I Pay an Employee $20 an Hour. Here’s Why I Need to Charge at Least $60 for His Labor

What contractor labor rate should I charge if I pay an employee $20 an hour? That’s a question I’ve had to answer in my own contracting business.

For my contracting business, the answer is generally at least $60 per man-hour.

That does not mean I’m putting $40 an hour in my pocket. A $20 hourly wage is not the same thing as a $20 hourly labor cost. Once I account for payroll taxes, workers’ compensation, paid time off and the paid hours that aren’t truly productive, I’ve calculated that a $20-per-hour employee can cost my company around $30 for each productive labor hour.

And even that $30 is still a cost. It isn’t a selling price.

Here’s how I actually think about labor when estimating larger projects, why I estimate crew-days instead of individual hours, and why I’ve learned not to let a square-foot price determine what I charge for a job.

First, a $20 Employee Does Not Cost Me $20 an Hour

I covered this in much more detail using a full year of actual payroll data in my article on calculating true labor cost per hour.

In that real example, the progression looked like this:

The difference matters.

If I simply doubled the employee’s $20 wage and charged $40 per hour, I would be doubling the wrong number. My company doesn’t actually receive one productive labor hour for every hour that appears on payroll.

There are payroll taxes, workers’ compensation, PTO and other employee costs. There is also loading, unloading, fueling, equipment preparation, meetings, breakdowns and all the other paid time that comes with operating a contracting company.

That’s why I want to know my effective labor cost per productive hour before deciding what labor needs to sell for.

My Rule of Thumb: At Least 2× Effective Labor Cost

For the type of project work we do, I generally want the labor selling rate to be at least twice the effective labor cost.

If an employee effectively costs the company around $30 per productive hour, I generally want to recover at least:

For larger projects that keep the crew working at the same site for several days or even several weeks, I can sometimes live with something closer to $55 per man-hour.

For a one-day job or something even smaller, less than $60 per man-hour is generally a no-go for me.

Different types of work can also support different rates. For example, our hardscape labor may generally fall around $60–$75 per man-hour, while specialized irrigation work can be substantially higher. Simpler work such as shrub trimming may be somewhat lower.

The exact number isn’t the important lesson. The important part is that I don’t start with the employee’s wage. I start with what that labor actually costs the company.

I Estimate Larger Jobs in Crew-Days, Not Individual Hours

Most of our larger projects aren’t estimated by asking whether they will take 23 hours or 27 hours.

I think in crew-days.

Let’s say I expect a project to take three days with a three-man crew. The crew’s paid workday from sign-in to sign-out is 10 hours after subtracting an unpaid lunch.

The calculation is simple:

If I’m carrying $60 per man-hour in the estimate:

That’s much closer to how I actually estimate a project than trying to predict every individual productive hour.

Why I Include Sign-In to Sign-Out

There is another intentional cushion in my method.

I’m using an effective labor cost that already accounts for nonproductive time, but when estimating a large project I still calculate the crew from sign-in to sign-out rather than pretending every minute of every day will be spent physically installing the project.

I do that intentionally.

Almost every job has question-mark time.

• Equipment has to be transported.
• Trucks and machines need fuel.
• Materials need to be loaded or moved.
• Equipment needs maintenance.
• Something unexpected happens on the site.
• The job has to be cleaned up.
• The crew still has to get back to the shop and put things away.

I would rather acknowledge those realities when I estimate the job than build an estimate around a theoretically perfect day that almost never happens.

I Also Don’t Estimate Hardscape Jobs in Quarter-Days

For larger project work, the smallest labor increment I normally use is a half-day, and even half-days aren’t especially common.

My labor estimates look more like this:

4 days. 5.5 days. 7 days. 10.5 days.

They don’t normally look like:

4.25 days. 7.75 days. 10.25 days.

If a crew finishes a large project a couple of hours earlier than expected, that doesn’t necessarily mean I suddenly have several perfectly billable hours available somewhere else.

There may be equipment to load, a site to clean, trucks to unload, materials to return or another project that simply doesn’t make sense to mobilize for that late in the day.

A half-day can work, especially on a small one- or two-man job. But on larger crew-based projects, I try to estimate in realistic chunks of time rather than pretending I can schedule every quarter of a day perfectly.

How Do I Know How Many Days a Job Will Take?

Mostly experience.

After doing the same type of work repeatedly, you develop production expectations.

For example, if I’m looking at a fairly standard 400-square-foot paver patio, I may know from experience that a three-man crew should take approximately three full days under normal conditions.

That immediately gives me a starting point for labor:

If I’m unsure, I ask the foreman.

I’ll simply ask something like, “How many days do you think this will take, and with how many men?”

That information is much more valuable to me than forcing a production estimate I don’t trust.

Why I Don’t Price a Paver Patio by Square Foot Alone

A lot of contractors use square-foot pricing. I do too—but I don’t want square footage to be the sole calculation determining the selling price.

I use it as a reasonableness check.

Here’s a simplified example showing why.

Suppose my historical turnkey price for a basic paver patio is around $24 per square foot.

A customer wants a small 10-foot-by-12-foot patio:

If I stop there, my proposal is $2,880.

But now let’s actually build the job from the bottom up.

Materials

Labor

Now suppose the patio takes three employees two full days.

