Part 1 Understanding Your True Costs & Break-Even Analysis

Introduction:

This is Part 1 of our 5-part series on pricing strategies for painting and handyman businesses. This series builds on our

 Part 1: Understanding Your True Costs & Break-Even Analysis

You've built a professional business with proper tools, legal structure, insurance, and accounting systems. But there's one question that keeps every contractor up at night: "Am I charging enough?"

Most contractors price their services based on gut feeling, what competitors charge, or what they think clients will pay. The problem? None of these methods account for your actual costs. You might be busy, working hard, and still losing money without realizing it.

In this first part of our pricing series, we'll dive deeply into understanding your true costs—not just materials and labour but every single expense that keeps your business running. Once you know these numbers, you'll discover your break-even point and can price strategically for actual profit, not just revenue.

Review all your factors to determine the most accurate price for the job.

Important Legal Disclaimer

Please Note: The information provided in this guide is for educational and informational purposes only and should not be considered financial, accounting, or business advice. Pricing strategies, cost calculations, and business financial decisions vary significantly based on individual circumstances, market conditions, and local regulations.

Before implementing any pricing strategies based on this information, you should:

• Consult a certified public accountant (CPA) about your specific cost structure and tax implications
• Work with a business advisor who understands your market and industry
• Research competitive rates in your specific geographic area
• Verify compliance with any pricing regulations or consumer protection laws in your jurisdiction

This guide helps you understand what questions to ask and how to think about pricing, but it cannot replace personalized professional advice from qualified experts familiar with your specific situation.

Why do most contractors undercharge?

Before we dive into the numbers, let's understand why pricing is such a common problem: Many contractors may lack a clear understanding of their costs or undervalue their skills and expertise. This often leads to a cycle of underpricing that can ultimately impact their profitability and sustainability in the market.

Focusing solely on direct costs leads to calculating painting and labour hours while neglecting insurance, vehicle costs, tooling, marketing, and numerous other expenses.

Forgetting about unbillable time—You think in terms of 40-hour weeks, but much of that time is spent on estimates, driving, shopping for materials, administrative work, and other tasks you can't bill for.

Competing on price alone—When you don't know your true costs, you lower prices to win jobs, unaware that you're working for below minimum wage after all expenses.

Not accounting for profit—breaking even isn't success. You need profit for growth, emergencies, retirement, and actually building wealth.

You are undervaluing your expertise by focusing on the number of hours worked rather than the value you deliver and the years of experience you bring.

Let's rectify this by gaining a clear understanding of your true expenses. By establishing a comprehensive budget and tracking all costs, you can set prices that reflect the value of your work and ensure profitability. Additionally, recognizing the worth of your expertise will empower you to confidently communicate your value to clients, leading to more sustainable business practices.

Direct Costs vs. Indirect Costs

Understanding the difference between direct and indirect costs is foundational to proper pricing. Direct costs are expenses that are directly attributed to a specific product or service, such as raw materials and labour. In contrast, indirect costs, like overhead and administrative expenses, support the overall operations but are not directly tied to a single output, complicating their allocation.

Direct Costs (Cost of Goods Sold—COGS)

These are expenses directly tied to completing a specific job. If you didn't do the job, you wouldn't incur these costs: materials needed for production, wages for workers directly involved, and any other expenses that are essential to the creation of that particular product. Understanding the distinction between these costs is crucial for accurate budgeting and financial analysis within a business.

Materials and supplies:

• Paint, primer, stain, sealers

• Lumber, drywall, hardware.

• Plumbing fixtures and materials

• Fasteners, adhesives, and caulking.

• Sandpaper, drop cloths, tape

• Any materials that become part of the completed work

Direct labour:

• Hours you personally work on the job

• Hours employees work on the job

• Subcontractor payments for work on specific jobs

Job-specific expenses:

• Permits were pulled for the project.

• Dumpster rental for that job

• Equipment rental (scaffolding, specialty tools) for the project

• Fuel costs driving to and from that specific job site

Your accounting software should put these in different groups, usually as COGS. But indirect costs are harder to divide since they cover multiple projects. These could encompass expenses unrelated to a project, such as office rent, utilities, and administrative salaries. We must evenly distribute these costs across all jobs to accurately depict the true cost of any project.

