If you're at the kitchen table at 10 at night pricing a job off what the other guys charge, you're guessing, and there's a good chance it's too low. The estimate goes out in the morning, so you look at the last job like it, round up a little for the supply house and hope it covers everything.
Pricing a job without guessing comes down to four numbers from your own books: what an hour of billable labor really costs you (wages plus payroll taxes, insurance and the hours nobody pays for), your overhead spread across every billable hour, your materials at cost plus a markup, and a profit you set as a margin of the selling price instead of a markup on cost. Once you've done that math one time, you can turn it into an hourly rate or a flat-rate price book and only touch it again when wages, overhead or material costs change.
And that kind of guessing shows up all over the trades. In a thread about charging too much on Mike Holt's electrical forum, one contractor said it's "usually some guy charging insanely low rates and me trying to convince him he's losing money." It's easy for a skilled tradesperson to undercharge for years when nobody showed them how the numbers fit together, and it's something you can fix in one evening with a calculator and last year's books.
How do I know if I'm charging enough?
You're charging enough when the price covers your labor, overhead, materials and a profit you chose on purpose, and there's still money in the bank after every bill and paycheck. If your schedule is full weeks out and you still can't pay yourself steadily, that's usually a sign the prices are too low.
For an outside reference point, the National Association of Home Builders' Remodelers' Cost of Doing Business Study found that remodelers averaged a 29.9% gross profit margin and a 6.3% net profit margin in 2024, with operating expenses at 23.6% of revenue. Service trades run differently than remodeling, so treat those as a reference and not a target, but they show how thin the net can get even for an established company.
What does a job really cost me?
Every job carries four kinds of cost, and a price that only covers the first one or two will lose money even when the crew does great work. There's direct labor at your people's full loaded cost, which is more than their wage, and there are materials and equipment, along with the freight, waste and supply house trips that come with them. Then there are the direct costs that belong to this job and no other, like permits, disposal, rentals and subs.
The fourth is overhead, which is everything it takes to keep the doors open whether or not a job is running: the office, the trucks, insurance, software, phones, marketing, your office staff and your own salary. It's the easiest one to leave out, so pull last year's profit and loss statement and add up everything that isn't tied to a specific job, and that total is your annual overhead. Your bookkeeper can help if your books mix the two together, and then you're ready for the labor rate.
How do I figure my true labor rate?
Your true labor rate is a tech's wage plus everything you pay on top of it, divided by the hours you can actually bill. A lot of underpricing starts when the math stops at the wage.
Start with the hourly wage and add the burden. The IRS's employment tax page lists the employer share as 6.2% for Social Security and 1.45% for Medicare, so you're at 7.65% before anything else. After that come workers' comp, state and federal unemployment, health insurance, retirement, paid time off and any vehicle or phone allowance, and your payroll provider and insurance agent can give you the real figures.
Then figure out your billable hours. A full-time tech is paid for about 2,080 hours a year, but nobody bills all of them, because unbilled drive time, shop time, training, callbacks, holidays and slow days all come out. Pull a few months of time records and count how many hours actually ended up on invoices.
Here's a worked example with round numbers, and you'll want to swap in your own.
A tech earns $30 an hour.
Employer Social Security and Medicare add $2.30 an hour, and say workers' comp, unemployment, insurance and paid time off add another $5, for a loaded cost of about $37.30 an hour.
Over a year that's 2,080 paid hours, but say only 1,500 end up billed. Spreading the full year's cost across the billable hours gives you about $51.72 per billable hour.
Say your annual overhead is $400,000 and you have six techs billing 1,500 hours each, or 9,000 billable hours in all. That works out to about $44.44 of overhead per billable hour.
Add the two together and your break-even is about $96.16 per billable hour, before materials and before any profit.
If you want a 10% net profit margin on labor, divide that break-even by 0.90, which gives you about $106.84 an hour. Seeing how far that sits above the $30 wage is often the moment the whole pricing problem starts to make sense, and it's also where the next mix-up creeps in.
Am I looking at markup or margin?
Markup is what you add on top of cost, as a percentage of cost, and margin is what you keep, as a percentage of the selling price. They're two different numbers for the same dollars, and mixing them up quietly costs money on every job.
On a job with $100 of cost, a 50% markup makes the price $150, and the $50 you keep is only a 33% margin. To get a 50% margin you need a 100% markup, which makes the price $200, and a 25% markup only gets you a 20% margin.
The formula worth remembering is that price equals cost divided by one minus the margin you want. For a 30% margin on $100 of cost, that's $100 divided by 0.70, or about $143. If you've been setting prices with a markup but reading your reports in margin, that mismatch alone could explain why the numbers never seem to line up.
How do I raise prices without losing my best customers?
Raise prices on new work first, give existing customers a short heads-up and lead with what they get from you instead of an apology. I think the most generous thing you can do for a customer is tell them the truth, and a price that covers the real cost of the work is part of that.
You'll also have plenty of company. In ServiceTitan's 2026 Residential State of the Trades survey of more than 1,000 contractors, reported by ACHR News, 27% said they expected to raise service prices 6% to 10% and 23% expected increases of 2% to 3%, while 28% planned to keep prices the same.
Here's the order I'd take it in:
Update your price book or rate sheet once, from the math above, instead of nudging prices job by job.
Apply new prices to new estimates right away, and to maintenance agreements at renewal.
Give existing customers 30 days' notice in a short, friendly note.
Train your techs and office to explain the price in terms of what's included, not to discount it on the spot.
Watch your close rate for a couple of months, and if you're still booking nearly everything you quote, you probably have more room.
The by-hand way to keep this current is a spreadsheet with your loaded labor rates, overhead per hour and markup table, reviewed every quarter. The tool way is a price book in your field service software built from those same numbers, so every tech quotes the same way whether you're on the call or not. If you'd like help building that, here's how I approach estimate and pricebook systems, and job costing for contractors is how you check whether the prices are holding up on real jobs.
Questions owners ask
What markup should a contractor use on materials?
There's no single right number for every shop. Start with the margin you need on materials to cover handling, waste, warranty risk and the trips to the supply house, then convert it to a markup with the formula above. Some shops use a sliding scale, with a higher markup on small parts and a lower one on big equipment.
Should I switch to flat-rate pricing?
Flat rate works well for repeatable service work, because the customer knows the price up front and your techs aren't arguing about hours. It only works if the flat prices are built from your real labor rate and average task times, so do the labor-rate math first and build the price book from it.
How often should I raise prices?
Review your numbers at least once a year, and again any time wages, insurance or material costs jump. Small, regular increases are easier on customers than a big one every few years.
What's the difference between markup and margin?
Markup is a percentage of your cost, and margin is a percentage of the selling price. A 50% markup on a $100 cost gives you a $150 price but only a 33% margin, so know which one you're looking at before you set a price.
So the next time it's 10 at night and an estimate is due in the morning, you won't be pricing off what the other guys charge. You'll have a loaded labor rate, an overhead number for every billable hour and a margin you picked on purpose, so the job comes down to counting the hours and the materials, and the price you send is one you can stand behind.
If you'd like to see who's actually setting and approving prices in your company, the free Foundation Inspection follows a job from the first call to the money in the bank and asks who owns each step along the way, including building the estimate and approving the price and margin before it goes out. It takes about an hour, and it shows you which few handoffs would make the biggest difference first.
I'm Tim Volner, and I run Sentric Group in Salem, Oregon, where I work with contractors who've built a solid company but have reached the point where it can't seem to run for a single day without them.