How To Calculate Labour Costs As A Heating & Plumbing Business

It’s impossible to price jobs well without knowing how much your time is worth. Knowing your labour costs allows you to set prices that ensure you make a fair profit for every job.

But working out labour costs isn’t as simple as tallying up your salary and that of any employees for an hourly rate. Labour costs include other expenses in your business relating to your employees, and don’t consider that only a portion of your workday is actually billable.

To quickly calculate your labour costs and labour rate, skip ahead to our free calculator. 

What is labour cost?

Labour costs refer to the total expenses associated with employing staff (including yourself). For many trades businesses, labour costs make up a big chunk of expenses.

They include not only payroll but any other financial cost related to your company’s employees such as National Insurance contributions, pension contributions, overtime pay, and so on. However, labour costs should also factor in variable or one-off expenses like training and certification.

Managing these costs effectively is essential for the sustainability and growth of trades businesses in the competitive UK heating & plumbing industry. 

How to calculate your labour cost

Step 1: Add up all employee salaries

Calculate how much you pay your employees, plus any national insurance, private pension contributions, and other benefits. If you work as a sole trader, this would be simply the salary you “pay” yourself.

Step 2: Factor in any additional costs

Labour costs include a lot more than how much you pay your employees. This may include:

• Software subscriptions
• Overtime 
• Bonuses
• Fuel & other transport expenses
• Licences
• Training & certification courses

These may be fixed costs (those that are the same month on month, regardless of how much work you do) or variable costs (those that vary based on the amount of work). 

Step 3: Add them together

The third and final step is to add all these costs together. Bear in mind that wages may be a yearly figure, but other things such as subscriptions may be monthly. 

Labour cost calculator

What is a labour cost percentage?

Your labour cost percentage is the proportion of labour costs in relation to the total revenue your business makes. 

The formula to calculate your labour cost percentage is: 

Labour costs / total revenue (in the same time period)

For most trades businesses, a labour cost between 20-40% is ideal. This figure is important for tracking the health of your business and will help you determine whether you’re spending too much on labour or something else.

How are labour costs used in job pricing?

There are many different ways to price a business, including:

• Competitor-based pricing where you look at similar trades businesses in your area and price yourself accordingly
• Markup pricing where you calculate the cost of materials and add a percentage markup (which covers your labour costs)
• Hourly rate pricing, which incorporates your labour costs among others to base prices on how long the job takes
• Flat-rate pricing which is simple and transparent for jobs like gas safety checks.

We’ve written a full guide about the pros and cons of different pricing strategies, alongside a more detailed comparison of hourly and fixed pricing. However, in all of these strategies, knowing your labour costs and true hourly rate is essential. 

For most trades businesses, calculating a properly-costed hourly rate is the simplest and most effective way to price, as it can be used to break down a job and estimate how much time it will take to complete.

From labour rate to hourly rate

On top of labour, a costed hourly rate needs to factor in all your business overheads and profit. It should be a rate you can charge per billable hour to earn the profit you desire. For this, you need to know:

• Labour costs (which we know from earlier)
• All business overheads
• Holiday and other paid time off
• Sick days
• Non-billable hours (admin work, driving, etc)

We’ve put together a full guide for calculating your hourly rate, but you can also use our calculator to do the maths for you:

Do you charge VAT on labour?

VAT is charged for the service and invoice as a whole, so yes – for VAT-registered businesses, VAT is charged on labour costs. 

* Note that most trades businesses choose to incorporate VAT into their labour costs instead of itemising it out for the customer to help avoid confusion.

Adding VAT to your invoice using Gas Engineer Software is quick and easy. Simply input your VAT number to your account settings and the rest is done for you. Sign up for a free trial today. 

There are a few exceptions in which VAT should not be charged on labour (or is charged at a reduced rate, meaning you can offer more competitive prices to customers. These cases include: 

• Work done on new build houses
• Solar panel installations
• Heat pump installations
• Insulation work

You can read more about VAT exemptions and reductions here. 

Should you show your labour cost on your quotes?

Whether you’re using a labour cost figure or a fully costed hourly rate, not all heating businesses opt to add it onto their quote. Some customers can take issue with labour rates, often if the job was a quick fix and they don’t value the years of experience behind the work.

Ultimately, there is no right or wrong answer. It depends on personal preference and the type of job being quoted for. It may make more sense to add labour rates onto a larger job that takes a few days or weeks to complete, while a small <1 hour job is often quoted at a fixed price