Indirect Costs (Overhead/Operating Expenses)

You have to pay these costs regardless of what job you're doing, and they can't be linked to any one job: Rent, utilities, and administrative wages are some of the costs that are necessary for a firm to run smoothly. To make sure that a business stays profitable and viable in the long run, it is important to understand and keep track of these costs.

Fixed overhead (costs that stay relatively constant):

• General liability insurance

• Workers' compensation insurance

• Commercial auto insurance

• Professional liability insurance

• Tools and equipment insurance

• Business licenses and permits

• Rent (if you have a shop/office)

• Accounting and bookkeeping services

• Legal fees

• Business software subscriptions (accounting, CRM, etc.)

• Website hosting and maintenance

• Phone/internet service

Variable overhead (costs that fluctuate with business activity):

• Vehicle fuel (general driving, not job-specific)

• Vehicle maintenance and repairs

• Tool purchases and repairs

• Marketing and advertising

• Office supplies

• Bank fees and credit card processing fees

• Continuing education and training

• Professional association dues

• Uniforms and safety equipment

Owner's compensation:

• Your salary or draw (the money you take home)

• Your health insurance, if it is not provided through a spouse, is also considered.

• Retirement contributions

• Taxes on your personal income

Many contractors neglect to add their pay as a cost. If you don't pay yourself, you don't have a business; you have an expensive hobby. It's important to think about the financial effects of not paying yourself, as it can have a big effect on your motivation and the long-term viability of your business. You can get a better idea of how profitable and long-term viable your firm is by keeping track of all of your expenses, including your compensation.

Calculating Your Annual Operating Expenses

Let's walk through a real example. Please take a moment to use a spreadsheet or notebook to calculate alongside this example. Start by listing all your fixed costs, such as rent, utilities, and salaries. Next, add your variable expenses (like materials and marketing) to get a comprehensive view of your financial landscape.

Sample Annual Cost Breakdown for Small Painting & Handyman businesses

Direct Costs (COGS)—variable by Job:

• Materials and supplies: $35,000

• Subcontractor payments: $12,000

• Total Direct Costs: $47,000

These costs vary based on how much work you do and will be calculated per job. We need to focus on all other factors for our pricing strategy. Additionally, consider the market rates for similar services in your area to ensure your pricing is competitive. It’s crucial to regularly review and adjust your costs to maintain profitability while meeting client expectations.

Insurance:

• General liability: $1,200

• Commercial auto: $1,800

• Workers' comp (for yourself): $2,500

• Tools and equipment: $800

• Subtotal: $6,300

Vehicle Costs:

• Loan/lease payment: $6,000

• Fuel (non-job-specific): $3,500

• Maintenance and repairs: $2,000

• Registration and fees: $300

• Subtotal: $11,800

Tools and Equipment:

• New tool purchases: $2,500

• Tool repairs and maintenance: $600

• Equipment rental (general use): $400

• Subtotal: $3,500

Marketing and Business Development:

• Website: $500

• Google Ads: $2,400

• Social media advertising: $1,200

• Vehicle lettering: $800

• Business cards and materials: $300

• Yard signs: $200

• Subtotal: $5,400

Professional Services:

• Accounting/bookkeeping: $1,500

• Legal fees: $500

• CPA (tax preparation): $800

• Subtotal: $2,800

Business Operations:

• Licenses and permits: $400

• Software subscriptions: $1,200

• Phone/internet: $1,400

• Office supplies: $400

• Bank fees: $300

• Credit card processing fees: $1,500

• Subtotal: $5,200

Owner's Compensation:

• Desired salary: $60,000

• Self-employment tax (on salary): $9,180

• Health insurance: $6,000

• Retirement contribution: $6,000

• Subtotal: $81,180

TOTAL ANNUAL OVERHEAD: $116,180

This sum doesn't include direct job costs (materials, job-specific labour), which we calculate separately for each project. However, you must cover this $116,180 to maintain operations and pay yourself a $60,000 salary.

Shocking realization: You need to generate enough gross profit (revenue minus direct costs) to cover $116,180 before you make a single dollar beyond your base salary.

Calculating Your Required Hourly Rate

Now that we know annual overhead, let's calculate what you need to charge per hour just to break even. To determine your required hourly rate, divide the total annual overhead by the number of billable hours you expect to work in a year. This figure will provide you with the minimum amount you need to charge per hour to ensure that all your essential costs are covered before you can start earning additional income.

