Who this is for: Managers
📋 Set Up Your Business Foundation — 3-Part Guide
- Part 1: Costs and Overhead
- Part 2: Labor Burden and Markup — You are here
- Part 3: Reading Your Numbers and Adjusting
💼 Why this matters
Most underpriced service businesses have the same problem: they charge for the work but not for what the work costs. Labor isn’t just what you pay someone — it includes the overhead your business absorbs every hour a worker is on a job. And margin isn’t the same as markup. Confusing these two is one of the most common reasons a contractor closes a good month and still feels broke. This article fixes both.
What “labor burden” actually means #
When you put a worker on a job — including yourself — the cost to your business is not just their hourly pay. It includes every fixed cost your business absorbs per hour that person is working: payroll taxes, workers’ comp, insurance, the portion of your rent and utilities that hour represents, and any other overhead that runs whether a job is happening or not.
That total is your real cost per hour. Pricing based on pay rate alone leaves the overhead gap out of the estimate. Over time, that gap comes out of your margin — which is why jobs that seem profitable on paper don’t show up in your account.
PriceRight Pro splits this into two fields that pre-fill every service you create:
- Labor cost per hour — what you actually pay (or cost yourself) per hour on a job. For employees: their gross hourly rate plus payroll taxes and benefits. For yourself: the hourly equivalent of what you need to pay yourself.
- Overhead per hour — the portion of your monthly fixed costs allocated to each hour of billable work. Take your total monthly overhead from Part 1 and divide by the number of billable hours you work per month.
💡 Example
You pay yourself an effective $35/hr in labor cost. Your monthly overhead from Part 1 is $3,500, and you work about 140 billable hours per month. Overhead per hour = $3,500 ÷ 140 = $25/hr. Your real cost per billable hour is $35 + $25 = $60/hr — not $35. Every service priced below that floor loses money.
Markup vs. margin — the distinction that changes everything #
These two words describe the same profit goal from different directions. Confusing them is one of the most common pricing mistakes in a service business.
- Margin is profit as a percentage of your selling price. A 40% margin means 40 cents of every dollar you charge is profit.
- Markup is profit as a percentage of your cost. A 40% markup on a $60/hr cost gives you a selling price of $84/hr — but that only produces a 28.6% margin, not 40%.
If you’re targeting a specific margin — say, 40% — and you calculate it as a markup instead, you’ll underprice every job. PriceRight Pro uses margin as the target, which is the correct approach for a service business. The default is 40%. The field is called Default margin target (%) in Settings.
⚠️ Solo operators: price your own time
If you work alone, your labor cost is not zero — it’s the hourly equivalent of the owner’s draw you set in Part 1. If you don’t build the cost of your own time into your estimates, you’re technically working for free on every job. Enter your effective hourly cost in Default labor cost/hr to fix this.
Set your Service Defaults in Settings #
From the home screen, tap the gear icon in the top-right corner to open Settings. Scroll to the Service Defaults section. You’ll see four fields. Fill in all four:
- Default labor cost/hr ($) — your real cost per hour of labor on a job (pay + taxes + benefits). This pre-fills the labor cost field on every new service you create.
- Default overhead/hr ($) — your fixed overhead cost per billable hour (total monthly overhead ÷ monthly billable hours). Pre-fills the overhead field on every new service.
- Default margin target (%) — the gross margin you want on every service. The default is 40. Adjust this to match your business goals. Most healthy service businesses operate between 35–55%.
- Default platform fee (%) — any platform that takes a cut of your sale belongs here: Etsy, Shopify, Amazon, Stripe, or anything else. The fee is factored into your margin calculations so your net profit figure reflects what you actually keep after the platform takes its cut — not the gross before fees.
These values save automatically. Every new service you add after this will have these defaults pre-filled — you can override any of them per service, but you’ll rarely need to.
💡 Tip: Your Default margin target is a floor, not a ceiling. High-demand services, rush jobs, and work that requires specialized skill can — and should — be priced at a higher margin. The default is the minimum you’re willing to accept, not the most you’ll ever charge.
🗂️ Tax Checkpoint
Labor burden costs — including employer payroll taxes and workers’ comp premiums — are deductible business expenses. The labor and overhead costs you enter here aren’t just for pricing accuracy; they feed into your cost records, which reduce your taxable income at year-end. See Tax Planning: Track Home Office and Vehicle Deductions → for the full deduction picture.
✅ You’re done with Part 2.
Your labor burden and margin target are set. Every service you build from here will be priced against your real costs — not your hourly rate alone. Part 3 covers how to read the results of your Foundation setup and what to do when the numbers say you need to adjust.
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