How to Set an Hourly Rate That Actually Pays You (Contractor's Guide)

Your hourly rate is the single most important number in your business. It decides what you take home, whether you can take a holiday, and whether you are building something or just buying yourself a job. Get it too low and you work yourself into the ground for nothing. Set it with a bit of math behind it and the same workload starts paying you properly.

This guide shows exactly how to set an hourly rate as a tradesperson or small contractor. We will do the cost-plus math from the ground up, sanity-check it against your local market, look at when to charge different clients different rates, and cover how to raise your rate without losing the customers you want to keep. Real numbers throughout, so you can plug in your own.

Why most tradespeople undercharge

The classic mistake is to look at what you used to earn per hour as an employee, add a bit, and call that your rate. If you made 25 an hour on the payroll, charging 35 feels like a raise. It is not. As an employee, your boss covered your tools, your van, your insurance, your downtime, the office admin, and roughly half your taxes. Now you cover all of it. Your charge-out rate has to carry costs that used to be invisible to you.

The second mistake is assuming you bill 40 hours a week. You do not. A huge slice of your week is unbillable: driving between jobs, quoting, chasing payments, buying materials, maintaining equipment, doing the books. Price as if every hour is billable and you will fall short every single month.

The cost-plus method, step by step

Cost-plus means you start from what your business actually costs to run, add the take-home pay you want, account for tax, and then divide by the hours you can realistically bill. Work through these five steps in order.

Step 1: Set your target take-home pay

Start with what you want to earn for yourself in a year, after business costs but before personal income tax. Be honest about the life you want, not the bare minimum you can survive on. Say you want a take-home of 45,000 for the year. That is your starting target.

Step 2: Add your business overhead

List every cost of being in business for a year, whether or not you have a job that day. A typical solo contractor might look like this:

Van lease, fuel, and maintenance: 7,200
Tools and equipment (purchase plus repair): 2,500
Liability and van insurance: 1,800
Phone, software, and subscriptions: 900
Accountant and bank fees: 1,200
Marketing, website, and workwear: 1,400
Training and certifications: 1,000

That is 16,000 of overhead per year. Add it to your take-home target: 45,000 plus 16,000 gives a revenue need of 61,000 before tax.

Step 3: Count your real billable hours

This is where the rate is won or lost. Start from a full year and subtract everything you cannot bill:

52 weeks minus 5 weeks of holiday, sick days, and public holidays = 47 working weeks
A 45-hour working week, but only about 60% is actually billable after travel, quotes, admin, and materials runs = roughly 27 billable hours per week
47 weeks times 27 hours = 1,269 billable hours per year

If you assumed 47 weeks at 40 billable hours, you would have planned for 1,880 hours, nearly 50% more than reality. That gap is exactly why people who look busy still run out of money.

Step 4: Do the division

Divide what you need to earn by the hours you can bill:

61,000 revenue need ÷ 1,269 billable hours = 48.07 per hour.

Round it to a clean 50 per hour. That is your cost-plus floor: the rate that covers your costs and pays you what you wanted, assuming you actually hit your billable hours. Charge below it and you are subsidising your clients out of your own pocket.

Step 5: Layer tax on top

The 50 figure is revenue before income tax and social contributions. Self-employed people typically owe a meaningful share of profit in tax, and you have to set money aside for it. If your effective rate on this income is around 30%, then to keep 50 of value you should think in terms of a higher headline rate, or budget so that roughly a third of every invoice is parked for the tax bill. The cleanest habit is to treat tax as non-negotiable: the moment money lands, move about 30% into a separate account and never touch it. Your 50 rate then genuinely delivers the take-home you planned for.

A worked example: a painter pricing a job

Say you are a painter with the 50 per hour rate above. A client wants a three-bedroom interior repaint. You estimate 32 hours of labour plus materials.

Labour: 32 hours × 50 = 1,600
Materials: 380 in paint and supplies, with a 20% handling markup = 380 × 1.20 = 456
Subtotal: 1,600 + 456 = 2,056
VAT at 21%: 2,056 × 0.21 = 431.76
Total invoice: 2,487.76

Notice the rate is the engine, but it is not the whole price. Materials markup covers your time sourcing and fronting the cash, and tax sits on top. When you track the job properly you can compare your estimate of 32 hours against the hours you actually logged, and refine your next quote. If the repaint really took 38 hours, your effective rate dropped to 42 an hour, and that is a signal to estimate more carefully or price the next one higher.