Calculating Your Required Hourly Rate

With the annual overhead costs identified, let's determine the hourly rate you need to charge to break even. To find out how much you need to charge per hour, divide your total annual overhead by the number of hours you intend to work, which you may bill for. This will give you a starting rate that you can adjust based on your desired profit and market rates. Step 1: Determine Your Billable Hours.

This section is where contractors make their biggest mistake. While you may work 40 hours per week, it's important to consider how many of those hours are actually billable to clients.

You should review all the factors to ensure an accurate price for your job quote.

Consider all unbillable time:

• Estimates and consultations often do not result in actual jobs.

• Driving to/from job sites

• Shopping for materials

• Loading/unloading vehicle

• Invoicing and bookkeeping

• Marketing and business development

• Answering phone calls and emails

• Vehicle and equipment maintenance

• Administrative tasks

Realistic billable hours calculation:

Total work hours per year:

• The total work hours per year is calculated as 50 weeks, which accounts for 2 weeks of vacation and holidays.

• 40 hours per week

• = 2,000 hours annually

Unbillable time (conservative estimate):

• Estimates: 3 hours/week × 50 weeks = 150 hours

• Driving/errands: 6 hours/week × 50 weeks = 300 hours

• Administrative: 4 hours/week × 50 weeks = 200 hours

• Marketing/business development: 2 hours/week × 50 weeks = 100 hours

• = 750 unbillable hours

Actual billable hours: 2,000 - 750 = 1,250 hours.

This means you can charge for only 62.5% of your time. This is normal for small contracting businesses. Understanding the breakdown of unpaid hours is crucial for effective time management and financial planning. By identifying these areas, you can strategize to reduce them, potentially increasing your billable hours and overall profitability.

Step 2: Calculate the break-even hourly rate.

To find your entire annual overhead, divide it by the number of billable hours: This formula will determine the minimum hourly rate required to maintain profitability. This number helps you decide if your rates are sustainable or if you need to change them to earn more.

$116,180 ÷ 1,250 hours = $92.94 per hour

This is your break-even hourly rate. If you charge $92.94 per hour for all billable work and accurately bill all 1,250 hours, you'll cover your overhead and pay yourself your $60,000 salary.

But there are problems:

1. You won't bill exactly 1,250 hours—some weeks are slower.

2. This includes ZERO profit for business growth, emergencies, or building wealth.

3. You haven't accounted for any estimation errors or warranty work.

Step 3: Add Profit Margin

A healthy contract business needs at least a 15–25% net profit margin beyond the owner's salary. Let's use 20% as our target.

If $92.94 is our break-even rate (100%), we need to calculate the rate that makes this 80% (leaving 20% profit):

$92.94 ÷ 0.80 = $116.18 per hour

Round up to $120 per hour for easier calculations.

This is your minimum profitable hourly rate.

At $120/hour:

• You cover all overhead: $92.94

• You generate profit: $27.06 per hour

• Annual profit on 1,250 hours: $33,825

This profit can be used for:

• Emergency fund for slow periods

• Major equipment purchases

• Business growth and expansion

• Additional owner income/bonuses

• Retirement savings beyond base contributions

Applying This to Different Pricing Models

Your minimum rate of $120 per hour applies no matter how you show clients your prices: This means that the minimum fee stays the same no matter how you charge, whether it's a flat rate, a retainer, or a project-based price. It's important to make sure that clients understand this requirement properly so that there is no confusion and expectations are managed well.

Hourly pricing: Charge $120/hour directly.

Project pricing: Estimate hours required and multiply by $120, then add materials.

Per square foot pricing: Calculate your typical hours per square foot and ensure the rate generates the $120/hour equivalent.

We'll dive deeper into these pricing models in Part 2, but the foundation is always your required hourly rate.

This illustrates different methods of arriving at the correct price.

What If Your Number Seems Too High?

Many contractors calculate their required rate and then panic, thinking, "I can't charge $120/hour—nobody will hire me!"

Here's the truth:

1. You might be wrong about market rates. Many contractors underestimate what clients will pay for quality, professional work. Research your actual market.

2. You can reduce costs. If your required rate seems impossibly high, review your overhead. Are there expenses you can cut? Can you be more efficient?

3. You can increase efficiency. If you can complete jobs in fewer hours while maintaining quality, your effective rate increases even if you charge the same.

