December 30, 2022

How to calculate your labour costs in 2023

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If you work in construction, plumbing, fencing or any other trade, a part of your job will involve writing quotes and invoices for your customers. As part of this process, you need to work out how to price your projects and decide where you are going to make your money.

It may seem simple on the surface, but working out your costs and deciding how to price your labour, in particular, can be a real challenge.

To make things easy for you, we’ve broken down how to calculate your labour costs into three main topics:

  • Working out how much to charge for your labour.
  • How to add your labour to your quotes, including how to present labour costs to your customer.
  • Whether VAT is charged on labour.

How to decide what to charge for labour

To calculate your labour costs you need to consider four variables,

  • Your customer demographic
  • Your business expenses
  • How in demand your business is
  • Your industry authority

The first point to understand is that your labour cost essentially equates to your job profit. Whatever you charge as labour is what you will be taking home once the job is done. Once you understand this, deciding how to charge for your labour comes down to straight market demand.

The only other way to make a profit is to add markup to your materials, which is another valid form of pricing.

Whichever method you use or if you decide to use both methods, you still need to understand the key factors that influence how much profit you can make from any given job.

Industry authority

Industry authority is all about how respected and established you are as a business.

If you have a good reputation and are known to deliver a high-quality service, then it is easier for you to demand higher prices. Customers are happy to pay for a product or service that they find valuable, even more so if they consider it to be a premium product or service.

If you are able to establish your business as a premium service, then you can pretty much name your price when it comes to setting your labour costs. We further discuss some of these topics in our blog on raising your prices.

Customer demographic

You need to understand the type of customer you are catering for. If you deal with customers looking for a premium service and you have good industry authority and an established reputation, then you can afford to charge high labour costs.

Sometimes it can be difficult to break into this market, but once you become known as a business that deals with expensive properties or high-value projects it becomes easier to win more of this work and charge high labour costs to match.

Demand

This aspect of material pricing comes down to straight market economics - unless you’ve got the demand don’t expect to command high prices.

But on the flip side, if you’ve got a large number of customers queuing up to use your business then you really should be charging a high labour price.

To put it simply, your time is valuable. If you’re working on a project, it has to be worth your time, because there are a whole lot of customers who are waiting in line and are ready to pay for your services.

Expenses

Arguably the most important factor to consider is your business expenses. If your prices are not able to cover the cost of your expenses then you clearly have a problem.

When deciding how much to charge for your labour you should first establish your total business costs and break those down by the number of jobs you complete on average per month. You should also consider the worth of those jobs.

If you tend to work 20 jobs a month and your monthly expenses are £5000, then each job needs to bring in an average of £250 per month just to cover your costs.

Of course, some jobs are bigger and will be able to cover a greater expense and some jobs are smaller and have smaller expenses, but the average should cover it all.

Your labour should be enough to cover all these expenses - plus an additional profit - so that you’re not just breaking even but are making money.

For more information on how to price a job take a look at our blog covering everything involved in pricing a job.

How to add labour to a quote

Once you’ve calculated your labour costs, you need to decide how to add these charges to your quote and how you’re going to present the costs to the customer. Or, it may be that you don’t want to reveal your labour costs to your customer at all, which is also a valid option.

As we touched on earlier, when it comes to adding your labour costs you need to consider whether to include your labour as markup on your materials or whether to set it as a fixed sum.

Markup

Markup is usually added as a percentage of the cost of your materials. For example, you might want to add a 10% markup to all your materials.

For example, if you were quoting for a new front drive, your quote might include:

  • Tiles for £300
  • Cement for £200
  • Lining for £150
  • Gravel for £500

With a 10% markup, your tiles are now priced at £330, cement costs £220, lining £165 and gravel £550. You would therefore take home a profit of £115 on those materials. You could of course set your markup to be much higher if you wanted to make a greater profit.

It’s also important to note that for larger projects involving more expensive materials, even a small percentage will equate to a sizable profit. For example, 10% of a £45,000 project would produce £4,500 in profit.

Fixed sum labour

Attaching your labour as a fixed sum is easy to do. When building your quote you should decide on a figure that you want to make from that project. You then add that number to the total cost, once you’ve calculated all your expenses.

For example, if you wanted to make £500 from installing a new boiler, you would calculate the cost of the boiler and any piping or other materials involved in the project and total up your price. Once you’ve got your figure you simply add £500 to the bill.

How to make quoting for labour easy

One of the biggest challenges when charging for labour is caught up in the process of designing your quote. Even once you’ve decided whether to charge your labour as a lump figure or to add material markup, you still need to implement these charges onto the quote.

Every time you design a new quote for a customer, you have to recalculate your costs. Even worse, if you want to implement different labour pricing strategies for different customers you have to readjust every time.

All this can get complicated and time-consuming very quickly. That’s why we recommend using Payaca.

Payaca’s quoting software allows you to build quotes very quickly using saved groups of materials. In just a couple of clicks, you can add materials to the quote and include a labour charge either as a lump sum (adjustable for different projects and customers) or as markup.

If you are going to add markup, then calculating your percentages is also super easy. All you need to do is click a button and the software will automatically add a percentage markup, of your choice, to all your materials. It’s done instantly and saves you working out the calculations yourself.

Should you show labour on your quote?

Whether or not you decide to show your labour charges to your customers is a matter of personal preference. Most tradespeople choose not to display these charges as there is a chance customers may take issue with your quoting process.

However, it is not uncommon to display your labour on the quote and some customers may even request it.

Please be aware that when you provide the final invoice it is a requirement that you display VAT.

Is VAT charged on labour costs?

VAT is a tax that is added to all materials and goods that are considered luxury items (although note that this a broad term and can apply to all sorts of items some of which you may not consider a luxury).

Most of the time VAT isn’t visible, but whenever you buy any luxury goods VAT is included in the sale price.

Labour is not considered to be a luxury item and therefore VAT is not charged on the cost of labour. This means that any VAT displayed on a quote or invoice should only apply to the cost of the materials not the cost of labour.

For more information on when you need to charge VAT and how it works for trade businesses have a read of our blog on pricing a job.

Labour cost calculator

The main aim of this blog has been to provide you with information on how to decide your labour prices and how to present these costs to your customers in the quote.

If you own or manage a trade business you may also be looking for some insight into how to calculate your expenses including how much of your business expenses are incurred through labour.

The calculator provided allows you to work out exactly how much each employee costs to your business, which you can then compare against your income.

This will help you to understand your total business expenses and therefore what prices you need to charge per project, to ensure you make a profit.

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