Their base wages are $22, $21 and $17 per hour, averaging $20 per hour.

At nine paid hours per employee per day in this example:

At base wages alone, the payroll appears to be:

But that’s not what those employees actually cost the company.

If their estimated effective labor costs are approximately $31.90, $30.45 and $24.65 per productive hour, the average is about $29 per man-hour.

Now Look at the Job Again

The square-foot price doesn’t even cover the estimated direct cost in this example.

I’d be approximately $91 underwater before considering company overhead or generating any profit at all.

Small Jobs Can Be Especially Dangerous to Price by Square Foot

The 120-square-foot patio illustrates another problem with unit pricing: small projects don’t shrink every cost proportionally.

A patio that’s half the size doesn’t necessarily require half the mobilization.

I may still need a truck, trailer, mini skid steer, compactor and saw. Materials still have to be picked up or delivered. The crew still has to load equipment, travel to the property, set up, clean the site and return everything when they’re finished.

That’s one reason a small project can require a higher price per square foot than a much larger one.

The square footage gets smaller. Many of the costs surrounding the installation don’t.

Labor Markup and Gross Margin Are Not the Same Thing

This distinction is worth understanding.

If my effective labor cost is $30 and I sell that labor for $60, I’ve marked up the labor cost by 100%.

But the gross margin on that labor component is 50%:

Markup is measured against cost. Margin is measured against selling price.

Confusing the two can create some surprisingly large pricing mistakes.

One Thing I’m Changing in My Own Pricing Process

Historically, I haven’t started every estimate by choosing a specific target margin and working backward from it.

I’ve priced labor, materials, equipment and the other parts of the job at rates I’ve learned can make money. Then I’ve looked at the resulting overall job margin to make sure the estimate makes sense.

That has worked, but the more closely I’ve tracked actual job costs, the more I’ve realized something:

For our project work, I generally like estimated job-level gross margins somewhere around 30% to 50% before company overhead.

A 50% job is exceptionally profitable. Around 30% can still be acceptable. Below that isn’t where I generally want our projects to land.

That doesn’t mean every job needs exactly the same margin. A larger, predictable project can make sense at a different percentage than a tiny, complicated project. Risk, duration, complexity and total gross-profit dollars all matter.

But I want to know the number before I sign the company up to perform the work.

The Three Checks I Want Before Sending an Estimate

The way I think about pricing today can be summarized with three checks.

1. Build the Job From Its Actual Costs

Estimate realistic crew-days and man-hours. Account for materials, equipment, fuel, disposal, subcontractors and other direct costs. Don’t start with what you hope the project costs.

2. Check the Resulting Margin

Once I’ve built the selling price using the labor and material pricing that makes sense for my company, I want to know what estimated gross margin that price actually produces.

If I don’t like the result, I want to know that before I send the proposal.

3. Compare It With Historical or Unit Pricing

Now I can look at price per square foot, price per crew-day or similar completed jobs.

If my detailed estimate says $40 per square foot when comparable jobs normally sell around $24, I want to understand why.

Maybe access is terrible. Maybe the design is complicated. Maybe it’s a tiny project with disproportionately high mobilization costs.

Or maybe I made a mistake in my estimate.

Either way, the unit price gives me another data point. It doesn’t make the decision for me.

So What Should You Charge for a $20-an-Hour Employee?

If another contractor asked me that question today, my short answer would be:

I wouldn’t want to charge less than about $60 per man-hour for that employee in my business.

But I would immediately add that $60 isn’t a universal contractor labor rate.

Your workers’ compensation rate may be different. Your payroll taxes, PTO, productivity, overhead, insurance, equipment costs and market may be different. Your type of work may support a completely different selling rate.

The useful question isn’t:

“What multiple should every contractor put on a $20 wage?”

It’s:

“What does this employee actually cost my company for a productive hour, and what does that labor need to sell for so the entire job produces an acceptable margin?”

That’s the number I want to know.

Frequently Asked Questions

How much should a contractor charge for a $20-an-hour employee?

There isn’t one correct rate for every contractor. In my business, I generally want at least about $60 per man-hour when an employee’s effective labor cost is around $30 per productive hour. Your appropriate selling rate depends on your actual employee costs, productivity, overhead, type of work and desired job margin.

Is doubling an employee’s hourly wage enough?

Not necessarily. Doubling a $20 wage gives you $40, but the employee may actually cost substantially more than $20 after payroll taxes, workers’ compensation, PTO and nonproductive paid time. I prefer to calculate the employee’s effective labor cost first and make pricing decisions from that number.

What is the difference between labor markup and margin?

Markup compares profit to cost, while margin compares profit to selling price. If labor costs $30 and sells for $60, that’s a 100% markup on cost but a 50% gross margin on the $60 selling price.

Should contractors price jobs by square foot?

Square-foot pricing can be useful as a comparison or reasonableness check, especially when you have good historical data. I don’t use it as the sole method for determining a project’s selling price because two projects with identical square footage can require very different amounts of labor, equipment, mobilization and other costs.

Should contractors estimate labor by hours or days?

It depends on the work. For larger hardscape projects, I generally estimate labor in crew-days because that’s how our crews and equipment are actually scheduled. For smaller service or repair work, hourly pricing may make more sense.