True Hourly Profit: What Is an Hour of Your Capacity Actually Worth?
A job can look profitable on paper and still be a poor job for your business.
This matters most in businesses where labour is the limiting factor. Trades, construction, professional services and other labour-based businesses only have so many productive hours available. Once those hours are used, they are gone.
Most businesses already have a way of pricing work. They might charge an hourly labour rate, add a markup to materials and subcontractors, and then look at the Gross Profit dollars or Gross Profit percentage to decide whether the job was profitable.
There is nothing wrong with doing that. Gross Profit is an important number.
The issue is that it does not tell you how much profit you generated from the labour hours the job consumed.
That is what True Hourly Profit, or THP, is designed to show.
True Hourly Profit = Gross Profit ÷ Labour Hours
If a job creates $3,000 of Gross Profit and uses 40 labour hours:
$3,000 ÷ 40 = $75 THP
That means each labour hour consumed by the job generated $75 of Gross Profit.
Why Gross Profit Percentage Isn't Enough
Gross Profit percentage tells you how much of the sale remains after the direct costs required to produce it. It is useful, and I would not suggest that you stop looking at it.
But Gross Profit percentage looks at the profitability of the revenue.
THP looks at what the business produced from its limited labour capacity.
Those two views can tell very different stories.
Let's take three jobs. They all use exactly the same pricing rules:
Labour is charged at $120 per hour.
Materials are marked up by 30%.
For this example, the direct labour cost is $50 per hour.
If you were reviewing these jobs the way many businesses do, this is what you would see.
| Job A | Job B | Job C | |
|---|---|---|---|
| Labour Hours | 10 | 40 | 20 |
| Labour Sales @ $120/hr | $1,200 | $4,800 | $2,400 |
| Materials Cost | $500 | $1,000 | $10,000 |
| Materials Charged | $650 | $1,300 | $13,000 |
| Total Sales | $1,850 | $6,100 | $15,400 |
| Direct Labour Cost | $500 | $2,000 | $1,000 |
| Gross Profit | $850 | $3,100 | $4,400 |
| Gross Profit % | 45.9% | 50.8% | 28.6% |
If you were looking at those three jobs using Gross Profit percentage, Job B looks like the winner. It produced a Gross Profit of $3,100 at 50.8%.
Job A looks fine at 45.9%.
Job C might worry you. It has the largest sale and the largest Gross Profit dollars, but the Gross Profit percentage is only 28.6%.
If your rule was that a job needed to achieve a 40% or 45% Gross Profit margin, Job C could easily look like the one you should avoid.
The problem is that we still have not looked at what those jobs consumed to produce their Gross Profit.
Why This Matters When You're Busy
Most people know of a large construction company that has won a huge project, looked successful from the outside, and then gone broke.
Sometimes something genuinely goes wrong on the project. Costs blow out, delays occur, disputes happen or conditions change.
But these are often businesses with experienced estimators, good foremen, project managers and a history of delivering substantial work. It is unlikely that everyone involved simply looked at the job and intentionally signed up to something they believed would lose money from day one.
The job probably did look profitable.
The quote may have included labour margin. Materials may have been marked up. The projected Gross Profit percentage may have looked acceptable. On paper, the project worked.
The issue can be that the business has not properly connected that projected Gross Profit with the number of productive labour hours the project is going to consume.
Imagine a business needs to average $130 THP across its productive labour hours to cover its overheads and generate the profit it is aiming for.
It then wins a large project producing $85 THP.
There is still Gross Profit.
The project may still show an acceptable GP%.
But every hour committed to the project produces less Gross Profit than the business needs.
If a small job has this problem, the damage may be manageable.
If a two-year project absorbs a large portion of the company's labour capacity, it can be enormous.
That is one of the dangerous things about labour-based businesses. You can win a lot of apparently profitable work and still go backwards because the hours you have available are not generating enough Gross Profit.
Now Look at the Same Jobs Through THP
We have not changed the jobs.
We have not changed the prices.
We have not changed the Gross Profit.
We are simply dividing the Gross Profit each job produced by the labour hours it consumed.
| Job A | Job B | Job C | |
|---|---|---|---|
| Labour Hours | 10 | 40 | 20 |
| Gross Profit | $850 | $3,100 | $4,400 |
| Gross Profit % | 45.9% | 50.8% | 28.6% |
| True Hourly Profit | $85/hr | $77.50/hr | $220/hr |
Now the result looks quite different.
Job B had the highest Gross Profit percentage, but produced the lowest THP at $77.50 per hour.
Job C had the lowest Gross Profit percentage, but produced $220 of Gross Profit for every labour hour it consumed.
That does not mean GP% suddenly stops mattering. It means GP% and THP are looking at the business from different angles.
GP% tells you how profitable the revenue was. THP tells you how effectively you used the labour hours that are limiting your capacity.
When labour is your constraint, that second view matters a lot.
How profitable was the revenue?
Useful for understanding margin and how much of each sale remains after direct costs.
What did our limited labour capacity produce?
Useful for understanding which jobs, clients and types of work make the best use of the productive hours available.
Check Your Job’s THP
Job THP Calculator
Enter the income from the job, the direct costs of delivering it, and the labour hours used. We'll calculate the Gross Profit, Gross Profit percentage and True Hourly Profit.
