An hourly rate is not a number you choose. It is a number you calculate: everything the business has to pay for in a year, divided by the hours you can actually charge for. Both halves are routinely got wrong — the top is missing overhead, and the bottom counts hours nobody is paying you for.
The formula
shop rate = (what you must earn + annual overhead) ÷ billable hours
“What you must earn” is your own pay — the wage you would have to offer someone to do your job, not what is left over at the end of the year. Overhead is everything the shop consumes whether or not a job is on the bench: rent, power, insurance, tooling and blades, software, accountancy, vehicle, phone.
The denominator is the part that decides whether the rate works.
Note what is not in the formula: materials and profit. Materials are charged separately at what you pay, and profit is a margin applied to the finished job — both covered in how to price custom woodworking.
You bill far fewer hours than you work
A full week in the workshop is not a full week on jobs. These hours are real, they are unavoidable, and no customer pays for them directly:
- Quoting and site visits — including the jobs you do not win
- Sourcing timber, collection, and waiting at the merchant
- Machine setup, jig-making and tooling changes
- Sweeping, dust extraction, sharpening and maintenance
- Delivery, installation travel and snagging visits
- Invoicing, chasing payment and bookkeeping
A one-person shop that tracks this honestly usually lands between 50% and 70% billable. Sixty per cent is a reasonable starting assumption if you have never measured it — but measure it, because it is the single number with the most leverage over your rate.
A worked example
A one-person shop. The owner needs £35,000 a year, overhead runs £14,000, and they work 45 weeks at 40 hours — 1,800 hours on their feet, of which 60% is billable.
Divide by the 1,800 hours worked instead — the mistake almost everyone makes — and the rate comes out at £27.22. Charge that while billing 1,080 hours and the year ends roughly £19,600 short of what the business needed. Nothing about the workmanship changed. One denominator did.
Three things the number is not
The rate is a cost, not a price
Your shop rate recovers what an hour of your time costs the business. Profit is applied afterwards, as a margin on the whole job. Blending them into one inflated rate hides which of the two is wrong when a job disappoints — and it is almost always the hours, not the margin.
An employee costs more than their wage
Gross pay is the start. Employer contributions, pension, holiday and sick pay, and the hours they are on the clock but not on a job all sit on top. Budget meaningfully above the headline wage, and apply the same billable-hours division to their week too.
Do not benchmark against the shop down the road
Their rate encodes their overhead, their premises and their billable ratio, none of which you can see. A rate copied from a forum post is a guess wearing a number. Work out yours, then decide whether the market will bear it — that is a separate question, and an honest one.
Then check it against reality
A calculated rate is still an assumption until a finished job tests it. Record the hours a job really took against the hours you quoted, and the gap tells you which half of the formula was wrong — a rate that looked fine on paper fails the moment the billable share turns out to be 45% rather than 60%. The rate is not a decision you make once; it is a number your own completed jobs keep correcting.
Common questions
There is no universal figure, and a rate copied from someone else encodes their overhead and their premises rather than yours. Calculate it: take the pay you need plus your annual overhead, and divide by the hours you can actually bill. Then decide separately whether your market will bear the result — that is a real question, but it is a different one.
Usually between 50% and 70% of the hours worked. Quoting, sourcing, machine setup, clean-up, delivery, invoicing and the jobs you do not win are all real hours that no customer pays for directly. Dividing by hours worked rather than hours billed is the most common way a rate comes out too low.
No. Materials are charged separately, at what you pay, with a waste allowance applied to them. Folding materials into the hourly rate makes the rate wrong for every job that is not exactly average, and hides which part of a disappointing job actually went wrong.
Keep them separate. The rate recovers what an hour costs the business; profit is applied afterwards as a margin on the whole job. Blending them into one inflated rate means that when a job underperforms you cannot tell whether the hours or the margin were at fault.
Start from gross pay, then add employer contributions, pension, and holiday and sick pay, and apply the same billable-hours division to their week. Their cost to the business is meaningfully above the headline wage, and the hours they are on the clock are not all hours on a job.