An hourly rate is built on chargeable hours, not on paid hours. A 39-hour contract pays 2,028 hours a year, and the Working Time Regulations 1998 take 5.6 weeks of that back as statutory leave before a single hour reaches a customer. Travel, collection, surveys, callbacks and admin remove several hundred more, so an operative who is paid for 1,810 available hours may only sell around 1,290: the same annual cost then spreads over a quarter fewer hours and the hourly cost rises by 40 %. Two further gaps finish the job, the employer costs a bare wage figure hides, and the margin coefficient, which is not one plus the rate you are aiming at.
From paid hours to chargeable hours
The first calculation to make is not a price but a denominator. Start from the contracted annual total, then remove everything that is paid without being sold. The figures below are an example for a second-fix operative, to be replaced by your own timesheets, but the shape of the deductions is stable from one firm to the next.
| Item | Hours per year |
|---|---|
| Contracted hours, 39 per week | 2,028 |
| Statutory leave, 5.6 weeks | −218 |
| Sickness and other absence | −40 |
| Travel to yard and between sites | −170 |
| Preparation, collection, loading | −110 |
| Surveys and unsuccessful quotations | −80 |
| Callbacks and warranty rework | −55 |
| Training, meetings, admin | −65 |
| Chargeable hours | 1,290 |
That is an occupancy of 71 % against the 1,810 hours actually available after statutory leave. This number, not the headline rate, is the real lever on profitability: it moves by clustering jobs geographically, by lifting the quotation conversion rate and by cutting rework. The survey and pricing time is the part that compresses fastest once the survey feeds the quotation directly.
The denominator sets the hourly cost before any negotiation
Take a fully loaded annual cost of £52,000 for one operative: wages plus employer costs, plus a share of van, tools, insurance, software and overheads. The hourly cost then depends only on how many hours you spread it over.
| Chargeable hours in the year | Hourly cost |
|---|---|
| 1,810 | £28.70 |
| 1,600 | £32.50 |
| 1,450 | £35.90 |
| 1,290 | £40.30 |
| 1,150 | £45.20 |
From the top of the table to the bottom, the gap is £16.50 an hour on identical costs. That is why two firms paying the same wages can advertise very different hourly rates without either being expensive or cheap: they are simply not selling the same number of hours.
What construction adds to the employer cost
National Insurance, pensions and the scheme deductions
Employer National Insurance runs at 15 % on earnings above the £5,000 secondary threshold, and eligible employers offset up to £10,500 a year through the Employment Allowance, which matters most on a payroll of two or three. Pension auto-enrolment adds an employer minimum of 3 % of qualifying earnings. A wage figure taken straight from a payslip carries none of this, which is the single most common reason an hourly cost comes out too low.
The Construction Industry Scheme does not change the cost but it changes the cash. On labour supplied to a contractor, 20 % is deducted at source from a registered subcontractor and 30 % from one who is not, and the difference is recovered later against the tax account. The same logic applies to the domestic reverse charge on construction services: the VAT never reaches your bank, so any working-capital plan built on gross invoiced amounts is wrong from the start.
Then come the costs rarely allocated per hour and which nonetheless weigh: van and fuel, tools and their replacement, public liability and employer's liability cover, software, accountancy, waste transfer and disposal, and the cost of the accreditation itself when you are inside a certification cycle. On that last item, the orders of magnitude are set out in our article on what certification costs a trade business.
From cost to selling price: the coefficient
The hourly cost is not a selling price. There is still the margin to cover, which is what funds the unexpected, the reinvestment and the result. And this is where the most expensive arithmetic error in trade pricing sits.
| Target margin on the selling price | Correct coefficient | Coefficient if you multiply by 1 + margin | Margin actually achieved |
|---|---|---|---|
| 10 % | 1.111 | 1.10 | 9.1 % |
| 15 % | 1.176 | 1.15 | 13.0 % |
| 20 % | 1.250 | 1.20 | 16.7 % |
| 25 % | 1.333 | 1.25 | 20.0 % |
| 30 % | 1.429 | 1.30 | 23.1 % |
Mark-up or margin: the confusion that costs three points
A 20 % mark-up on cost and a 20 % margin on the selling price are not the same thing. The first multiplies the cost by 1.20, the second divides it by 0.80, which is a multiplication by 1.25. Confusing the two loses 3.3 points of margin on every line, and the gap widens as the target rises: at 30 % the correct coefficient is 1.429 and the error costs close to 7 points.
Estimating practice keeps the two steps apart for exactly this reason: you start from the prime cost of labour and materials, apply an overhead recovery factor that spreads the fixed costs of the business over the productive hours, and only then apply the margin coefficient to the resulting cost. Merging the two means funding the business out of the margin, which is working at a loss from the first thing that goes wrong. The formula fits on one line: selling price = cost ÷ (1 − margin rate). It applies the same way to labour and to materials, provided you start from the real landed cost of the material on site rather than the list price. On that point, prices, VAT and product characteristics stay current in the catalogue, which saves recalculating every line by hand.
What to track job by job to correct the rate
An hourly rate is only right until the next job. The useful control is two figures recorded at handover: the hours actually spent by activity, and the variance against the hours sold. A drift of thirty minutes a day per operative is around 110 hours a year, close to 9 % of the chargeable volume in the example above. Carry that variance onto the next quotation rather than onto the year-end result.
Two cash-flow points to watch. The hourly rate says nothing about the gap between money going out and money coming in: materials are paid to the merchant long before the valuation is settled, and it is that gap, not the margin, that puts firms into default. See our article on payment terms in retrofit work. Finally, a quotation that does not carry the information a written estimate has to show gets renegotiated line by line: labour, materials and accessories flow down from the work plan with VAT applied line by line, which keeps the discussion on scope rather than on the price of an hour.
