Guide
Some percentage of what you invoice will never get collected. Here's the benchmark range for your trade, the formula to build that loss into your rate, and the three fixes that cut it fastest.
Every business that invoices after the work is done writes some of it off eventually. The question isn't whether you'll lose money to non-payment. It's how much, and whether your pricing already accounts for it.
Most owner-operators price as if every invoice gets paid in full. Then they wonder why the margin never quite matches the spreadsheet. The gap is usually bad debt, sitting there unbudgeted.
Bad debt rate is total write-offs over a period divided by total revenue billed in that period. It varies more by collection method than by trade. A plumber taking deposits and a plumber invoicing net-30 with no deposit are running two different businesses, risk-wise.
| Collection model | Typical bad debt rate | Why |
|---|---|---|
| Deposit-taking trades (50% upfront, balance on completion) | Under 0.5% | Customer has skin in the game before you start; balance disputes are rare and small |
| Typical residential service (invoice on completion, no deposit) | 0.5% - 2% | Some customers delay, a few dispute, a handful vanish |
| Net-30 terms, no deposit, no card on file | 3% - 5% | You've extended unsecured credit with no leverage to collect |
If you're property management, strata, or commercial with genuinely reliable payers, you might sit under 1% even on net-30. But that's earned trust with a specific client, not a general policy. If you don't know your number, assume the top of your bracket until you've tracked it.
If a slice of your invoices never gets paid, every dollar you do collect has to cover its own cost plus a share of the dollars that vanished. The uplift required is:
Required rate uplift = bad debt % / (1 − bad debt %)
This isn't a rough rule of thumb. It's the exact multiplier that restores your original margin after accounting for the loss.
Worked example: you run a $95/hour rate and your trailing bad debt rate is 3% (net-30, no deposit, typical for a two-van HVAC outfit that grew fast and got sloppy on terms).
That $2.94 isn't profit. It's the price of doing business on credit. Charge $95 and you're quietly eating a 3% margin cut on every job, whether or not that specific customer pays.
Run the same maths at other rates:
| Bad debt rate | Uplift factor | $95/hr becomes | $150/hr becomes |
|---|---|---|---|
| 0.5% | 1.005 | $95.48 | $150.75 |
| 1% | 1.010 | $95.96 | $151.52 |
| 2% | 1.020 | $96.94 | $153.06 |
| 3% | 1.031 | $97.94 | $154.64 |
| 5% | 1.053 | $99.99 | $157.89 |
At 5% write-offs, you'd need to charge close to $158 to net the same as a clean $150. That's a real number, not a rounding error, and it's why a business bleeding at 5% often looks unprofitable even when the crew is busy every day.
Once you know your bad debt rate, plug the adjusted number into the hourly rate calculator alongside your overhead and target profit, so the uplift isn't a separate mental note you forget to apply.
Don't guess your bad debt rate. Pull it from your own books.
Bad debt rate = total invoices written off in last 12 months / total invoiced revenue in last 12 months
Set a rule for what counts as "written off": anything past 90 days with no payment plan and no active dispute you're pursuing, or anything you've formally sent to collections and closed out. Don't include invoices still in normal follow-up. That inflates the number and makes you overprice.
Do this quarterly, not annually. A rate calculated once a year hides trends. If your write-offs jumped from 1% to 2.5% over two quarters, you want to see that before it becomes a habit, not after your year-end accounts confirm it.
Example tracker, kept simple:
That 1.6% sits in the "typical residential service" bracket. If this business also took deposits on jobs over $500, the rate for that segment alone would likely be well under 1%, and mixing deposit and non-deposit work into one blended number can mask which jobs are actually the risk.
You don't fix bad debt by chasing harder after the fact. You fix it by changing terms before the job starts. Three changes move the needle more than anything else:
These three, used together, are the difference between the 3-5% bracket and the under-2% bracket. None of them require new software or a collections agency. They require a policy you actually enforce, including on the customers you like.
Bad debt uplift is one input into your rate, not the whole story. Once it's folded into your hourly, run the result through the markup and margin calculator to check it still clears your target margin on materials-heavy jobs, and check the whole model against the break-even calculator to see how many billable hours you need at the adjusted rate to cover fixed costs for the month.
A bad debt rate you don't know is a discount you didn't agree to. A bad debt rate you've measured and priced in is just another line item, same as fuel or insurance.
The Small Business Operations Kit ($19) turns guides like this one into fill-in-once worksheets: rate card, quoting sheet, job costing, payment terms and follow-up templates.