary for field service work with a vehicle.

What is a normal utilization rate for field technicians?

Most service companies land between 50% and 65%, and nearly every owner guesses 80% before measuring. On a 2,080-hour year, roughly 120 hours go to paid time off and holidays, 310 to drive time, 180 to loading and shop time, 140 to estimates that did not convert, 70 to callbacks and warranty work, and 110 to weather and cancellations — about 930 unbillable hours, leaving 1,150 billable. The measurement takes two weeks: have each technician record hours actually invoiced, not hours worked, then divide by hours paid. Pricing built on an assumed 80% is short by a quarter before anything else goes wrong.

Should you add your target margin to cost or divide by it?

Divide. To earn a 20% net margin on a loaded hourly cost of $115.09, the price is $115.09 divided by 0.80, which is $143.86 — not $115.09 plus 20%, which is $138.11 and delivers only a 16.7% margin. That 3.3-point gap applies to every hour you sell, all year, and it is usually the difference between the profit you planned and the profit you got. The same markup-versus-margin error decides the year for construction estimators, and it is just as expensive in service work.