Margin per hour: the number that reprices a service business

Aug 22
3 min read

Updated: 4 days ago

Introduction

Two jobs bill the same amount. One takes four hours, the other eleven. On any revenue report they look identical, and one of them is losing money.

For any business selling time or expertise, this is the number that changes decisions — and it is almost never calculated, because the hours are not recorded.

1. Margin per hour is gross profit divided by hours actually consumed

Take the fee, subtract direct costs — materials, subcontractors, travel, anything bought for the job — then divide by the total hours the job consumed.

Total hours is the part that gets understated. It includes the quoting, the site visit, the emails, the revisions, the chasing of payment and the meeting that could have been a message.

A job billed at a healthy rate that required six unbilled hours of coordination is often your worst work, and nothing in a revenue report will reveal that.

2. Track hours roughly rather than not at all

Precise time recording is resisted for good reasons, and the alternative in practice is no data.

Rough is enough. A number rounded to the half hour, logged per job, by whoever did it. Four weeks of that across your main job types produces most of the available insight.

You are not building a billing system. You are trying to find out which work pays, and approximate figures answer that clearly.

3. Rank your job types and expect a surprise

Group the jobs into the five or six categories you actually sell, and rank them by margin per hour.

The usual finding is that the largest, most prestigious jobs rank in the middle, small routine work ranks higher than anyone expected, and one category everybody enjoys is at the bottom.

That ranking is the point of the exercise. Without it, capacity gets allocated by preference and by whoever asked most recently.

4. Fix the quoting before blaming the work

A job with poor margin per hour is often not a bad job. It is a badly scoped one.

Look for the pattern: was the estimate optimistic, was the scope open-ended, were revisions unlimited, did the client's slow responses stretch the timeline?

Those are quoting and contract problems, and they are fixable without turning away the work. Only after the scope is tight is a low figure genuinely a property of the job.

5. Reprice on the hours, not on the market

Once you know the real hours, pricing becomes arithmetic rather than nerve.

Decide the margin per hour the business needs, multiply by realistic hours including coordination, and that is the floor. Quote below it deliberately or not at all.

This also makes fixed-price work safe. Fixed prices are dangerous when hours are unknown and perfectly sound when they are measured.

6. Charge for the unbilled hours or design them out

The coordination time is real work and it has to be either priced or removed.

Priced: a minimum engagement, a project management line, a call-out fee, a charge for revisions beyond a stated number.

Removed: templates, a standard intake form, fixed check-in points instead of ad hoc calls, clear limits on revisions. Removing is usually better, because it improves the client's experience as well as your margin.

7. Use it to decide what to stop selling

The hardest and most valuable use. Some work should be declined.

If a category sits well below the rest and cannot be repriced or scoped tighter, it is consuming capacity that better work could use. Declining it feels like turning down revenue; it is turning down a loss with extra steps.

Raise the price first. If clients accept, the problem is solved. If nobody accepts, you have your answer and the decision makes itself.

8. Recalculate when anything structural changes

Wages, subcontractor rates, software costs and your own efficiency all move.

Recalculate annually and whenever a cost changes materially. Also recalculate after you change a process — the reason to fix intake or templates is to move this number, and you should check that it moved.

Keep the previous figures so the trend is visible. A category drifting downward over three years is a repricing conversation before it becomes a crisis.

Conclusion

Divide gross profit by every hour the job consumed, including quoting, coordination, revisions and chasing payment. Rough time records are sufficient.

Rank your job types, fix scoping before condemning the work, set prices from measured hours, either charge for coordination time or design it out, decline what cannot be repriced, and recalculate whenever costs or processes change.