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How to calculate the hourly rate for a service business

Whether you bill by the hour or sell fixed fees and retainers, every price you quote hides an hourly rate. This guide shows how to work out the minimum rate that covers your costs and the target rate that leaves a margin — from three numbers: your monthly costs, your team's hours and how many of those hours are billable.

The formula in short

Cost per billable hour = monthly costs (salaries + overhead) ÷ billable hours per month
Target hourly rate = cost per billable hour ÷ (1 − target margin)

The first number is your break-even rate. Anything below it loses money. The second is what you should actually charge (or what your fixed fees should work out to per hour).

Step 1: Total monthly costs

Add up everything it takes to run the team for a month: gross salaries including employer contributions, rent, software, equipment, insurance, accounting, marketing and the owner's own pay. Leaving out the owner's pay is a common mistake — it makes the business look profitable while the owner works for free.

Step 2: Billable hours, not working hours

Nobody bills 100% of their time. Internal meetings, admin, sales, training, holidays and sick days all reduce the hours you can invoice. The share of working time that goes to client work is called billable utilization. If you don't know yours, measure it for a month or two — it is often lower than owners assume. Our billable utilization calculator helps you work it out.

Billable hours = people × working hours per person × billable utilization

Step 3: Cost per billable hour

Divide total monthly costs by billable hours. Dividing by all working hours instead is the classic error: it gives a lower number and leads to rates that never cover the costs.

Step 4: Add your target margin

Decide what margin you need for reserves, investment and profit. Divide the cost per billable hour by (1 − margin). Note: adding 30% on top of cost is not the same as a 30% margin — dividing by 0.7 is.

Worked example (fictional numbers)

Two things stand out. First, dividing by all 800 hours would have given €37.50 per hour — far below the real cost of €53.57. Second, raising utilization from 70% to 80% (640 billable hours) lowers the cost per billable hour to €46.88 and the target rate to €66.96. Utilization is as powerful a lever as price.

Step 5: Check what each client actually pays

Your target rate only matters if clients pay it in practice. With fixed fees and retainers, the real rate is revenue from the client ÷ hours the team actually spent on them. A €2,400 monthly retainer that takes 52 hours works out to €46.15 per hour — under the €53.57 cost in this example, so the client loses money even though nobody notices on the invoice. Use the effective hourly rate calculator per client, and read how to find unprofitable clients for what to do next.

Common mistakes

• Dividing costs by all working hours instead of billable hours.
• Leaving the owner's pay out of costs.
• Confusing markup with margin.
• Setting a rate once and never checking it against the hours clients really take.
• Guessing hours per client instead of logging them — estimates are usually too low.

Free tools: client profitability calculator · effective hourly rate calculator · billable utilization calculator