Profit Margins and Transparent Estimate Calculations

# Thread: Profit Margins and Transparent Estimate Calculations

1. Plastic
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## Profit Margins and Transparent Estimate Calculations

Hey all!

I was hoping to start a real transparent thread on how you pros go about including your profit margins into your estimates. The reason? Well, my shop has been getting away with "general idea quotes" and it's time we implement more of a system. Also, I suspect we're doing it wrong.

If any response to this thread, it'd be great to get other estimate models from job shop owners on what their estimate calculators look like and where they add their profit margins.

I'll go first...

Our private and in house estimate calculator (on an excel spreadsheet looks like this):

-- Material 1: \$XXX
-- Material 2: \$XXX
-- Material 3: \$XXX

-- Finishing supplies: \$XXX
-- Installation: \$XXX

-- Studio Fee at \$400/day*: \$(days of work times \$400)
-- Labor at \$125/hour**: \$(projected hours of work times \$125)
-- 20% of total of everything above: \$(.2 times studio fee, labor, materials etc...)
-- Grant Total: \$(that 20% added to all the numbers above it)

*We calculated our studio day rate by adding together all our monthly operating expenses including rent, our shop truck payments, utilities, insurance etc.. and then dividing that number by 30. So for any job, no matter how small, we will add at least 1 day. Our thought process being that studio day rate encompasses everything that goes into keeping the doors open and the lights on at the shop for the duration of any job.

**There are five of us that work here. Again, we figure if we all were paid \$25/hour (5 times \$25) our labor rate on our price calculator should be \$125/hour. So we estimate how many hours of work there are for any job and multiply by \$125, even if only one or two of us work on this or that job because we all gotta get paid right?

Then we add 20% (our profit margin?) to the whole sha-bang.

So.... If I thought this was the most professional method I wouldn't be starting this thread. After reading up a bit on here, it seems that you guys add profit margins to your material costs, not both labor and materials. And, it also seems that for coming up with labor costs, you guys likely break down the steps of a job into drilling; 1 hour, cutting; 1 hour, welding; 2 hours, and only include the hourly rate of the operator into your estimates.

I'd be curious to see how you guys would list out your pricing calc like I did above. And I'd like to know where you guys include your daily operating expenses and profit margins. Cause it looks like maybe we've been gouging the hell our of our clients?

So the real truth behind why I'm writing??? Because we only get these big jobs now, and then sit empty for a number of weeks because the smaller jobs, "can't afford us".

2. Billing \$125/hr because there are 5 of you getting paid \$25/hr is not really accurate and not the way most shops figure it. Mostly because it does not take into account a true picture of your overhead and not all 5 of you can always be working on the same project at the same time. And most shops will have multiple projects going on at the same time potentially going from one technician to another.
you typically would add up all your overhead expenses such as gross wages, insurance, electric bills, water bills, rent, equipment payments, annual tooling expenses, and maintenance expenses. Then you divide by the total billable hours (48-50weeks x 40hrs x #employees<excluding clerical and secretarial>). That will get you a cost per hour to have the doors open. This is your internal labor rate. Then you mark that up to determine your billable labor rate.
At this point it becomes important for everyone to keep track of their time on a job. At the completion of the job (or possibly monthly for large jobs), everyone's time is added up and billed at the "billable rate"
Materials for the job are calculated and marked up separately and added to the bill.

3. Diamond
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I think your 'studio fee' should be divided by 5, as some jobs require only one man, and his portion of the overhead is 1/5.

OTOH, employee benefits cost me at least 35% more than their base wage. So 5 guys @\$25/hr translates into \$125 * 1.35 just to break even. For a few employee shop, I'd guess that you should be billing out actual work hours at 100% base wage markup (\$250/hour) with 5 guys on one job and no studio fee. If you find you're making way too much money as you get more employees, then you can cut back a little

4. What is this "profit" you speak of?

Originally Posted by John1515
Cause it looks like maybe we've been gouging the hell our of our clients?

I charge by the spindle.
small mills = \$75/hr
APC mill = \$85/hr
Lathe = \$75/hr
The incoming new machine will be about \$125/hr
I mark material up 10%
I figure spindle time as "button to button" (not actual cycle time).
I add set-up time (this is usually an educated guess) with a minimum of 1 hour, and is the same amount as the spindle time for the machine in question.
I add programming time. \$75/hr with 1 hour minimum.

That sums it up.

