When it comes to deciding how much you should charge for your labor, there are a number of components to consider. Basically, these include salary, load, burden and profit. Let’s walk through the process of building a “Sell Rate” for your company.
We will begin by taking a journeyman painter who, just as an example, makes $21.71 per hour. To that salary, you will need to add the other items mentioned below.
The term “load”, or “burden,” is used to describe several expenses that are related to employee salaries. Normally, these include federal government taxes (FICA and FUI), worker’s compensation, state unemployment tax, liability insurance and health insurance benefits. You can check with your accountant or calculate these percentages yourself. Either way, you should be sure to keep them current as they are subject to change. For the purposes of this example, I will plug in a hypothetical number of $6.64 per hour. Adding this to the salary comes out $28.35.
To arrive at a figure for your overhead, take your latest financial statement and total all the indirect costs associated with running your business. This should include items such as support staff salaries, rent, utilities, office expenses, vehicle insurance and repairs, advertising, lead generation and whatever else you have to pay for. Remember this fact:
If you overlook something, you’re going to lose money.”
Once you have arrived at a total monthly expense for your overhead, divide that number by the total number of hours your crew works each month. Obviously, as with your other costs, this one is going to vary. Again, for the sake of this exercise, I will plug in another hypothetical number for overhead of $13.80 per hour. Adding this to the salary and load figure gives you $42.15. This is how much our journeyman costs per hour.
I’m going to take a wild guess here and assume than you are in business to make a profit. Therefore, you need to add something to the above number to ensure that happens. The question is how much profit do you want to make? As I have pointed out before, this can change, depending on your workload, how badly you want the job or what type of project it is. Let’s say you settle on 10%, just to make it easy. Taking the dollar amount we arrived at as your cost of doing business, $42.15 per hour, you need to calculate how you are going to end up with a 10% profit on top of that. If you multiply $42.15 times 10%, rounding up you get $4.22. Add those two together and you end up with a sell rate of $46.37. If this is your approach, you will actually be making 9% profit, not 10%. To see if I’m right, take the number you arrived at as your profit ($4.22), and divide it by the billing rate of $46.37. The correct way to go about this is to start with the cost figure ($42.15), and divide that by 90%. The result will be $46.83. This is your correct sell rate, representing an hourly profit of $4.68, which, if divided by the sell rate, will show a profit margin of 10%. You may have already been familiar with this method of calculating profit, but if not, you just made a whole lot of money. Please note, as salaries do change, you will want to recalculate this number every few months to keep it current.
For more info on this topic, please contact Lynn Fife, a consultant for just about every aspect of the painting industry. He has written several books, consulted for paint contractors and conducted seminars for the PDCA for over twenty years.
If you want to calculate the correct amount to bill for a “Mixed Rate,” which is to say a combined rate for various members of a given crew that make different salaries, the easiest approach is to simply add the salaries together and divide by the number of people. That is why big jobs are not always better than small jobs.
If, for instance, you have a foreman at $25 per hour, four journeymen painters at $22 per hour and two prep men at $18 per hour, the total would come to $149. Divide this by the number of people (7) and you get $21.29 per hour as an average mixed rate salary. This rate will vary, depending on the mix you have at any given time. Simply go through the same steps we did above to arrive at the appropriate mixed sell rate.
If you want to go back and figure out your profit margin for previous projects, please check out CraftJack’s ROI calculator.
Knowing your target sell rate will not only increase your profits, but save you time as numerous projects start piling up. By using the above steps, your sell rate will never be wrong again!
About the Author
Lynn Jackson has been a painting contractor for a number of years and is now an estimator/project manager for a large commercial/industrial painting company in the NW. He has bid and managed jobs as large as $5 Million. Lynn is also the author of a book on contracting and estimating, a software estimating program and has conducted numerous seminars on contracting, estimating and blueprint reading.