With any building work, price is always a huge factor, and the labour cost is nearly always the biggest component. So what’s a fair hourly rate for a builder these days and how do you work it out?
Do 40 hours work a week at $50 an hour for 49 weeks (3 weeks holiday) and your income is $98,000 a year. Sounds good. But hang on a minute. Do you really work 40 hours a week?
Yes and no. If you run a small business, you may work considerably more than 40 hours in any one week. But chances are a big chunk of that time is spent doing admin things, quotes, sorting out tradies, getting your ute serviced and maybe attending an industry event to upskill yourself and keep abreast of those ever-changing building regulations.
Oh, and let’s not forget the downtime when the weather turns to crap. Or a customer changes their mind and the windows are delayed four weeks, and the excavator driver comes down with the flu while the plumber has a family crisis.
So how do you take all this into account when you’re calculating your charge out rate? One of the most common mistakes small building businesses make is underestimating the amount of time spent on all the other off-the-tools tasks that are critical to running a business.
The average wage in New Zealand is currently $55,000 a year (before tax) so let’s assume that you want to earn at least this amount. Maybe you aspire to earn more than the “average”?
So let’s settle on a figure roughly 10% more than the average wage to make the numbers easy: $60,000. As well as two weeks holiday at the end of the year, you probably won’t work Easter, Waitangi Day, Anniversary Day, New Years Day etc. When you add up all the statutory holidays, it works out at roughly another two weeks.
If you get sick, you might lose another week.
So the working year now shrinks to a more realistic 46 weeks x 40 hours a week, a total of 1,840 hours.
|Potential hours per year (52 weeks x 40hrs)||2080|
|3 weeks holiday, 2 weeks stat holidays||200|
|1 week off sick||40|
But what about all those other tasks that suck away your time? A good exercise is to keep a precise record of your time for a week or two, so you know for sure.
Let’s take a punt and say it works out at 20% of your time, which equals 368 hours. Subtracting 368 from 1,840 leaves you with 1,472 chargeable hours. To earn $60,000 your hourly rate needs to be $40.76.
Unexpected delays due to weather, unforeseen building problems, tradies not turning up when they’re needed, clients changing their mind and niggling callbacks are all part of the equation.
Let’s say (being conservative) you lose one day a month due to these factors. That’s 96 hours. So now, you only have 1376 available hours. To reach the target $60,000 salary, you need to up your hourly rate to $43.60.
What about business overheads? Here’s an example of what they could be for a one-man band.
|Accounting, gst returns etc||$1500|
|Home office expenses||$600|
|Adverts & promotion, bus cards||$1500|
Let’s round this off to $12,000.
To earn a salary of $60,000 a year, you need to get $43.60 an hour. Your overhead costs of $12,000 (divided by the 1376 hours you can charge) means you need to add another $8.72 to your hourly rate.
So the rate now is $52.32.
Another thing you need to consider is a profit margin to cover the wear-out factor of your tools and other equipment necessary for your business. A profit margin of 15% is pretty typical in small businesses.
|Charge-out rate to cover your income requirements||$43.60|
|Charge-out rate to cover your overheads||
|Profit margin at 15%||
|Final charge-out rate||
According to the Ministry of Business Employment and Innovation, building contractors in New Zealand are currently charging between $45 and $65 an hour. On this basis, the average building business owner is earning $55 an hour, which is just below the average New Zealand wage.
Of course, you can go through all the numbers and trim the costs. But the bottom line is that to earn more, you need to look closely at how you can improve your productivity.
Even if you have been in business for a long time, it pays to do a reality check every now and then to see what your true hourly rate is. Split your day into half hour chunks and keep an accurate record. You’ll be surprised at how much time you’re spending that’s not being charged.