Hiring a tech: 3 costs to load into your labor rate

• Load the payroll burden into the rate using current figures from your payroll provider, insurance agent, and accountant.
• Estimate replacement and ramp-up cost from your own turnover history, not from a published figure alone.
• Divide the annual cost by the billable hours you have actually seen, not the hours you hope for.
• Recheck the rate every year and after any change in wages, benefits, insurance, or headcount.

The wage is only the part of the cost you can see on a paycheck. Once you hire someone, you also pay for the taxes and benefits that come with an employee, for the recruiting and training needed to get that person productive, and for the hours they spend in the truck, at the shop, or on the phone without billing a customer. If none of those costs appear in your labor rate, every hour the new tech works at the old price moves money out of the business.

This post walks through three costs that belong in the labor rate for a new technician. It also shows a simple way to spread them across the hours you can bill, so the rate you quote covers the person you actually employ. The method works for plumbing, HVAC, appliance repair, auto service, and most other trades where a tech sells time on a job.

The first cost is the amount you pay on top of the hourly wage because you have an employee. Accountants often call this the payroll burden or the employer burden. It usually includes:

• Employer payroll taxes, set by federal and state rules
• Unemployment insurance taxes, paid to the state and sometimes the federal government
• Workers' compensation insurance, which often costs more for trades with higher injury risk
• Health insurance, retirement contributions, or other benefits you offer
• Paid time off, including vacation, sick days, and paid holidays
• Any required training or licensing fees you cover

The exact percentages depend on your state, your insurance carrier, your benefit plan, and your payroll setup. You should not guess at them. Ask your payroll provider, your insurance agent, and your accountant for the current rates that apply to your shop, and write them down in one place. Then add them together as a percentage of wages, or as a dollar amount for each paid hour, so you can use them in the rate calculation. For the paid-time side, see paid leave allowances for technician costs .

Unemployment taxes deserve a closer look because they can change over time. Rates and the amount of wages subject to tax may be revised, so a figure you worked out last year may not hold this year. Put a reminder on your calendar to recheck every tax and insurance line each year. A labor rate built on last year's burden can drift away from your real costs without any obvious warning.

One practical tip: do not bury the burden in your overhead line and forget it. Burden belongs to the technician. If you add a second tech, the total burden doubles, but each tech's burden goes into that tech's own rate, so each rate is recalculated only from that tech's own costs. Keeping the burden inside the labor calculation makes each tech's cost visible.

The second cost is what it takes to find the person, bring them on board, get them productive, and handle the times they leave. This cost is easy to overlook because most of it is spread across months and different parts of the business. Recruiting ads, job board fees, and the owner's time in interviews show up in one place. The senior tech who rides along to train the new hire shows up in another. The callbacks caused by a rookie's first few jobs show up somewhere else again.

Turnover is often the biggest piece of this cost, so it deserves a closer look. Contractor Magazine reports that, according to the Center for American Progress, "on average, replacing an employee typically costs approximately 20 percent of his or her annual wages, in a review of 22 case studies" ( Contractor Magazine ). Treat that as a starting point rather than a rule for your shop. The same article cites Gallup, which estimates that the cost to replace an individual employee is "50 to 200 percent of the annual salary for a skilled plumbing technician, and depends on the position and experience level" ( Contractor Magazine ).

The range is wide for a reason. A replacement for an entry-level helper costs far less than a replacement for a licensed, experienced diagnostic tech who knows your customers and your equipment. Costs at the high end of that range often include lost jobs, customers who do not come back, and the time a manager spends rebuilding a schedule. Your own history matters more than any published figure. Look at the last two or three times a tech left your shop and add up what it cost: the recruiting spend, the overtime that covered the gap, the training hours, the rework, and the revenue you lost while a bay or truck sat empty.

To load this cost into a labor rate, first estimate how long you expect the new hire to stay. Then divide the total replacement and ramp-up cost by the number of billable hours you expect that person to work over that tenure. The result is an hourly amount you add to the rate. A shorter expected tenure means a higher charge for each hour, which is why retention and turnover belong in the same conversation as pricing.

Ramp-up time is part of this cost as well. A new tech often takes weeks or months to reach full speed. During that period, you pay the full wage while the tech completes fewer jobs per day, needs more help, and may return to the same site to fix a mistake. You can estimate the lost productivity by comparing the new tech's job count to your experienced techs' job count over the first few months. Count the difference as a cost of the hire, and spread it across the billable hours that follow.

The third cost is the one most shops miss completely. A technician is not paid to be busy. They are paid to do billable work for customers, and a lot of the paid day is not billable. Drive time between jobs, time spent loading and restocking the van, time on the phone with dispatch, waiting for a part, filling out paperwork, and time spent on callbacks and warranty fixes all cost money without generating an invoice.

Start with two numbers for each tech: paid hours and billable hours. Paid hours are the hours you pay for, including overtime, paid time off, and paid holidays. For more inputs on paid time, see Paid technician time: 6 inputs for your labor rate . Billable hours are the hours the tech spends on work a customer pays for at your rate. The gap between them is the non-billable portion, and it shows how much of your labor cost has to be recovered from the hours you do bill.

