Profit Margins and Transparent Estimate Calculations - Page 2
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  1. #21
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    A bit OT as I can not answer your question as I only machine parts for my own products. That said I do have several parts I send out for laser and forming work.

    I had been using one shop for some time but always had some small issues that came up so I sent RFQ's for 5 different parts to 4 local shops last month and each one came back within a dollar or two on each of the part's I needed to be quoted.

    It kind of blew my mind honestly. Must be a hell of a competitive market to have been so exacting in there qoutes Leaves me thinking these shop must be using some universal quoting software. Yes, I understand there fairly easy process to quote but still.

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    Quote Originally Posted by Dave K View Post
    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.
    The universal tendency among machinists is to brag about how fast they can do something, how little they charged for it, and yet claim to charge $100 an hour or more, yet only make $500 in a day. Something doesn't add up.

    Years of experience with a variety of work helps to level out the surprises, because you should remember where you got stung. The norm is that things seldom go as smoothly as planned, so you allow for it. And let's face it, most working guys work in 2 hour blocks: clock in and work til coffee time, then lunch, then coffee time, clock out. So be realistic about the natural rhythm of things and don't leave yourself holding the bag on all the leftover fragments of those 2 hour blocks by not charging out that time. That's why I say after estimating the actual machine time, you step back and take a realistic estimate of "how many of these things did I say I say I was going to make in a day? Yeah, fat chance, here's the more likely number".

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    Quote Originally Posted by HuFlungDung View Post
    The universal tendency among machinists is to brag about how fast they can do something, how little they charged for it, and yet claim to charge $100 an hour or more, yet only make $500 in a day. Something doesn't add up.

    Years of experience with a variety of work helps to level out the surprises, because you should remember where you got stung. The norm is that things seldom go as smoothly as planned, so you allow for it. And let's face it, most working guys work in 2 hour blocks: clock in and work til coffee time, then lunch, then coffee time, clock out. So be realistic about the natural rhythm of things and don't leave yourself holding the bag on all the leftover fragments of those 2 hour blocks by not charging out that time. That's why I say after estimating the actual machine time, you step back and take a realistic estimate of "how many of these things did I say I say I was going to make in a day? Yeah, fat chance, here's the more likely number".


    LOL! I see what you're saying. I'll try to remember it on my next quote.

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    Quote Originally Posted by Spruewell View Post
    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.
    Thanks for all your clear insights. We have a new working doc now that includes the items we've discusses: a labor rate based on internal labor costs, rush fee estimator, and added an hourly labor calc as well so we're not just ball parking.

    One issue did come up in transmitting this information to my peers. The two founders actually get a higher salary than the other three of us. And, they expense a number of things like food and coffee. For example, we took a look at coffee and about 2.2K is spent per year. So though we might list their "salary" as 50K they receive fringe benefits their being founders.

    Two questions resulted:
    1) Should there be different internal labor rates for different people?
    2) Should the founder's fringe benefits (like 1K in coffee) be added to each of their salaries making it 51 instead of 50,or example. We're all just on the same page of accurately accounting for our business.

    So, do these questions make sense? Let me know what you think and thanks again. We've made a lot of progress.

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    I'd think of course there should be different rates for different people. Also, if you use machinery and equipment, be sure to budget for repairs and replacements. Sometimes getting a machine back up and running turns into a very expensive affair and you absolutely have to allow for that in your budget.

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    the bottom line is what the market will bear. Why is coffee $1.00 at Mcdonalds, $ 5.00 at starbucks? The market. The machine shop is the same way. production jobs you ususally have to quote as you are attempting- but one off tooling jobs or stuff with development- what works for me is a multiplication factor. simple easy low material cost low risk stuff- 3-4 times material usually works out. The more labor intensve, higher risk, the factor goes up. On stuff you figure has to be done once to try, then again to finish ( to deliver yet one ), double material price in the start.

    in the end a factor of incoming material price on jobs you did well on should be your target....whether thats double, triple, quadruple or more is up to you. If the client is not complaining don't be in a rush to charge them less. Obviously the price has to be competitive in your market and reasonable- but reasonable is harder to define than a factor of material.

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    Quote Originally Posted by wheelieking71 View Post
    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?
    The bigger volume shops I've been in (~$12 Million/year in sales) actually didn't do their accounting that differently than you did - the $/hr. numbers for the machines were just higher to cover the additional overhead. And in my experience, that's pretty much par for the course with engineering/design firms as well. We use $150/hr. for engineering and project management time for quoting purposes, but obviously no one is getting paid that much. It's just how overhead is accounted for.