Check your rate against the market

Cost-plus tells you the lowest rate you can afford to work for. The market tells you the ceiling. You need both. To find the market range:

Get three or four quotes from competitors as a mystery shopper, or ask peers in a trade group what they charge.
Look at job boards and local listings for posted rates in your trade and region.
Separate the bargain operators from the established pros. You want to know where reputable, insured, qualified tradespeople sit, not the cheapest person with a ladder.

If your cost-plus floor is 50 and the local market for a qualified painter runs 45 to 70, you have room. Pricing at 55 to 60 is comfortable and still competitive. If your floor came out at 50 but the market tops out at 45, that is not a pricing problem, it is a cost problem or a positioning problem, and dropping your rate to match will only bury you faster.

Charge different rates for different work

One flat rate for everything leaves money on the table. The professionals charge by context.

By client

A long-standing client who gives you steady, easy, fast-paying work can fairly sit at your standard rate. A new client with a messy site, slow payment history, and constant change requests should be priced higher to cover the hassle. In Billr you can store a default hourly rate and currency on each client record, so the right rate is applied automatically every time you track for them and you never have to remember who pays what.

By job type

Skilled, high-liability, or unpleasant work commands more. Emergency call-outs, weekend work, working at height, and specialist finishes all justify a premium over routine labour. Set a per-project rate for those jobs.

By project

For a specific contract you can override the client default with a project rate. Billr lets you set a per-project rate that overrides the client rate, and it snapshots whichever rate applied onto each time entry as you log it. That snapshot matters: if you raise your prices next year, your old entries and the invoices built from them stay exactly as they were. Your history never silently rewrites itself.

How to raise your rate without losing good clients

Rates should rise at least with inflation, and faster as your skill and reputation grow. Sitting on the same rate for five years is a quiet pay cut. Here is how to do it cleanly:

Raise new clients first. Quote every new enquiry at the new rate immediately. There is no awkward conversation because they never knew the old one.
Give existing clients notice. A short, friendly message a month ahead works: "From the first of next month my rate moves to 58 per hour. Thanks for the work this year, I look forward to the next project."
Tie it to value, not apology. You are not asking permission. You are informing them, the same way your suppliers inform you.
Expect to lose your worst clients. The price-only shoppers leave first, and that is fine. It frees your calendar for clients who pay what you are worth.
Use your numbers. When you can see in your earnings and invoice reports exactly how much each client brings in and how reliably they pay, raising rates becomes a confident business decision instead of a nervous guess.

A 10% rate increase, from 50 to 55, on 1,269 billable hours is an extra 6,345 a year for the same work. Even if you lose one or two of your lowest-paying clients, you almost always come out ahead.

Key takeaways

Build your rate from costs up: take-home pay plus overhead, divided by realistic billable hours, with tax set aside on top.
Only about 60% of your working hours are billable. Pricing as if all of them are guarantees you fall short.
Use cost-plus for your floor and the local market for your ceiling, then position confidently between them.
Charge by client, job type, and project rather than one flat rate for everything.
Raise rates regularly: new clients first, clear notice for existing ones, and let your reports give you the confidence.

Frequently asked questions

How do I set an hourly rate if I am just starting out?

Do the cost-plus math even with estimates, then check the local market. As a newcomer you might price slightly below the established range to win your first jobs, but never below your cost-plus floor. The moment you have a few happy clients and reviews, move up to the market rate.

Should I charge by the hour or by the job?

Many tradespeople quote a fixed price per job, but you still need an accurate hourly rate underneath it to build that quote and to know afterwards whether you made money. Track your real hours against each fixed-price job so you can see your true effective rate and price the next one better.

How often should I raise my rate?

Review it at least once a year. Increase at least in line with inflation, and more when your skills, certifications, demand, or reputation grow. Long gaps make a big jump feel jarring to clients, so small regular steps are easier for everyone.

Does Billr calculate my rate for me?

No. The math is yours, and that is the point: only you know your costs, your target income, and your market. What Billr does is let you store your chosen rate per client and per project, apply it automatically to your tracked time, snapshot it onto each entry so your history never changes, and report on earnings so you can see whether your pricing is working.

Once you have set a rate worth charging, the next job is making sure you actually capture and bill every hour at it. Track your hours with Billr, apply your client and project rates automatically, and turn them into paid invoices without re-typing a thing. Start free and see what your time is really worth.