How to Calculate Your Billable Rate
Turn a fully-loaded labor cost into the hourly price you must charge to hit your profit goal.
If you bill clients for labor — as a shop, contractor, agency, or freelancer — the single most important number you can know is your billable rate: the hourly price you must charge so that, after all costs, you actually make your target profit. Charge too little and you work hard to lose money; charge based on the wage alone and you forget everything the employee truly costs. This guide shows how to turn a fully-loaded cost into a defensible bill rate.
The Employee Cost Calculator has a built-in billable-rate section that does this math for you — here is how it works so you can trust the number.
Step 1: Start from the true cost, not the wage
Your billable rate must cover the fully-loaded cost of the employee — wage plus payroll taxes, workers' comp, benefits, overhead, and paid time off — not just the wage. If you have not calculated that yet, start with our guide on the true cost of an employee. For our example, assume a $25/hour machinist has a fully-loaded cost of about $80,000 per year.
Step 2: Use billable hours, not paid hours
Here is the mistake that sinks most pricing: dividing cost by all 2,080 paid hours. Nobody bills every paid hour. Time goes to paid time off, admin, travel, training, cleanup, and gaps between jobs. The hours you can actually invoice are your billable hours, and they are always fewer than paid hours.
If your machinist is productive 1,872 hours a year after time off, and only 75% of those hours are billable to customers, that is about 1,404 billable hours — not 2,080. Spreading an $80,000 cost across 1,404 hours gives a cost per billable hour of about $57, not the $38 you would get by dividing by 2,080.
Step 3: Add your profit margin correctly
Profit can be expressed two ways, and confusing them is a classic error:
- Markup is profit as a percentage of cost.
- Margin is profit as a percentage of price.
To hit a target margin, you divide — you do not simply add the percentage. The formula is:
For a 30% margin on a $57 cost: $57 ÷ (1 − 0.30) = $57 ÷ 0.70 = about $81.75 per hour. At that rate, 30% of the price is profit. If you had instead just added 30% ($57 × 1.30 = $74), your actual margin would only be about 23% — a common and costly slip.
Worked example
| Step | Value |
|---|---|
| Fully-loaded annual cost | $80,000 |
| Billable hours per year | 1,404 |
| Cost per billable hour | $57 |
| Target margin | 30% |
| Bill rate | ~$81.75 / hour |
| Profit per billable hour | ~$24.50 |
Common billable-rate mistakes
- Billing off the wage. A $25 wage is not a $25 cost; loaded, it is closer to $43/hour before profit.
- Assuming 100% utilization. Nobody bills every hour; use a realistic billable percentage.
- Confusing markup and margin. Adding 30% is not the same as a 30% margin.
- Forgetting non-billable roles. Supervisors, admin, and shop time still have to be covered by billable work.
- Never revisiting the number. Wages, insurance, and material costs rise; re-check your rate at least yearly.