Next, add the overhead you carry for each tech. This commonly includes:

• The vehicle, its fuel, maintenance, insurance, and registration
• Tools, meters, and diagnostic equipment assigned to the tech
• Phones, tablets, and software licenses used for scheduling, invoicing, or parts lookup
• Uniforms, safety gear, and personal protective equipment
• Supplies that are used on jobs but not charged back to the customer
• Dispatch or office time that supports the tech's day

Some of these items are fixed for each tech, such as a truck payment or a software seat. Others depend on how many jobs the tech completes, such as fuel or consumables. Split them into those two groups. Fixed costs can be spread over the billable hours you expect. Variable costs can be added for each job or each hour, depending on how you track them.

The non-billable share matters because it changes the rate directly. If a tech bills fewer hours than you expect, each billable hour has to carry more of the fixed cost, and the rate has to be higher to cover the same expense. Many shops set their labor rate using an optimistic billable count, and then wonder why the margin disappears in the first slow month. Use the billable hours you have actually seen from similar techs, not the number you hope to see.

Once you have the three cost groups, the calculation is straightforward. The goal is a rate for each billable hour that covers the full cost of the technician and leaves a margin for the business.

Here is the method in plain steps:

1. Find the annual cost of the tech's time. Add the wage for the paid hours to the payroll burden from cost one. This is the direct cost of employing the person.
2. Add the hiring and ramp-up cost. Take your expected replacement and ramp-up cost from cost two, adjusted for the expected tenure, and add it to the annual cost. Do this as an annual figure so it can be compared with the other costs.
3. Add the overhead. Add the fixed and variable overhead from cost three for one year. Include the vehicle, tools, software, and any dispatch time that supports this tech.
4. Divide by the billable hours. Take the total from steps one through three and divide it by the number of hours you expect the tech to bill in the year, based on past performance and not on hope.
5. Add your margin. Once you have the cost for each billable hour, add the profit and reserve margin your business needs. This is the target you set for the shop, not something the technician causes.

The result is your loaded labor rate. It may look high when you first see it. That is the point. A rate that looks high next to a bare wage is a rate that covers the cost of the person, the time they cannot bill, and the risk of losing them. A rate that looks low is often a rate that works only as long as nothing goes wrong.

Illustrative example: a loaded rate in steps

Assume a technician's wage is 20 dollars an hour. These figures are made up for illustration only.

Be careful about how you use the loaded rate with customers. You do not have to publish every component on an invoice. You do need to know that the number covers the full cost, so that when a customer pushes back on price, you know what you are giving up by discounting it. If a discount reduces your rate below the loaded figure, the job earns less than your target margin, and if the rate falls below the cost of each billable hour, the job loses money even if the tech looks busy.

A labor rate is not a one-time decision. Once the new tech starts, track the actual numbers against the estimate, at least for the first year. Four measures give you a clear picture:

• Billable hours for each tech, compared with the number you planned
• Callback and warranty rates for the new tech, compared with your experienced techs
• Turnover, including how often techs leave and how long it takes to replace them
• Overhead for each tech, including vehicles, tools, and software

If the actual billable hours come in below plan, the rate needs to rise, or the non-billable time needs attention. Look at drive time, dispatch habits, parts delays, and the scheduling process before you raise prices for everyone. If callbacks are higher for the new tech, the answer may be more training, better job assignment, or a mentoring schedule rather than a higher rate. If turnover is high, the replacement cost in cost two is likely understated, and the rate needs to reflect that.

Review the rate at least once a year, and again after any change to wages, benefits, insurance, or the number of techs. Small changes add up. A small rise in workers' compensation premiums or a benefit plan update can change the burden enough to matter, especially across several techs.

Several errors show up again and again in shops that add technicians without updating their pricing.

Using the wage as the cost. The wage is the starting point, not the full cost. Leaving out the burden and the overhead is the most common reason a new hire fails to pay for itself.

Ignoring turnover. Owners often assume the new tech will stay for years. Plan for a realistic tenure instead, and use your own shop's history to estimate it. Then load the replacement cost in a way that matches that tenure.

Counting paid hours as billable hours. A tech who is paid for a full week may bill far fewer hours. Use the billable number when you divide the costs, or the rate will be too low.

Forgetting ramp-up. The first months of a new tech are expensive. The wage starts on day one, but full productivity may take much longer. Include that gap in the cost.

Copying a competitor's rate. A rate that works for another shop may not cover your costs. Their wages, overhead, job mix, and turnover are different. Use the method above with your own numbers.

Setting the rate once and never revisiting it. Insurance, taxes, benefits, and tech performance all change. A rate that was right when you hired the tech can become wrong within a year.

If you are about to add a technician, start with three tasks. First, gather the real payroll burden: the employer taxes, insurance premiums, benefit costs, and paid time off for the role you are hiring. Second, look at your past turnover and ramp-up, and write down a realistic replacement cost and expected tenure. Third, pull the billable hours your current techs actually log, and use that figure to estimate the new tech's billable hours.

With those three numbers, you can run the five-step method and see the rate that covers the hire. You may find that the current price is close, or you may find that it leaves a gap you need to close before the new tech starts. Either way, you will know the number before the hire changes your cash flow, rather than after.

Today, pull your most recent payroll and insurance statements and total the burden you already pay for each tech.

Is the wage the same as the labor rate?

No. The wage is only part of the cost, so the rate also has to cover payroll burden, hiring and turnover, and the time a tech cannot bill.

Which billable hours should I use?

Use the billable hours your current techs have actually logged, not the number you hope to see.

How often should I recheck the burden?

Recheck every tax and insurance line once a year, because rates and taxable wages may be revised.