Guides
The $2 rule: gross profit for every $1 of wages
Tradies Sidekick team · 5 November 2026
Revenue tells you how busy you were. It doesn't tell you whether the hours you paid for were worth buying. The labour efficiency ratio does, and for most trade and service businesses the line to watch is $2 of gross profit for every $1 of wages.
What is the labour efficiency ratio?
The labour efficiency ratio (LER) is your gross profit divided by the wages of the people on the tools. Gross profit here is revenue less materials and subcontractors. It answers one question: for every dollar I pay someone to do the work, how many dollars come back?
| Revenue, last 12 months (ex GST) | $600,000 |
| Less materials and subcontractors | −$180,000 |
| Gross profit | $420,000 |
| Field wages, including super | $230,000 |
| Gross profit per $1 of wages | $1.83 |
Why $2 is the line
Think of each dollar of gross profit a wage brings back as two jobs to do. The first dollar pays the wage. The second dollar has to cover everything else: vehicles, insurance, phones, software, admin, the accountant, tax, and the owner's pay.
At $2.00 that second dollar usually stretches far enough. Below about $1.80 it doesn't, and the gap is nearly always made up the same way: the owner works long hours for less than they pay their staff. The business looks busy and still feels broke.
Healthy: $2.00 or more. Tight: $1.80 to $2.00. Under the line: below $1.80.
What the $2 rule catches that other numbers miss
- Underpricing. If your rate doesn't cover the real cost of an hour, each wage dollar brings back less.
- Unbilled time. Travel, rework, waiting on materials and callbacks are paid hours that bring in nothing.
- Hiring ahead of the work. A new starter costs wages from day one but takes weeks to fill their diary. The ratio dips, and that's a signal to fill the diary before the next hire.
Because it combines pricing and productivity, it's harder to fool than a utilisation percentage. Padding timesheets doesn't lift it. Only more gross profit per wage dollar does.
How to lift your labour efficiency ratio
1. Price from the real cost of an hour
A $35 hourly rate can cost you $50 or more for each billable hour once super, leave and non-billable time are counted. Quote from the real figure. The employee cost calculator works it out.
2. Cut the hours nobody pays for
Travel between jobs is the biggest one for service businesses. Group work by suburb, and win customers near the ones you already have. See job density.
3. Fix the jobs that keep coming back
A callback is a paid visit that brings in nothing. If one person's jobs need more callbacks than everyone else's, that's training, not bad luck.
4. Hire when the work is booked
Look at how far ahead your team is booked before adding someone. If the next three weeks are already full, the new wage will pay for itself quickly. If not, it will drag the ratio down for months.
Working it out from your profit and loss
You can calculate it once a year from your P&L with the calculator above. The trouble with once a year is that by the time you see a bad number, the year is gone. Tradies Sidekick works it out from your Xero invoices, the materials and hours your team logs in ServiceM8, and each person's full hourly cost, for the business and for each person. It updates every night. You see a slide while there's still time to act.
Questions
Which wages should I include?
Only people doing billable work, including their super. Leave out office staff. If you're on the tools yourself, include a fair wage for your field hours, otherwise the ratio flatters you.
Is $2 the right target for every trade?
It's a rule of thumb. Material-heavy work can run a little lower, and labour-only services should aim higher. Your own trend over time matters more than the exact benchmark.
How is this different from gross margin?
Gross margin divides profit by revenue. The labour efficiency ratio divides it by wages, so it tells you whether the people you pay are earning their keep, which margin alone can't show.
What is a good labour cost as a percentage of revenue?
It depends on the trade, which is why the ratio to gross profit is more useful. At $2 of gross profit per $1 of wages, field wages are half of gross profit.