    Let's say you have 4 spindles running a set number of hours - 8 a day, for the sake of argument. That means you have 32 hours of spindle time, per day. There's an average of 22 business days in a month. That means you have 704 hours of spindle time in an average month - call it 700 for easy math. If your monthly rent is 2100, that means if you wanted to account for your rent in your $/hr. of spindle time number, you would add $3/hr. to any of your spindle time rates. The same goes for every other fixed cost.

    Now, whether you work 5 days a week, or 7 days a week, 8 hours a day, or 16 hours a day, your rent doesn't change - meaning you can lower the impact of your rent on your $/hr. spindle rate by working more days, or more hours. But if you're paying hourly employees, you have to factor in overtime. And even if you're not, you have to factor in the value of your time.

    Then there's the whole 'Direct v. Indirect' time - if an employee is standing at a machine running a job for 8 hours, those 8 hours are easily accounted for and applied to the job directly. If your office manager works for 8 hours on quotes, payroll, invoices, paying bills, answering phones, etc. across all jobs and customers, those 8 hours are a lot harder to associate to any single job, which is why it is often referred to as indirect labor cost, or overhead. Of course, this is just one approach to accounting - there are many schools of thought on this. I just happen to be more familiar with these because it's typically how I've seen machine shops operate.

    If you're working on huuuuuge quotes (millions of dollars over the course of years) you have to have a fantastic handle on both your direct and indirect costs if you want to be profitable. And things that were indirect for a small shop can become direct in a big shop (like inspection time.) It goes from simple to mind-blowingly complex very quickly. Often times a significant amount of time and energy go into the quote, going so far as to program the part(s) and prove out the programs, all the while beating up your supplier network on material and tooling cost. The margins on a lot of this work are extremely thin, so you really need to be on your game.

    The rabbit hole is deeper than anyone realizes on this, and past a certain point, being successful as a machine shop has more to do with being good at business than being good at machining.

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    Quote Originally Posted by Johnny SolidWorks View Post
    and past a certain point, being successful as a machine shop has more to do with being good at business than being good at machining.
    This is true for any business. I grew up with many friends who had parents that owned companies. They were successful businesses, and the families did quite well. I've only met less than a handful of people who have built 'real' corporations- large businesses, greater than 500 employees with tens/hundreds of millions of dollars a year in revenue. I've spent quite a lot of time trying to discern what it is that separates a large business from a medium business, and a large part of it is knowledge of scaling a company. Operations change drastically once the scales are tipped into big business territory. Seems you need more lawsters and account admins than production personnel. Getting the work and retaining the work from other large co's and having the inertia to sustain customers stretching Net120 to Net300+ is essential.

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    Quote Originally Posted by Johnny SolidWorks View Post
    The bigger volume shops I've been in (~$12 Million/year in sales) actually didn't do their accounting that differently than you did - the $/hr. numbers for the machines were just higher to cover the additional overhead. And in my experience, that's pretty much par for the course with engineering/design firms as well. We use $150/hr. for engineering and project management time for quoting purposes, but obviously no one is getting paid that much. It's just how overhead is accounted for.

    Let's say you have 4 spindles running a set number of hours - 8 a day, for the sake of argument. That means you have 32 hours of spindle time, per day. There's an average of 22 business days in a month. That means you have 704 hours of spindle time in an average month - call it 700 for easy math. If your monthly rent is 2100, that means if you wanted to account for your rent in your $/hr. of spindle time number, you would add $3/hr. to any of your spindle time rates. The same goes for every other fixed cost.

    Now, whether you work 5 days a week, or 7 days a week, 8 hours a day, or 16 hours a day, your rent doesn't change - meaning you can lower the impact of your rent on your $/hr. spindle rate by working more days, or more hours. But if you're paying hourly employees, you have to factor in overtime. And even if you're not, you have to factor in the value of your time.

    Then there's the whole 'Direct v. Indirect' time - if an employee is standing at a machine running a job for 8 hours, those 8 hours are easily accounted for and applied to the job directly. If your office manager works for 8 hours on quotes, payroll, invoices, paying bills, answering phones, etc. across all jobs and customers, those 8 hours are a lot harder to associate to any single job, which is why it is often referred to as indirect labor cost, or overhead. Of course, this is just one approach to accounting - there are many schools of thought on this. I just happen to be more familiar with these because it's typically how I've seen machine shops operate.

