Most trades businesses underprice their work. The owner knows what materials cost, has a rough idea of labor hours, adds a percentage that feels right, and sends the quote. The job gets done, the customer pays, and the owner wonders at the end of the year why there is no money in the account despite being busy all year.
The problem is almost always the same: the pricing does not cover the full cost of doing business. Burden costs (employer taxes, insurance, benefits), overhead (trucks, rent, tools, insurance, office), unbillable hours, and the distinction between markup and margin are the four gaps that leak money from every job.
Markup vs Margin: Why the Difference Costs You Money
Markup is the percentage added to cost to arrive at the selling price. Margin is the percentage of the selling price that is profit. They describe the same dollars but as a percentage of different bases, and confusing them is the single most expensive accounting mistake in the trades.
Example: a job costs $10,000. You add 30% markup. Selling price = $10,000 x 1.30 = $13,000. Profit = $3,000. But the margin is $3,000 / $13,000 = 23.1%, not 30%. If you told yourself you needed a 30% margin, you actually needed a 42.9% markup to achieve it. Selling price at 42.9% markup = $10,000 x 1.429 = $14,290. Profit = $4,290. Margin = $4,290 / $14,290 = 30%.
The conversion formulas are: Margin = Markup / (1 + Markup). Markup = Margin / (1 - Margin). At 50% markup, margin is 33.3%. At 100% markup, margin is 50%. The numbers diverge significantly at higher percentages, which is exactly where the confusion costs the most money.
Bottom line: if your accountant, business advisor, or franchise system tells you to hit a 30% margin, you need a 43% markup on job costs. If you apply 30% markup thinking it gives you 30% margin, you leave 7% on the table on every job. On $500,000 in annual revenue, that is $35,000 in lost profit.
The True Cost of an Employee Hour
An employee's hourly wage is not the cost of employing them. The fully loaded cost includes employer FICA (7.65%), FUTA and SUTA (1-5%), workers' compensation (1-25% depending on trade), health insurance ($5,000-15,000/year employer share), retirement match (3-6%), paid time off (vacation, sick, holidays = 10-15% of wages), training, uniforms, tools, and vehicle costs if applicable.
A journeyman electrician earning $35/hour typically costs the employer $52-62/hour when all burden costs are included. The burden multiplier is 1.5-1.8x the base wage. For high-workers-comp trades like roofing or steel erection, the multiplier can exceed 2.0x.
But the burden rate per paid hour is not the number you need for job pricing. You need the rate per productive (billable) hour. If your technician works 2,080 paid hours per year but only 1,600 are billable (after PTO, training, drive time, shop time, and callbacks), the cost per billable hour is: total annual cost / 1,600 billable hours. If the annual cost is $108,000 (at $52/hour x 2,080), the billable rate is $108,000 / 1,600 = $67.50/hour.
This is the number you must recover on every billable hour before you make any profit. If your shop rate is $65/hour and your burden cost is $67.50, you lose $2.50 on every hour your employee works. That is $4,000 per year per employee of unrecovered cost, even though the shop looks busy.
Overhead Recovery: The Costs People Forget
Overhead is every cost of running the business that cannot be directly attributed to a specific job. Rent, utilities, insurance (liability, auto, umbrella), truck payments and fuel, office staff, accounting, software subscriptions, marketing, phone, internet, tool replacement, continuing education, license fees, and the owner's salary if not billed directly to jobs.
A typical one-truck electrical or plumbing business has $80,000-150,000 in annual overhead. A larger shop with 5-10 technicians, a warehouse, and an office runs $300,000-600,000. These costs must be recovered through job pricing or the business bleeds money regardless of how busy it is.
The simplest allocation method: divide annual overhead by total billable hours across all technicians. If overhead is $150,000 and the shop bills 8,000 hours per year (5 techs x 1,600 billable hours), the overhead allocation is $18.75 per billable hour. Add this to the burden rate to get the fully loaded cost per hour that your billing rate must exceed.