Then I look at the number and adjust accordingly.
There are pain in the ass factors considered. And, gravy factors considered. As well as good/bad customer factors.

5. Diamond
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Originally Posted by John1515
Hey all!

.................................................. .................................................. ........

So we estimate how many hours of work there are for any job and multiply by \$125, even if only one or two of us work on this or that job because we all gotta get paid right?

.................................................. .................................................. .........

That remind me of a local grinding shop. They ruined my parts beyond repair. The owner offered to only charge me half of his the quote.

When I asked why I should pay anything. he replied, "how will I make payroll if you don't pay?"

6. Diamond
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Sometimes you have to charge "market rate" and not work on a set hourly shop rate. My hourly shop rate is an average target. If you try charging the same for difficult jobs as the easy ones you will miss out on a lot of easy ones. My top rate is 2 1/2 times the bottom one. It all comes out in the wash. If it is something out of tool eating exotic material it gets the top rate and possibly a multiplier if I figure the machine will be down often for retooling and adjustments. If it is a bar fed brass job that can run while I am out running errands, and requires no tooling changes or adjustments I will go with the bottom rate if necessary to get the work.

7. Along those lines:
There have been times things have fallen on my desk for quote that I knew exactly what they were.
Quick google search to retail pricing. Average it, and quote 40% of that average for the parts "in the white".
I have gotten, and made money on, more than one job that way, simply because I was to busy to actually sit down and quote it.
But, you have to be damn sure you know EXACTLY what you are looking at. And, exactly what your capabilities are.
The market will only support so much \$\$\$, no matter what you think the work is worth.
You learn this real fast when you specialize in aluminum widgets (like everybody else).

8. Originally Posted by wheelieking71
What is this "profit" you speak of?
Well heck. I had to go look it up.

prof·it
ˈpräfət/
noun
noun: profit; plural noun: profits
1.
a financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something.

Appears to be synonymous with "fantasy" or "ghost"... Oh, wait... I think I found it... Look up "Cruel Joke".

9. I feel for you guys that have to quote "real" work (the stuff that has to have paperwork following it around).
There is so much hidden time. I have never once figured metrology in to a quote. But, I am sure it is a huge factor in some shops.
That CMM doesn't pay for itself unless its getting paid. The guy operating it ain't free either. Or the admin taking care of all that paperwork.
Recently I have seen a couple job postings for "CNC machine shop estimator". How does one get universally qualified for that job?!
I can't imagine any two shops are run the exact same way?

10. Diamond
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Originally Posted by wheelieking71
I feel for you guys that have to quote "real" work (the stuff that has to have paperwork following it around).
There is so much hidden time. I have never once figured metrology in to a quote. But, I am sure it is a huge factor in some shops.
That CMM doesn't pay for itself unless its getting paid. The guy operating it ain't free either. Or the admin taking care of all that paperwork.
Recently I have seen a couple job postings for "CNC machine shop estimator". How does one get universally qualified for that job?!
I can't imagine any two shops are run the exact same way?
Yup, I don't often quote by the hour any more. It's more like how many jobs can I typically handle in a day, so a real small job might rate an hour, but most jobs are half a day or a full day. Half a dozen small jobs can more than fill a day.

If someone thinks they're better off calculating machine time to the minute to win some work, they're welcome to do it that way. Better have a real good rate for that because of the 'hidden time'.

11. Plastic
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This is very helpful so thank you. And then I crunched numbers... Be great if you could take a look.

For total billable hours we get (50 weeks x 40 hours x 5 employees) 10,000 hours.

If we take our yearly shop expenses at 100K (rent, utilities, insurance etc...) plus all our yearly salaries at 200K (5 full time people at 40K salaries) I get 300K for our yearly overhead. If I divide that 300K by 10,000 billable hours I get \$30 per hour as our "internal labor rate." In other words, for every hour we are in the shop we each need to be pulling in \$30 of value in order for us to hit our end of year numbers.

Am I on course so far?

So should our labor markup be something in the 30% - 50% range? That are "billable labor rate" be in the ballpark of \$60 per hour? Which would mean if one person takes 5 hours to make a box, we would quote a client that needs the same box at 5 hours x \$60 or \$300 for labor. Then we'd add materials (call it \$100) which we would mark up in the 10 - 20% range (call it 20% for this example or \$120)and then we have our total quote at \$420 for the box?

Many thanks for your advice on all this. It really helps us to dial in our process.

