How do I set an hourly rate that covers my costs?

Start with the complete cost of running the service over a stated period, then divide by the hours customers can actually be charged for. Add any desired surplus explicitly. Finally, test the rate against credible paid demand. Arithmetic can tell you what the business needs; it cannot make customers accept the price.

Do not divide the month's costs by every hour someone is at work. Quoting, administration, training and checking may be necessary even when the customer cannot be billed separately for them.

Build the paid-time budget

Consider a fictional translation-layout studio planning June 2027. The owner and one colleague each have 160 paid hours. Complete owner compensation is $4,800; the colleague's full employer cost is $4,000. Another $3,200 covers all other nonlabor operating costs, including rented equipment, software, premises and administration bills. Administration hours are already inside the two paid roles, not charged again here. Total cost is $12,000. There is no unpaid founder work, owned-equipment depreciation, financing, capital spending or income tax in this limited model.

Each person needs sixty of those hours for nonbillable work, leaving one hundred potentially billable hours each: two hundred in total. The supplied schedule includes every required task, including final checks. It is capacity, not two hundred hours of confirmed purchases. Whether a particular task can be invoiced depends on the offer the customer accepted.

The rate covering the stated costs at two hundred billed hours is $12,000 divided by 200: $60 an hour. Dividing by all 320 paid hours instead would give $37.50. Charging that lower number for two hundred hours produces only $7,500, leaving $4,500 of costs uncovered.

Name the surplus you want

Suppose the owner wants $3,000 above these complete operating costs for the month, before the excluded items. Required revenue is $15,000. At two hundred billable hours, that calls for $75 an hour.

The $3,000 is 20 percent of $15,000 revenue. Adding a percentage to costs and describing that same percentage as a sales margin would be another calculation. The existing guide to markup and margin explains that distinction.

OpenStax's discussion of service-job costing includes labor and overhead rather than treating the labor payment as the whole customer charge. The studio's figures and time budget here are original assumptions, not industry rates.

Test the hours as well as the rate

• 200 hours at $75: $15,000 revenue less $12,000 cost leaves the intended $3,000.
• 160 hours at $75: $12,000 revenue covers the same costs, leaving zero surplus.
• 100 hours at $75: $7,500 revenue leaves a $4,500 shortfall.

All costs remain committed in those three scenarios. A quieter month does not automatically remove wages, rent or the work needed to find the next customer. The rate calculation is therefore a hypothesis about both price and saleable time.

For the complete supplied cash timing, start with $5,000 usable cash. All customer amounts in each scenario are collected June 30 before all $12,000 of costs are paid that day. No other cash events occur. The closing balances are $8,000, $5,000 and $500 respectively. Different actual payment dates would need a different forecast; these balances cannot fund an earlier bill that this model has not supplied.

Take the calculation to the offer

1. Record all paid time and costs for one consistent period. Keep owner compensation visible.
2. Identify the hours that fit the schedule and can legitimately be billed under the proposed service terms.
3. Calculate the cost-covering rate and any separate surplus target.
4. Investigate whether suitable customers will buy that service at that rate and volume. Keep inquiries separate from accepted work.
5. Review actual billed hours, corrections, collection and costs before carrying the same rate into another period.

A fixed-price service may still use this internal check. It does not turn the quote into an hourly contract. The price-basis comparison explains what the customer has bought; the next-customer guide examines an extra order after existing costs are already committed.

If customers will not buy enough at the required rate, investigate the service, costs or operating scale. Do not repair the spreadsheet by counting nonbillable time as sold.