THP Helps You Compare More Than Individual Jobs
This is where THP becomes particularly useful.
You can calculate it job by job, but once you have enough data you can also start comparing groups of work.
You may find that one customer consistently produces strong revenue but low THP because their jobs consume a lot of labour. Another customer may look smaller but consistently produce excellent THP.
You may find that a certain type of project performs well, while another type that everyone assumed was profitable consistently uses too many labour hours.
You may discover jobs where you can be both competitive and highly profitable. These are often the jobs you want more of.
You may also identify jobs where the only way to make the return worthwhile is to price higher. If the market will not accept the higher price, perhaps those are jobs you actually want to lose.
There are lots of combinations, which is exactly why THP is useful. It gives you a common measure that can be applied across different-sized jobs, customers and types of work.
Good Clients
Customers whose work consistently produces strong returns from the labour hours they use.
Good Job Types
Work where your business is efficient, competitive and able to produce a strong THP.
Work to Grow
Jobs you can win at a sensible price while still producing the return your business needs.
Poor-Fit Clients
Customers who may create plenty of activity and revenue but consume too much capacity for the return produced.
Work to Price Higher
Jobs that may still be worthwhile, but only if the price reflects the labour capacity they consume.
Work You're Happy to Lose
Jobs where the price required to make the economics work is higher than the market wants to pay.
This does not mean you automatically reject every low-THP job. There can be strategic reasons for taking work. It might lead to better projects, fill unused capacity, retain an important customer or create some other value.
But once you know the THP, at least the decision is deliberate.
Labour Is Often the Real Constraint
A labour-based business cannot simply keep increasing output forever.
You only have so many people and so many productive hours.
This means every job you accept is also a decision about what those limited hours will be used for.
If one type of work produces $80 THP and another produces $180 THP, doing more of the $80 work does not automatically mean the business is growing stronger.
You may simply be filling your available capacity with work that produces a lower return.
That is why revenue alone can be misleading.
The goal is not necessarily to keep everybody as busy as possible. The goal is to use the capacity you have in a way that creates the financial result the business needs.
So What Should Your THP Be?
There is no universal THP number.
A $100 THP could be excellent for one business and completely inadequate for another.
Your target depends on:
how much productive capacity you actually have;
the annual operating expenses the business needs to cover; and
the net profit you want the business to produce.
This is where the Productivity calculation from the previous page becomes important.
If you have six productive FTE, you might initially think you have:
6 × 38 hours × 52 weeks = 11,856 labour hours
But you cannot bill all of those hours.
If the business operates at 70% Productivity:
11,856 × 70% = 8,299 productive hours
Those 8,299 hours are what the business actually has available to generate the Gross Profit needed to cover overheads and profit.
The formula is:
(Annual Operating Expenses + Target Net Profit) ÷ Productive Hours = Target THP
That does not mean every job has to produce exactly that amount.
Some will be higher and some will be lower.
It gives you an average target for what your limited productive capacity needs to generate across the year.
Actual THP Versus Target THP
Once you have a target, completed jobs become much easier to assess.
If your Target THP is $133 and a job produces $80, the job may still show a Gross Profit. But it produced considerably less from each productive hour than the business needs on average.
That gives you something useful to investigate.
Was the price too low? Did the job run over the allowed hours? Was there rework? Were variations missed? Did the scope change? Is this simply a type of work where the market price does not support the return you need?
Likewise, if a type of job repeatedly produces $200 THP, it is worth understanding what makes that work different.
THP Is Not About Charging by the Hour
THP does not mean you need to charge customers by the hour.
You might charge a fixed price, quote the whole project, use packages, value-based pricing or any other pricing method.
THP is an internal management measure.
Regardless of how the client was charged, you can look at the completed job and ask:
How much Gross Profit did we create from the labour hours this job consumed?
That gives you a consistent way of comparing completely different jobs.
THP Is a Driver, Not Just Another Number
Knowing the number is only useful if you do something with it.
If THP is too low, the answer might be pricing. But it might also be job efficiency, rework, missing variations, material markup, scheduling, job selection, the type of customer you are targeting or the kind of value your business creates.
Sometimes the conclusion is that you should improve the way the work is delivered.
Sometimes it is that you should charge more.
Sometimes it is that you should do more of a different type of work.
And sometimes the answer is simply that this is not work your business should be trying to win.
The useful part of THP is that it gives you a number that helps you find those differences.
Calculate Your Target THP
Use the calculator below to estimate the average True Hourly Profit your business needs from its productive labour capacity.
Target THP Calculator
Enter your productive FTE, annual operating expenses, Productivity and target Net Profit. We'll estimate the average THP your productive hours need to generate.
What Does This Number Mean?
Your Target THP is the average amount of Gross Profit each productive labour hour needs to generate for the business to cover its operating expenses and achieve the Net Profit you are aiming for.
Do not treat it as a rigid rule that every job has to meet.
Use it as a benchmark.
Then compare actual jobs, customers and types of work against it and start looking for patterns.
The important question is not simply whether one job produced $90 THP and another produced $180.
It is understanding why they were different, whether that difference is repeatable, and what you want to do about it.
Because when labour is your limiting factor, the question is not just how much work you can win.
It is how you want to use the limited hours you actually have.
