How do you calculate a charge-out rate?

Add the pay you want for a year (plus super or pension) to your yearly overheads, then divide by the hours you can actually bill a customer for. That is your break-even rate. Divide it by one minus your profit margin to add profit: a $91.93 break-even rate with a 15% margin is $91.93 ÷ 0.85 = $108.15 an hour.

How many billable hours are there in a year?

Fewer than most people think. A 45-hour week over 46 working weeks is 2,070 hours, and if 70% of that is on the tools rather than quoting, travelling, buying materials and doing admin, about 1,450 hours can be billed. Use your own diary or timesheets for a few weeks to check your billable share.

Why is my charge-out rate so much higher than an hourly wage?

An employee is paid for every hour, holidays included, and the employer pays for the van, tools, insurance and the time between jobs. When you work for yourself, your rate has to cover all of that from the hours a customer pays for, so it is often two to three times the hourly wage for the same pay.

Should the rate include GST or VAT?

Work the rate out without it, because GST or VAT is not your money. If you are registered, add it on top when you quote: in Australia a $108.15 rate is about $119 including 10% GST.

How do I set a charge-out rate for an employee?

Use the same method with their pay, on-costs (super, payroll tax, workers' compensation, leave) and their billable hours, plus a share of the business overheads. The can I afford to hire calculator shows the full monthly cost of a role and the extra sales it needs.

What profit margin should I add?

There is no single right figure. The margin is what the business keeps after paying you a fair wage, so it pays for tax, quiet months, new tools and growth. Work out what those need for a year and divide by your sales. The guide on what a good profit margin is walks through it with a worked example.

Are my figures stored or sent anywhere?

No. The calculation runs in your browser. Nothing you type is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.

Charge-out rate calculator: what to charge per hour

How the calculator works

Yearly cost = the pay you want × (1 + super or pension %) + yearly overheads.
Billable hours = hours a week × weeks you work × the share of hours you can bill.
Break-even rate = yearly cost ÷ billable hours. Below this, you are paying yourself less than you planned.
Charge-out rate = break-even rate ÷ (1 − profit margin), so the margin is a share of what the customer pays, not a markup.
At today's rate: today's rate × billable hours, minus overheads, is what is left to pay you.

All rates are before GST or VAT. Materials you charge on to customers with their own markup are not overheads; leave them out.

A worked example

A sole-trader electrician in Adelaide. Made-up figures to show the arithmetic.

	$ a year
Pay they want (what an employed electrician might earn)	85,000
Super at 12%	10,200
Van, fuel, insurance, tools, phone, software, accountant	38,000
Yearly cost	133,200

Billable hours: 45 hours a week × 46 weeks = 2,070 hours worked, and 70% of them are billed, so 1,449.
Break-even rate: $133,200 ÷ 1,449 = $91.93 an hour.
With a 15% margin: $91.93 ÷ 0.85 = $108.15 an hour, or about $119 including GST.
Compared with a wage: $85,000 over 38 hours × 52 weeks is $43.02 an hour. The charge-out rate is 2.5 times that.
At the $85 they charge today: $85 × 1,449 = $123,165 a year. After $38,000 of overheads, $85,165 is left, which pays $76,040 plus super: $8,960 less than planned, and no profit. The gap is $23.15 an hour, $33,541 a year.
The cheaper fix: billing 75% of hours instead of 70% (less driving between jobs, quoting at night) brings the rate needed down to $100.94.

Press "Load the worked example" above to see it in the calculator. To check what a rise does to sales before you announce it, the price increase calculator shows how many jobs you could lose and still be better off.

Checking it against your Xero figures

Overheads: run Accounting › Reports › Profit and Loss for the last 12 months and add up Operating Expenses, leaving out your own wages or drawings. How to read a Profit and Loss in Xero explains each section, and fixed and variable costs shows which ones belong here. The overhead rate calculator shows what they come to per billable hour and per job.
Billable hours: divide 12 months of labour sales by your rate. If you invoice 1,200 hours at $85, you billed less than the 1,449 hours the rate assumes, and your rate needs to be higher still.
Is it working? Net profit after a fair wage for yourself is the test. The net profit calculator and what is a good profit margin for a small business show how to judge it.
What you can take home: how much can I pay myself works it out from the Balance Sheet, after setting aside tax.

Charging by the job rather than the hour? Work out the hours the job will take, multiply by this rate, and add materials at your markup. The margin and markup calculator does the materials part.

Questions

How do you calculate a charge-out rate?: Add the pay you want for a year (plus super or pension) to your yearly overheads, then divide by the hours you can actually bill a customer for. That is your break-even rate. Divide it by one minus your profit margin to add profit: a $91.93 break-even rate with a 15% margin is $91.93 ÷ 0.85 = $108.15 an hour.
How many billable hours are there in a year?: Fewer than most people think. A 45-hour week over 46 working weeks is 2,070 hours, and if 70% of that is on the tools rather than quoting, travelling, buying materials and doing admin, about 1,450 hours can be billed. Use your own diary or timesheets for a few weeks to check your billable share.
Why is my charge-out rate so much higher than an hourly wage?: An employee is paid for every hour, holidays included, and the employer pays for the van, tools, insurance and the time between jobs. When you work for yourself, your rate has to cover all of that from the hours a customer pays for, so it is often two to three times the hourly wage for the same pay.
Should the rate include GST or VAT?: Work the rate out without it, because GST or VAT is not your money. If you are registered, add it on top when you quote: in Australia a $108.15 rate is about $119 including 10% GST.
How do I set a charge-out rate for an employee?: Use the same method with their pay, on-costs (super, payroll tax, workers' compensation, leave) and their billable hours, plus a share of the business overheads. The can I afford to hire calculator shows the full monthly cost of a role and the extra sales it needs.
What profit margin should I add?: There is no single right figure. The margin is what the business keeps after paying you a fair wage, so it pays for tax, quiet months, new tools and growth. Work out what those need for a year and divide by your sales. The guide on what a good profit margin is walks through it with a worked example.
Are my figures stored or sent anywhere?: No. The calculation runs in your browser. Nothing you type is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.

This calculator gives an estimate from the figures you enter. It is not financial advice. Xero is a trademark of Xero Limited. This tool and ReportPilot are independent and are not made or endorsed by Xero.

Charge-out rate calculator: what should I charge per hour?

Your charge-out rate