12. Originally Posted by HuFlungDung
Yup, I don't often quote by the hour any more. It's more like how many jobs can I typically handle in a day, so a real small job might rate an hour, but most jobs are half a day or a full day. Half a dozen small jobs can more than fill a day.

If someone thinks they're better off calculating machine time to the minute to win some work, they're welcome to do it that way. Better have a real good rate for that because of the 'hidden time'.
That is why I mentioned "button to button". Which really throws my reference of spindle time out the window (if'n you read between the lines).
Most times I sit at my monitor scrolling the solid model around pondering the actual process. Including deburring. If deburring has to happen between operations?
Is it easy to load? Shove it in a corner, and GO! Or, is it gonna be fussy to locate? Can an operator run it? Or, do I have to do it myself.
And, about a million other variables, that, nobody but me would know or think of in my shop.
That is why I asked how a guy would get universally trained to be a CNC machine shop estimator.
I do take the actual cycle time in to account as a metric to base all the other variables on. But, the actual price is only a very loose reflection of that number.

13. Stainless
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Don't forget to include taxes, benefits, unemployment, sick days, vacation days, and the couple weeks a year you lose to "I'm here, but my dog just died so I'm not being meaningfully productive" time.

I figure an employee really costs about twice their hourly rate. Markup would be on top of that.

14. Originally Posted by John1515
This is very helpful so thank you. And then I crunched numbers... Be great if you could take a look.

For total billable hours we get (50 weeks x 40 hours x 5 employees) 10,000 hours.

If we take our yearly shop expenses at 100K (rent, utilities, insurance etc...) plus all our yearly salaries at 200K (5 full time people at 40K salaries) I get 300K for our yearly overhead. If I divide that 300K by 10,000 billable hours I get \$30 per hour as our "internal labor rate." In other words, for every hour we are in the shop we each need to be pulling in \$30 of value in order for us to hit our end of year numbers.

Am I on course so far?

So should our labor markup be something in the 30% - 50% range? That are "billable labor rate" be in the ballpark of \$60 per hour? Which would mean if one person takes 5 hours to make a box, we would quote a client that needs the same box at 5 hours x \$60 or \$300 for labor. Then we'd add materials (call it \$100) which we would mark up in the 10 - 20% range (call it 20% for this example or \$120)and then we have our total quote at \$420 for the box?

Many thanks for your advice on all this. It really helps us to dial in our process.
Your \$400 studio-fee is absurd, honestly. And, definitely killing the small jobs.

Do you have problems hitting dates? just curious.

15. Plastic
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Originally Posted by wheelieking71
Your \$400 studio-fee is absurd, honestly. And, definitely killing the small jobs.

Do you have problems hitting dates? just curious.
We hit all our dates. Our reputation is solid, but we operate in a feast or famine mode: high end premium jobs then nothing because we haven't dialed in our quoting process. The old hatchet method of, "yeah, throw in a couple \$400 studio day fees and let's all get paid while Bill and Bob are the only two in the shop," surprisingly doesn't cut it when someone's like, "hey, can you build a sliding door for under 3K please?" So our quotes scare the smaller fish away thus the present estimate over-haul.

Billing \$125/hr because there are 5 of you getting paid \$25/hr is not really accurate and not the way most shops figure it. Mostly because it does not take into account a true picture of your overhead and not all 5 of you can always be working on the same project at the same time. And most shops will have multiple projects going on at the same time potentially going from one technician to another.
you typically would add up all your overhead expenses such as gross wages, insurance, electric bills, water bills, rent, equipment payments, annual tooling expenses, and maintenance expenses. Then you divide by the total billable hours (48-50weeks x 40hrs x #employees<excluding clerical and secretarial>). That will get you a cost per hour to have the doors open. This is your internal labor rate. Then you mark that up to determine your billable labor rate.
At this point it becomes important for everyone to keep track of their time on a job. At the completion of the job (or possibly monthly for large jobs), everyone's time is added up and billed at the "billable rate"
Materials for the job are calculated and marked up separately and added to the bill.
I'm not sure if "spruewell's" method above is best but it resonates with me. This is what I'm thinking going forward for quoting smaller jobs:

-- Material Cost

-- Car rental, consumables etc...

-- Labor. Labor being \$60 per hour for each person working on the job. One person on the job? Then it's \$60 x hours. Two people on the job? \$120 x hours. And that number \$60 comes from doubling our internal hourly labor cost (300K in overhead that include all 5 of our yearly salaries divided by 10,000 billable hours (50 weeks x 40 hours x 5 employees): 300K divided by 10,000 hours x 2 = \$60).