    If you're working on huuuuuge quotes (millions of dollars over the course of years) you have to have a fantastic handle on both your direct and indirect costs if you want to be profitable. And things that were indirect for a small shop can become direct in a big shop (like inspection time.) It goes from simple to mind-blowingly complex very quickly. Often times a significant amount of time and energy go into the quote, going so far as to program the part(s) and prove out the programs, all the while beating up your supplier network on material and tooling cost. The margins on a lot of this work are extremely thin, so you really need to be on your game.

    The rabbit hole is deeper than anyone realizes on this, and past a certain point, being successful as a machine shop has more to do with being good at business than being good at machining.
    try 18billion... it really gets complicated then. Not easier, not better.

  13. #30
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    Charging different rates for different people is not uncommon. However, it rarely shows that way on a bill. Many shops will instead have different rates for different types of work. For example:
    Machining - $120/hr
    Fabricating - $90/hr
    Engineering/design - $150/hr
    Mechanic - $110/hr

    A customer will be less likely to question these different labor rate categories than saying George is $150/hr and Bob is $100/hr. Because frankly, if given the choice, they will want to pay for Bob.

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    Quote Originally Posted by Spruewell View Post
    A customer will be less likely to question these different labor rate categories than saying George is $150/hr and Bob is $100/hr. Because frankly, if given the choice, they will want to pay for Bob.
    but you forgot they want george class work for that price....

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  16. #32
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    A lot of folks have shared some really good advice here, I had to re-read your original post to grasp just how badly you had been doing your estimating.
    Amazing that the business lasted more than 6 months with that method.

    Some advice on things you asked that haven't really been covered, for that outside helper that comes in for four hours @25 per hour (your cost) you should be billing the shop rate for those four hours, not $100. Getting your head around that fact that each employee who works an hour on a specific job charges one hour of shop rate to that job is a key element in estimating, whether it is an owner or the new kid sweeping up after it's all done.

    The key thing with estimating is being able to break down a job into manageable portions and figuring out how long it will take to get it done, and then applying your shop rate and cost of materials. 10% on top of materials is not enough to cover handling time, 30 to 50% is more appropriate, that is why we buy from wholesalers not retailers, our customers may be able to buy the same materials as we do but they pay retail, we pay wholesale and add the markup, bringing it close to what they would pay retail.
    In the cabinet industry we have wholesalers who won't sell to individuals, only businesses and as businesses we get good pricing on the products because we buy a lot of product and don't usually fuss over the pricing. This allows us to add in a markup on the product.
    As an example for instance, I can buy really good drawers slides for about $25 per pair, at the retail stores they are close to $50 per pair, my customer may know that retail price so when I say the slides will cost about $50 per pair they are not surprised and I get a 100% markup without gouging the customer.

    Best to figure on 20 working days in a month and 11 months total to calculate your yearly overhead and then daily/hourly rate.
    It is incredibly helpful to know how much your daily shop rate should be when estimating as I often am working on projects where I estimate the number of days it will take which accounts for lost time answering the phone and all the other interruptions that happen.

    The biggest advertising gimmick in the world is to say that you provide free estimates, they are only free if the customer doesn't hire you, the next customer does pay though, for the previous estimate and their estimate. Estimates are automatically included in the cost of the job if you get the job. One rule of thumb is that you should be getting around 50% of the jobs you quote, if you are getting 100% then your prices are too low, if less than 25% then your prices are too high.

    You have been saying "NO" to all the smaller jobs by pricing too high with your old model of estimating, their is no need to overprice small jobs if your shop rate and estimating skills are sharp, small jobs can be profitable and can lead to bigger jobs.
    Don't ever be fooled into doing a small job because someone is promising a really big job after this small one is done, I call them snake oil customers and I can spot them a mile away, or a kilometre as I am in Canada. The customer will expect you to lose money on the big job after you lost money on the small one, not a good precedent to set.

    It is a challenge to estimate correctly, that is why it is an estimate. However if you give a customer a quote and you made a mistake, be honest, tell them you made a mistake but will honour the price you gave, this lets them know that you are honest and that if they do the job again it will cost more. Nothing wrong with that, too many shops charge more than their quote and that is simply wrong.

    Remember that some jobs go well and you will make more than your shop rate, some jobs go sideways and you make less, hopefully that results in just a small reduction in your shop rate for that job not a negative amount.

    That enough for now, getting late.

    Good luck with your estimating, I hope you find this helpful.

    Michael


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