Most contractors who struggle financially are not bad at their trade — they are pricing their work wrong. Either they are charging too little to cover their real costs, or they are guessing at numbers without a system. Here is how to set contractor rates that actually work.
Calculate your true cost of doing business
Your rate has to cover more than your time. Before you quote a single number, add up your real annual costs: vehicle expenses, tools and equipment, insurance, licensing and bonding fees, software, marketing, and any subcontractor overhead. Divide that total by the number of billable hours you expect to work in a year. That number — your overhead per hour — gets added to your target wage before you set any rate.
Self-employment tax is 15.3% on top of income tax. If you were making $30/hour as an employee, you need to charge significantly more than $30 as an independent contractor just to break even after taxes and benefits you are now covering yourself.
Hourly vs. flat-rate vs. cost-plus pricing
There is no single right pricing method for contractors. Each has its place depending on the type of work:
- Hourly rate: best for open-ended service calls, troubleshooting, or small jobs where scope is unclear
- Flat-rate / fixed bid: best for well-defined projects where you can estimate scope accurately — protects you when you work efficiently
- Cost-plus: materials plus a set markup (typically 15-30%) plus labor — common on larger remodels where material costs vary
- Time and materials: hybrid approach billing labor hourly and materials at cost plus markup
For most home improvement projects, a fixed-price bid with a clear scope of work is what clients expect and what protects you from scope creep. See our guide on contractor estimates and quotes for how to write bids that win jobs without leaving money on the table.
How to mark up materials correctly
Many contractors pass materials through at cost and lose money on the time spent sourcing, ordering, picking up, and managing them. A standard material markup of 15 to 25 percent is industry-normal and compensates for that overhead. On large material orders, even a smaller percentage adds up to meaningful revenue.
Always document your material costs with receipts and build the markup into your estimates explicitly. This is not padding — it is legitimate compensation for the procurement work you do that most clients never see.
Research your local market rates
Rates vary significantly by region, trade, and project type. A licensed electrician in San Francisco charges very different rates than one in rural Tennessee — both correctly, because their cost of living and operating costs differ. Get a sense of what comparable licensed contractors charge in your area by asking peers, checking Angi or HomeAdvisor listings, and occasionally bidding against competitors on the same job.
If you are consistently winning every job you bid, you are probably underpriced. A healthy win rate for a well-established contractor is roughly 40 to 60 percent of bids. Losing some jobs on price is a sign your rates are positioned correctly.
Track job profitability to improve over time
Pricing improves when you compare estimated costs to actual costs after every job. If you consistently run over on labor or materials for a certain type of work, your estimate model needs adjustment. Tracking this in a CRM like Threecus alongside your job history gives you the data to price future work more accurately and profitably.
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