-- 20% margin mark up on the whole thing - materials and labor - to get the grand total.

Did I just do a whole bunch of math voodoo? Either way, this process should bring down our estimates on smaller jobs. I also like the idea of hitting 10,000 billable hours. In other words, if we invoice 2500 hours of work every quarter then we'd know were on course to hit our salaries included in that 300K overhead number. And if we did that, that 20% margin would be 60K in the business account that could be used for tools/growth and/or bonuses.

Penny for ya'll thoughts?

16. Cast Iron
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What you need to learn is "cost accounting"

get a basic cost accounting textbook and apply it to your situation.

An idea to consider is that even when some jobs are operating "at a loss"
the revenue on those still helps to pay your fixed costs.

17. Sounds like you are getting the basic idea. Those numbers are pretty rough, but for examples sake, that is the way it's done. However, out of the five of you, is ther one who does the books, pays the bills, handles the insurance, and does the billing? This paperwork takes a fair amount of time. If this is enough to take one person's full time, then you need to subtract his time from your billable hours. \$300,000/8000=\$37.50/hr instead of \$300,000/10,000=\$30.00/hr

18. Plastic
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Originally Posted by Spruewell
Sounds like you are getting the basic idea. Those numbers are pretty rough, but for examples sake, that is the way it's done. However, out of the five of you, is ther one who does the books, pays the bills, handles the insurance, and does the billing? This paperwork takes a fair amount of time. If this is enough to take one person's full time, then you need to subtract his time from your billable hours. \$300,000/8000=\$37.50/hr instead of \$300,000/10,000=\$30.00/hr
I seeeeeeeeee. And the person's who's doing the books is accounted for in the internal labor rate because his salary is part of that 300K, which is why the internal labor rate goes up from \$30 to \$37... So that's how the overhead of having someone doing the books gets covered in our billable labor rate...

Right now, everyone kind of does a little bit of everything... I've mostly done free form metal fabrication for them (Hossfeld and forming hammer work) but I've been getting more interested in business. So I've been tasked to systematize their estimating process because it's something that all of us do.

I've also taken over payroll, but I still jump in to help in the shop and do installs. Bills and insurance are taken care of by the two original founders.

I realize I could probably pick everyone's brain here forever, but for brevity's sake there are just two more pieces of the puzzle for me: when we need to hire additional labor on a big job and rush fees.

-- Right now, my thinking on hiring a freelancer is to add that line item to our in house estimate calculator/spreadsheet in the same category as a "material". We need Matt to come in for 4 hours at \$25/hour to do some finish work we add \$100 to the estimate. But it's a number outside our billable hours rate since he isn't on a salary?

-- For rush fees, I suppose it would be looking at our current work load, making the judgement that this new job would be a rush, and then increasing our overall margin from 20% to maybe 25% or 30%?

Be curious to know what you all think.

What you need to learn is "cost accounting"
I can't tell you how helpful it is to get the formal terms like this. It really opens up the doors to my digging deeper online, looking at the appropriate books, and getting to the heart of the matter. I don't know what I don't know.

19. freelance labor can be handled a couple different ways. You can put it as a line item on the bill "outside labor" and mark it up. Or treat that person as a "temporary employee" and bill their time at your normal rate.
I'm not sure how the rules apply there for that sort of thing. I imagine it's not much different from here, but you may want to check with an HR (human resources) professional in your area to make sure.
Rush jobs are kinda a seat of the pants judgment call. Gotta take into consideration what other jobs you may have in process that will have to be postponed and what it will cost you in overtime to complete the job. Not to mention what it may cost to have materials and supply orders expedited.
That being said, I don't "quote" rush jobs. I estimate them and use the disclaimer:

It's going to be a "time and materials" job

For example:
I could do that for about \$800.00. Hopefully less, but it may be more depending time and materials.

20. Diamond
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Yup, I don't often quote by the hour any more. It's more like how many jobs can I typically handle in a day, so a real small job might rate an hour, but most jobs are half a day or a full day. Half a dozen small jobs can more than fill a day.

I'm curious, you must find this to be a better system? Mostly what kills me on a quote, is the hidden cost of the screwing around with something that wasn't obvious until I get into the job. But quoting by the day rather than by the hour doesn't take care of that problem.