What an hourly rate actually has to cover
Deriving your rate from a salary makes you systematically poorer than you think. A worked example showing why - and how to do it properly.
Last updated: 1 July 2026
The most common way to set an hourly rate is to look at what everyone else charges, add a bit or knock a bit off, and call it a price list.
That is not entirely wrong - the market sets limits you cannot ignore. But it answers the wrong question. The market price tells you what you can charge. It says nothing about what you have to charge in order not to lose money.
Remarkably few firms know that second number. And it is the only one you can actually calculate.
Why the obvious calculation fails
It usually goes like this: someone earns €66,000 a year, divided by roughly 1,800 working hours gives about €37. So an hour costs €37, and anything above that is profit.
Both numbers in that calculation are wrong.
The numerator is too small. On top of gross salary come employer contributions, insurance, training, equipment, a workplace, software. Depending on the country and the setup you land somewhere between 1.3 and 1.8 times gross.
And the denominator is too large. Those 1,800 hours are the hours paid for, not the hours you can sell. Holiday, public holidays, sickness, internal meetings, training, writing proposals, raising invoices, business development - no client pays for any of it.
Both errors push in the same direction. Which is why a rate calculated this way is not slightly wrong, it is out by half.
How to calculate an hourly rate properly
Four steps, needed once a year.
Step 1: What an employee really costs
Gross salary plus everything attached to it. For our example:
| Item | Amount |
|---|---|
| Gross salary | €66,000 |
| Employer contributions and insurance | €14,500 |
| Workplace, equipment, software | €4,000 |
| Training, professional memberships | €2,500 |
| Full cost | €87,000 |
€66,000 has become €87,000 - a factor of 1.32, and that is a lean example.
Step 2: How many hours are actually billable
This is the uncomfortable part, because the number comes out smaller than expected.
| Item | Hours |
|---|---|
| Paid hours per year (40 h/week × 52) | 2,080 |
| less holiday (25 days) | −200 |
| less public holidays (8 days) | −64 |
| less sickness (typical 8 days) | −64 |
| Present | 1,752 |
| less internal time (meetings, admin, training, proposals) | −430 |
| Billable | 1,322 |
Those 430 hours of internal time are the figure you can argue about. For a field engineer who leaves in the morning and returns in the evening it is lower. For a consultant writing proposals and chasing new work it is higher. But it is never zero - and zero is what usually gets assumed.
Step 3: The labour cost rate
€87,000 divided by 1,322 gives €65.81.
Note what this is not: it is not break-even. This figure covers one person and nothing else - no office, no bookkeeping, no management. Sell at €65.81 and you are losing money.
Compared with the €37 from the obvious calculation it is still nearly double.
Step 4: Overhead and profit
The labour cost rate covers only that person. Not covered: management, bookkeeping, rent, business insurance, vehicles, interest, bad debt.
Overhead is normally spread across productive hours as a surcharge. How large it is depends heavily on the business - 15 per cent for a lean one-person practice, 40 per cent or more for a firm with administration, premises and vehicles.
At 25 per cent overhead:
€65.81 × 1.25 = €82.26
That is break-even. Nothing earned, nothing lost.
With a 10 per cent profit margin:
€82.26 × 1.10 = €90.49
That is the rate that carries the business. Not €37.
Why job costing uses the smaller number
This leads to a distinction that is easy to miss and expensive to get wrong.
Job costing on an individual project uses the labour cost rate - the €65.81, without overhead. That is correct: rent, bookkeeping and management cannot sensibly be assigned to a single project, and any allocation key would be arbitrary and make projects incomparable with one another.
The consequence: the margin from job costing sits before overhead. A project at twelve per cent margin does not automatically carry itself - it only does if the sum of all project margins covers overhead by the end of the year.
As a rule of thumb: with a 25 per cent overhead surcharge, a project needs around 20 per cent margin just to reach break-even. Anything below that eats into the substance, however positive the report looks.
What an hourly rate set too low does to you
The market price may be below your number. Then you have a problem - but a known one. Anyone who knows they are selling below cost can decide: cut costs, raise utilisation, push prices through, or leave the segment. Anyone who does not know decides nothing.
Discounts cost more than they appear to. Ten per cent off €90.49 is €9.05. The profit element is €8.23. So a ten per cent discount does not remove a tenth of the margin - it removes all of it, and a little more.
Utilisation moves the needle harder than price. Raise billable hours from 1,322 to 1,450 and the labour cost rate falls to €60. That is a bigger gain than most price increases, without a single conversation about money.
How the self-employed should calculate their rate
The same calculation applies, with two differences.
The salary is a decision, not a given. Put in what you want to earn, not what happens to be left over. The rest of the calculation then tells you whether the market supports it.
The share of internal time is higher. Anyone doing everything themselves - sales, proposals, bookkeeping, training, their own website - rarely clears 1,100 to 1,300 billable hours. Assuming 1,800 means being out by a third.
And retirement provision belongs in the full cost. For employees it hides inside the employer contribution; for the self-employed it is easily forgotten - and missing thirty years later.
How to calculate a day rate
Billing by the day does not avoid the calculation, it only hides it. A day rate of €1,200 sounds substantial. Over eight hours it is €150 an hour - over ten it is €120.
And the decisive question is unchanged: how many days do you actually sell in a year? From 220 working days, minus holiday, sickness and internal time, most people land at 150 to 170 sold days. €1,200 × 160 is €192,000 in revenue - and everything in the table above has to come out of it.
How to check your own hourly rate
Run the table once for yourself. An hour and a sheet of paper. The number at the end is either reassuring or uncomfortable - both beat having no number.
Compare it with what you actually invoice. Not with the price list, but with what survives discounts and unbilled hours.
And test the internal-time assumption against real data. Anyone recording hours against projects can see at year end exactly how much was billable. It is the one figure in the calculation you do not have to guess.
In Pulse you store an internal cost rate per person with a valid-from date, including retrospectively. Job costing then uses the rate that applied when the work was done, not today's.