4. You might be targeting the wrong market. Budget-conscious clients won't pay professional rates. That's okay—they're not your ideal clients.

5. You cannot stay in business charging less than your costs. If the market truly won't support your required rates, you need to either reduce costs dramatically or reconsider whether this business is viable in your market.

The worst option is to charge rates that you know are too low while hoping for a positive outcome.  You'll labour yourself to death, and then you'll have to close the business. Instead, focus on figuring out who your ideal customer is and how to improve your value proposition so that you can attract people who value and are willing to pay for the quality you give. This strategic approach will help your business endure for a long time and achieve success.

The Reality Check Exercise

Let's conduct a reality check using last year's numbers, or make an estimate if you are new to this process. This will help us identify trends and areas where we can improve. By analyzing these figures, we can set realistic goals and create actionable strategies for the upcoming year.

Your actual numbers:

1. Total revenue last year: __________

2. Total direct costs (materials, job-specific expenses): __________

3. Gross profit (line 1 minus line 2): __________

4. Total overhead (all other expenses + your salary): __________

5. Net profit (line 3 minus line 4): __________

6. Estimated billable hours you worked: __________

7. Actual hourly gross profit (line 3 ÷ line 6): __________

8. Required hourly gross profit (your calculated overhead ÷ realistic billable hours): __________

Questions to ask:

• Is line 7 higher or lower than line 8?

• If lower, you're working for less than you need—you must raise prices.

• Is line 5 positive? If not, you're losing money despite working hard.

• You have no buffer for slow times or growth if line 5 is hardly positive.

Most contractors discover they're charging 20%–40% less than they need to be profitable.

Common Cost Calculation Mistakes

Avoid these common errors:

Ignoring quarterly/annual expenses: Although insurance, licenses, and equipment purchases don't occur on a monthly basis, they still require consideration in your hourly rate.

Underestimating vehicle costs: The true cost of operating a work vehicle is much higher than just fuel. Include depreciation, maintenance, insurance, and eventual replacement.

Ignoring tool replacement: Tools wear out and need replacing. Budget 10-15% of your tool value annually for replacement and repairs.

Not paying yourself first: Your salary is a cost, not whatever is left over. Include market-rate compensation in your overhead.

Overestimating billable hours: Be brutally honest. Track your time for a month to see how much is actually billable versus administrative, driving, and other necessary but unbillable tasks.

Failing to account for seasonality: If you work fewer hours in winter, your hourly rate needs to be higher to cover fixed costs during slow months.

Moving Forward with Confidence

You now understand your true costs and required hourly rate. This is your foundation for all pricing decisions.

Key takeaways:

• Calculate both direct costs (per job) and indirect costs (annual overhead).

• Determine realistic billing hours (typically 60–70% of total work hours).

• Calculate your break-even hourly rate (overhead ÷ billable hours).

• Add a 15-25% profit margin to your break-even rate.

• This is your minimum profitable hourly rate.

In Part 2 of this series, we'll explore different pricing models—hourly, per project, value-based, and hybrid approaches—and when to use each. You'll learn how to apply your required hourly rate to different types of jobs and present pricing in ways that clients understand and accept.

The foundation is set. Now we'll build your complete pricing strategy on top of these numbers.

Action Items Before Part 2

1. Gather your actual numbers: Please retrieve last year's financial statements or estimate all costs if you are newer.

2. Calculate your true annual overhead: Use the categories provided above.

3. Please determine your realistic billable hours: Track your time for 2-4 weeks to see the reality.

4. Calculate your minimum hourly rate: To calculate your minimum hourly rate, divide your overhead by your billable hours, and then add your desired profit margin.

5. Compare to what you currently charge: Are you setting your prices profitably, or are you losing money?

This comparison allows you to assess whether your current pricing strategy is sustainable and ensures that you are not undercharging for your services. By understanding the gap between your calculated minimum hourly rate and your current charges, you can make informed adjustments to enhance profitability.

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💳  Understanding Your True Costs & Break-Even Analysis

 

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All the best,

Joseph F. Botelho 

He founded JFB Painting & Handyman Service, serving Georgina, Keswick, Sutton, and the York Region. Joseph F. Botelho, a former corporate strategist turned professional tradesman, assists contractors in establishing profitable, protected, and respected businesses. Follow along on Facebook and Instagram for daily tips and project updates. 

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