In the example above: $67.50 burden + $18.75 overhead = $86.25 fully loaded cost per billable hour. If your shop rate is $125/hour, your gross profit per billable hour is $38.75. At 8,000 billable hours, that is $310,000 in gross profit to cover the owner's income, debt service, equipment purchases, and retained earnings. If your shop rate is only $95/hour, gross profit drops to $8.75/hour, or $70,000 for the year, before the owner takes any pay.
Setting Billing Rates That Work
Your billing rate must cover: employee burden cost per billable hour, overhead allocation per billable hour, and desired profit per hour. The sum of these three components is your minimum billing rate.
Burden: $67.50/hr (from the earlier example). Overhead: $18.75/hr. Target profit: $25.00/hr (this is the business profit, not the owner's salary, which is in overhead). Minimum billing rate: $111.25/hr. Round to $115 or $120 for simplicity.
But billing rate is only half the equation. You also need to price materials, subcontractors, and equipment rental with their own markups. A common structure is: labor at shop rate, materials at cost + 30-50% markup, subcontractors at cost + 10-15%, and equipment at cost + 20-30%.
For flat-rate pricing (common in residential HVAC, plumbing, and electrical): build your flat-rate book from the same foundation. Estimate the time for each task, multiply by shop rate, add materials with markup, and add a flat overhead/profit charge. Test the prices against market rates and adjust the profit margin up or down to stay competitive while maintaining profitability.
The market sets the ceiling. Your costs set the floor. If the market rate for a task is below your floor, you either cannot compete on that service or you need to reduce costs. Do not reduce your billing rate below cost just to win jobs. That is a race to bankruptcy.
Working Backward from a Profit Target
Instead of pricing from costs up, start with your desired annual income and work backward to the billing rate and volume required to achieve it.
Example: the owner wants $120,000 take-home pay. The shop has 3 technicians billing 4,800 hours per year combined (1,600 each). Annual overhead (including owner's salary) is $320,000. Total burden cost for 3 techs is $324,000 ($108,000 each). Target business profit (above owner's salary): $50,000.
Total revenue required: $324,000 (burden) + $320,000 (overhead with owner's salary) + $50,000 (profit) = $694,000. Revenue per billable hour: $694,000 / 4,800 = $144.58/hr. This is the blended labor revenue rate the shop must achieve.
But not all revenue comes from labor billing. If 60% of revenue is labor and 40% is materials (with a 35% markup), then labor revenue is $416,400 and materials revenue is $277,600 (from $205,600 in material costs x 1.35). Check: $416,400 / 4,800 hours = $86.75/hr billable labor rate. That seems low and may indicate the owner's salary target is too high for the current volume, or more likely that the material markup needs to be higher or the number of billable hours needs to increase.
This exercise reveals the interdependencies between pricing, volume, overhead, and income. If you cannot hit your income target at the current billing rate and volume, you need to either raise prices, increase volume, reduce overhead, or adjust your income expectation. The calculator does this math for you.
The Most Common Pricing Mistakes
Using base wage instead of burden rate: If your journeyman earns $35/hour and you price jobs at $35/hour for labor, you are losing $17-27/hour on every labor hour sold. The burden costs are invisible on the time sheet but very real on the P&L.
Confusing markup with margin: If your accountant says you need 30% margin and you add 30% markup to job costs, you are leaving 7% on the table on every job. Use the conversion formula or the calculator.
Not including overhead in job pricing: Overhead exists whether you price for it or not. If you do not allocate overhead to each job, you will be busy and broke at the end of the year. Every billable hour must carry its share of rent, insurance, trucks, and office costs.
Pricing based on competitors instead of costs: You do not know your competitor's cost structure, overhead, or profit margin. They may be underpricing and losing money. Following them down prices you out of business too. Know your costs and price accordingly. If you cannot compete at profitable prices, find a different market or reduce costs, but do not sell below cost.
Not tracking unbillable hours: If you estimate jobs based on 2,080 hours per year but your techs only bill 1,500 hours, your pricing is based on a fantasy. Track billable vs total hours monthly and use the real number in your pricing model.