Free Tools & Calculators

How to calculate profit margin

To calculate the profit margin on a job, you can use the profit margin formula below, or use our profit margin calculator to quickly see how much you're earning after covering all of your costs.

Here's what you'll need to calculate profit margins using our calculator:

• Cost of labor for the job
• Total cost of all materials used
• Overhead costs
• The price you charged the client for services

Enter the key information above into our profit margin calculator, and you'll see your profit margin percentage, helping you price future services with confidence.

Profit margin formula

Knowing how to calculate profit margin is as simple as using this profit margin formula:

Your profit margin will show you how much you're actually making on each job after covering materials, labor, and overhead.

How to calculate labor costs

How do you calculate labor cost? Start by gathering the following:

• Hourly salary - Combined hourly wages for all employees assigned to the job.
• Hourly direct costs - Non-salary expenses related to the workers doing the job, such as taxes and benefits.
• Hourly indirect costs - Labor expenses for support staff who aren't on the job site, like office administrators, including their salaries, taxes, and benefits.
• Desired hourly profit - The net amount your business gets to keep after costs and expenses.

Knowing how to calculate labor cost is as easy as using this formula:

Say you're pricing a job that requires one technician and support from your admin team for quoting, scheduling, and invoicing.

• Your technician's hourly salary is $21
• Hourly direct costs (payroll and benefits) are $5
• Hourly indirect costs (admin support) are $18
• Your desired hourly profit is $8

Using the hourly labor costs formula, your total hourly labor rate is $52. This rate covers your technician's pay, overhead, and profit goals.

What are labor costs?

Labor costs are any fixed or variable expenses related to hiring, training, and compensating employees. They're a key part of your service costs and help you price jobs properly. Labor costs can include:

• Payroll
• Overtime
• Health care and benefits
• Bonuses
• Vacation and sick days
• Training days
• Insurance
• Meals
• Supplies

Understanding labor costs helps you price jobs for profit, nail your profit margins, and grow your business sustainably.

Direct vs. indirect labor costs

Direct labor cost includes the expenses accrued from the people doing the actual service work your business is getting paid for. It might be a house cleaner scrubbing bathrooms or a plumber fixing a leaky pipe. This labor cost is billable and directly tied to a specific service job.

To calculate direct labor, just add up hourly wages, overtime, bonuses, and payroll taxes for employees performing the hands-on work.

Indirect labor cost is part of your overhead and factors in the team members who keep your business running but aren't directly involved in the hands-on work. This includes wages and expenses for office admin who schedule jobs, or bookkeepers who handle payroll and taxes. While these expenses don't get billed directly to a job, they're essential to keeping your service business organized and efficient.

To calculate indirect labor, add up the hourly wages and direct costs for support roles like your office staff and supervisors.

How to use the service price calculator

Follow these steps to create profitable pricing using our free service pricing calculator:

1. Enter your labor costs. Add the total labor costs, including the number of workers, hours, and average hourly pay.
2. Enter your material costs. Total the cost of all supplies required to complete the job.
3. Add your overhead costs. Enter the total overhead costs for the job.
4. Add your profit. Enter the net dollar amount you'd like to keep after deducting labor, materials, and overhead.
5. Review your pricing. Check your service price, profit, and markup on the right-hand side of the calculator. Adjust any costs or your profit to make sure your price is competitive and profitable.

How to calculate a service price

You can use the calculator above to calculate profitable service pricing, or follow these steps to do it yourself:

• Determine your labor costs. Multiply the number of hours you'll need to complete the job by your hourly rate. Make sure to take into account wages, taxes, workers' compensation, and other employee-related expenses.
• Add your material costs. Total the amount you'll spend on materials, supplies, or parts required to complete the job.
• Factor in your overhead costs. Determine your hourly overhead cost rate and multiply that by the number of hours you expect the job to take.
• Add your desired profit margin to get the final cost you'll charge your customer.

Before sending the service price to your customer, check out what your competitors would charge for the same service. This will help you determine if you're offering a competitive rate or if you're pricing yourself out of the market.

Service price formula

Use this service price formula to determine how much you should charge for a service to cover your costs and make a profit:

Or, skip the manual calculations and use our service price calculator above.