How to Price Trade Work Using Gross Profit Per Hour

To price trade work properly, work out what one productive hour actually costs your business, decide how much gross profit you need on top of it, and price every job from that number. That is the Gross Profit Per Hour method. It replaces the two habits that quietly send builders, plumbers and electricians broke: guessing an hourly rate and slapping a markup on materials.

Why do hourly rates and markup on materials go wrong?

Most tradies set their hourly rate by looking at what the bloke down the road charges and adding ten dollars. That rate has nothing to do with your overheads, your van, your insurance or the apprentice who is on the clock but not on the tools yet.

Markup on materials has the opposite problem. It rewards jobs that use a lot of material and punishes jobs that need a lot of skill. A tiler who spends two days on a bathroom with a few hundred dollars of tiles earns almost nothing from a 20 per cent markup. A plumber doing a quick fit-off on a four thousand dollar hot water unit makes a fortune on paper, then loses it when the supplier price moves.

Here is where both methods break, from what I saw running a construction business:

• They ignore non-billable time. Quoting, driving, picking up gear, chasing invoices and fixing callbacks are all unpaid hours under a simple hourly rate.
• They ignore overheads. Public liability, tool replacement, software, accounting, phone, vehicle and the office your partner runs from the kitchen table.
• They hide your real margin. You can be flat out, invoicing well, and still have nothing left after wages and the ATO. Busy and broke is the normal state of an underpriced trade business.

What is Gross Profit Per Hour?

Gross profit is what a job leaves behind after you pay the direct costs of doing it: wages for the hours worked, materials and subcontractors. Gross Profit Per Hour is that number divided by the productive hours the job took. It tells you what each hour on the tools is actually earning the business, not what you invoiced.

Why does it matter? Because you only have so many productive hours in a year. If each one does not earn enough gross profit to cover your overheads and leave a real profit, no amount of extra work fixes it. More jobs at the wrong number means more stress at the same bank balance. This is the model I teach inside profit first business coaching for trades, and it works the same for a one-man carpenter and a builder running three crews.

How do you work out your real cost per productive hour?

Do this once properly and you will never price blind again. You need three numbers.

Step 1: Count your productive hours

Take the hours you and your team are paid for in a year. Then subtract everything that is not chargeable: leave, public holidays, sick days, training, quoting, travel between jobs, supplier runs, admin and rework. For most trades, productive time lands somewhere between 60 and 75 per cent of paid time. If you think yours is 95 per cent, you are not tracking it yet.

Step 2: Total your annual overheads

Everything the business pays that is not tied to a specific job. Vehicle costs, insurance, licences, phone, software, accounting, tools, marketing, workshop rent and the wage you pay yourself for running the business rather than working in it. The ATO's guidance on business deductions is a good checklist of what to include, because if you can claim it, it is an overhead.

Step 3: Divide and add the profit you want

Overheads divided by productive hours gives you the overhead cost of every hour on the tools. Add the direct labour cost for that hour, then add the gross profit the business needs. That final figure is your minimum charge for one productive hour.

A worked example with round numbers

As an example only, not anyone's actual figures: say a two-person electrical business pays 3,600 hours of wages a year, and after tracking, 2,500 of those are productive. Annual overheads come to $100,000. That is $40 of overhead for every productive hour.

1. Direct labour cost per productive hour, including super and on-costs: $55 as an example.
2. Overhead per productive hour: $40.
3. Break-even per productive hour: $95. Charge less than this and every hour loses money before a single material is bought.
4. Target gross profit per hour: say $50, to fund growth, a buffer and a real return for the owner.
5. Minimum charge per productive hour: $145.

Now price a switchboard upgrade that will take 12 productive hours with $900 of materials. Labour and profit come to 12 times $145, which is $1,740. Add materials at cost plus whatever handling margin covers your time sourcing them, and the quote writes itself. The point is that the labour number is no longer a guess. Same logic for a plumbing business pricing a bathroom rough-in or a builder pricing a deck. Different hours, different materials, same method.

How do you quote so profit survives variations and slow payers?

A good price can still be destroyed between the quote and the bank. Two things do it most often.

Variations

Quotes blow out when the scope grows and nobody writes it down. The client adds two more downlights, the joiner discovers the wall is out of square, the tiler finds the screed needs redoing. Price the base job on your productive hours, then put a clear line in every quote that extra work is quoted and approved in writing before it starts. Small businesses can lean on the Australian Small Business and Family Enterprise Ombudsman for plain guidance on contract terms and disputes if one goes sideways.

Slow payers

Thirty days unpaid on a job with a thin margin wipes the margin. Take a deposit, invoice progress stages on anything over a week, and make your payment terms short and visible. The business.gov.au guides on invoicing and payment terms are free and worth an hour of your time.

What should you not do?

• Do not copy a competitor's rate. You do not know their overheads, their productive hours or whether they are making money.
• Do not discount to win work you are already too busy to do well. Cheap jobs crowd out profitable ones.
• Do not change your prices before you have a month of tracked hours. Guessing the new number is just a more confident version of the old mistake.
• Do not hide price rises. Tell clients plainly. Some will leave, and that is fine. The ones who stay are the ones who value the work, and you will have hours back for them.

What to do this week

One honest caveat first. This method is only as accurate as the hours behind it. The first month of tracking will feel tedious and the numbers will surprise you, usually in the wrong direction. Push through it, because the second month is where pricing starts to feel calm instead of hopeful.

Start here, in order, and it costs nothing:

1. Log every hour for everyone on the team for the next four weeks, split into productive and non-productive. A notes app is enough.
2. Pull last year's overheads from your accounting software and total them.
3. Calculate your break-even cost per productive hour using the three steps above.
4. Check your last five quotes against it. If any priced labour below break-even, that is the leak.
5. If you want the numbers mapped out with someone who has done this in their own construction business, book a free scale session.