Time and Materials Rate Card Construction
Why this matters
A time-and-materials rate card looks like a simple two-number document: hourly rate and materials markup. In practice it determines whether the business is making money on T&M work, losing money on T&M work, or making money in a way that creates customer disputes. Most trade businesses build a rate card by surveying competitors and picking a number; the result is a rate that does not cover their true cost or, occasionally, a rate that makes them uncompetitive. The working approach is to construct the rate from the bottom up so the rate is defensible, the gross profit target is achieved at the stated billable utilization, and the customer disputes are resolvable by walking the math.
What a T&M rate card includes
A complete rate card has:
- Hourly labor rate, by classification (apprentice, journey, master, project manager)
- Materials markup methodology (percentage, tier schedule, or fixed markup amount)
- Travel charge (flat trip charge, mileage rate, or absorbed)
- Equipment rental rate (for company-owned equipment used on the job)
- Subcontractor markup
- Permit and inspection fee pass-through (cost plus markup)
- Overtime rate (typically 1.5x labor rate)
- Emergency / after-hours rate (typically 1.5x to 2x labor rate)
- Minimum charge (the floor on any single visit)
- Diagnostic fee (charged for the visit that diagnoses; often credited against repair)
Building the labor rate from the bottom up
The labor rate has to cover four things: technician wages and burden, vehicle and tool cost attributable to that hour, overhead allocation per hour, and target profit.
Component 1. Fully-burdened technician wage
The number is NOT the hourly wage paid. It is the hourly wage plus the burden: employer FICA, FUTA, SUTA, workers compensation, health insurance, retirement match, paid time off, training time, sick time.
A common burden multiplier for a residential service trade is 1.25 to 1.40 on top of the wage. A technician paid 25 dollars per hour might fully cost the business 32 to 35 dollars per hour all-in. The exact multiplier depends on the state (workers comp rates vary widely), the benefit package, and the PTO policy. Calculate it; do not assume.
The calculation:
Annual all-in cost per technician divided by annual billable hours equals the cost per billable hour.
Annual all-in cost: wages plus burden, totaled for the year.
Annual billable hours: total paid hours minus PTO minus sick minus training minus internal-work minus drive time that is not billable. A 2,080 hour year (40 hours times 52 weeks) minus 80 hours PTO minus 40 hours sick minus 80 hours training minus 200 hours other non-billable equals 1,680 billable hours.
If the technician's all-in annual cost is 70,000 dollars, the cost per billable hour is 70,000 divided by 1,680 equals 41.67 dollars per billable hour.
Component 2. Vehicle and tool cost per hour
The vehicle (lease or depreciation), insurance, registration, fuel, maintenance, plus per-tool depreciation and replacement. Annualize the total; divide by the same billable hour count.
A typical residential service truck runs significantly per year in total carrying cost. Divided by 1,680 billable hours, the per-hour vehicle and tool allocation is a meaningful per-hour number.
Component 3. Overhead allocation per hour
Office staff, rent, utilities, insurance, marketing, software, owner salary that is not directly billable. Annual overhead divided by the number of billable hours across the entire technician fleet equals the overhead per billable hour.
For a single-truck operation, the overhead per billable hour is high because one truck carries all the overhead. For a 10-truck operation, the overhead per billable hour drops because it spreads.
Component 4. Target profit
The owner's target margin on T&M work. Common targets:
- Conservative: 15 percent margin on the rate card
- Standard: 20 to 25 percent margin
- Aggressive: 30 percent or higher (only sustainable in high-demand low-competition markets)
Putting it together
Cost per billable hour = burdened wage + vehicle and tool + overhead. Rate = cost divided by (1 minus target margin).
Single-truck example: burdened wage 41.67, vehicle and tool 18.00, overhead 35.00 (single truck carries it all) = 94.67 cost. At 25 percent margin, 94.67 / 0.75 = 126.23 per hour, rounded to 130.
10-truck example: same burdened wage and vehicle, overhead 12.00 (spread across fleet) = 71.67 cost. At 25 percent margin, 95.56 per hour. The fleet has a lower rate floor and can compete on price; this is the structural reason scale economies matter in service trades.
Materials markup
Three methodologies. Flat percentage (cost plus 30 to 50 percent on small parts, lower on large equipment) is simple and works for low-mix inventories. Tiered (higher markup on small items by absolute dollars, lower on large; a typical schedule is 100 percent under 50, 50 percent at 50 to 250, 30 percent at 250 to 1,000, 20 percent over 1,000) produces a sensible margin across the mix. Cost-plus with stated rate (most transparent; common on commercial; cost and markup shown separately).
Residential customers typically prefer flat percentage (simple bill); commercial often requires cost-plus (transparent).
Trip charges, overtime, minimum, and diagnostic fees
Three trip-charge methodologies: free trip with all billing within the visit (first 30 minutes is travel/prep billed at standard rate; works when billable-hour density per visit is high); flat trip charge (fixed dollar on arrival plus hourly from start of work; standard residential); travel time billed (hourly from leaving shop to return; standard commercial and long-distance residential). Pick one and apply consistently.
Time over 40 hours per week is overtime under FLSA for non-exempt employees (29 USC 207). Customer rate recovers the premium: standard rate weekday 7am to 5pm; overtime rate 1.5x for weekday after 5pm and weekends; emergency rate 2x for nights and holidays.
Every T&M visit has a minimum charge covering the cost of dispatching a truck (e.g., trip charge plus one hour even if work took 15 minutes). Protects against sub-economical visits.
Diagnostic fee
Common in residential trades: a flat diagnostic fee charged for the diagnostic visit, often credited against the repair if the customer authorizes the repair. The fee protects against the customer who wants a free diagnosis and then declines the repair.
Annual review
Rate cards are reviewed annually. Triggers for re-rating:
- Wage inflation (techs are getting paid more; rate has to absorb the increase)
- Materials cost inflation (markups have to recover real cost)
- Insurance and benefit cost inflation
- Workers compensation rate change
- Competitive position shift (other rate cards moving)
Communicate rate increases to ongoing customers with notice (30 to 90 days). New work uses the new rate immediately.
References
- 29 USC 207 - Fair Labor Standards Act overtime provisions
- DOL Wage and Hour Division Fact Sheet 23 - Overtime Pay Requirements of the FLSA
- IRS Publication 535 - Business Expenses (rate-construction supporting cost categories)
- State workers compensation rate tables (state insurance department publications)
- AIA Document A102 - Standard Form of Agreement between Owner and Contractor (cost-plus contracts)