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Determining shop hourly rates, and jobs that fall under that rate

Econdron

Hot Rolled
Joined
May 31, 2013
Location
Illinois
I've been established as a business for a couple years now, so it's easier for me to determine what my expenses are and what my hourly rates need to be. That said, I did the math and took my average monthly expenses, divided that by 22 working days per month, divided by the number of employees, then by 8 hours per day and came up with about $63/hr in expenses. My typical shop rates are $80/hr, so that makes sense to me.

However, I have some jobs that I've been doing for years now. I just re-evaluated those and came up with them making about $50/hr. They're recurring jobs, pretty simple to do, I just don't charge very much for it. So my question is, when I look at these jobs and see that I'm charging less than my average hourly expenses, does that mean I need to try and raise the price on that job? Or does that average hourly expense not mean anything as it takes all the other job materials into account? I think I just answered my own question, but I'd like to hear some insight on this.
 
Sounds like you have an average shop expense of $63/hr and an average shop billing rate of $80/hr.

You have found a simple job that you only make $50/hr on. So it's below average. I'd see if I had some better jobs where you made $75. We already know it averages out to $63/hr for all jobs that year.

Having a $63/hr cost and billing $80/hr sounds pretty good to me. It basically says each guy is making you $17/hr. But before I started booking that Carribean vacation, I would want to know how many payroll hours were in that month vs. how many billable hours I had that month.

It's like my Daddy said about full time help. "He's always there. Even when you have nothing for him to do, he's still there".
 
There's a non-cash value to the steady jobs. Although they pay below your calculated shop costs, they are always there to pay for your fixed costs. While you would go broke if they were your only jobs, think about your financial situation if they suddenly went away. Would you have work to fill the hole?
 
You are to a good start....

The term is "OCPH" or operations cost per hour or per head count where you take every cost of having the store open for all available "sellable hours" and divide it by those hours.

If you have more than one productive person then their hours are added in.

You do not add in any sellable material but yiu do add in non itemize consumables as they are not sold do to speak.

Not done yet...

Look at expected and actual productivity as nobody runs 100% and may have a goal of 90% but actually maybe 70%.

Using 70% then 30% of your sellable hours are lost as pure cost and must be made up before profit.

So your net 0 hourly rate must be enough to cover the full sellable day in 70% of the day to break even.

Now you determine your expected labor profit and result is shop rate.

That is basic starting point and if the results are too high for market then costs or profit margin is too high.

That is why cost reduction is focus..

Sent from my SAMSUNG-SGH-I337Z using Tapatalk
 
As CatMan said, it's all about utilization. You're not getting 8 hours of billable work out of your employees every day. There are the big items (vacation, sick time, etc.) and the little items (bathroom breaks, meetings, cleaning up).

It's often easier to look at these things on a yearly basis, as 22 days per month is a bit high, that gives you 2112 working hours per year, where the standard number is 2080 (the number most people use) or 2087 (the number the feds use).

As an example, start with 52 weeks per year, take 1 week off for sick time, 2 weeks off for vacation, that leaves 49 weeks or 245 days. In an 8 hour day, you lose 15 minutes morning and afternoon to miscellaneous things, and 15 minutes to clean up at the end of the day. That takes you down to about 85% billability, which would put your actual costs at about $74 per working hour.

The other thing to keep in mind is fixed vs. variable costs. Your rent is a fixed cost. material, cutting tools, overtime are all variable costs. Let's say your $50/hr job runs 10 hours a month. If you drop it, your revenue goes down $500, but your costs don't go down $630.
 
far as i know, 70%work time delivers 30% profit : question is if one can reject those parts / tasks that consume 70% of the work time :)
 
However, I have some jobs that I've been doing for years now. I just re-evaluated those and came up with them making about $50/hr. They're recurring jobs, pretty simple to do, I just don't charge very much for it. So my question is, when I look at these jobs and see that I'm charging less than my average hourly expenses, does that mean I need to try and raise the price on that job?

It means you need to figure out how to do those jobs FASTER, or with more automation and less "attended" operations.
You didn't elaborate on what's involved, but if they are "pretty simple" they should have room for improvement.
 
Without explaining your equipment listed and number of employees and what you make your numbers are pretty meaningless. I have a CNC Swiss that on the right job can run unattended for up to 8 hrs at a time, by spending 5 minutes 3 times in a 24 hour period the machine could run 23.75 hours a day. If a person had a shop with multiple scenarios like that each employee could earn multiple times the hypothetical shop rate. On the other hand if you are an all manual tool and die shop when people stop turning handles all work stops.
 
Read about fixed versus marginal costs. Averages may not tell you much.

And of course, as suggested above - order mix, and differential pricing. To illustrate this, think about airline seats.

An airplane flying from Boston to Seattle is more like your shop than you think. Costs a great deal to procure it and get it running. Lots of ongoing costs to keep it running. And most of all, any given flight (like any given day in your shop) is a perishable resource. Either they filled the seats (you had all staff and machinery booked) or some of that resource was wasted (costly machine sat idle, staff stood around looking at it)

Which all helps explain why airline seat pricing is so complicated. The nicest seats (rush jobs, close tolerance jobs, etc) provide most of the revenue to break even. But in general don't fill the plane every flight. So various seats (staff time and machine time) are offered at various prices, trying to make sure the flight makes maximum revenue. Which is why if the plane has empty seats and is not overbooked, you can often walk up and get a seat pretty cheap - empty that seat generates $0[1]. Filling it with you adds some incremental cost $I, if they get you to pay $I+anything they are ahead.

Time on your machines, time of your staff, etc., are like airline seats - use it productively or its gone. Oh, the machine will be there tomorrow, the staff will come back, etc.

[1] The airline industry has lots of funky subsidies, contract constraints, and so forth, so an empty seat might kind of sort of be making revenue because it met some requirement which caused various federal subsidies to be paid - especially for service into smaller airports. But in many industries, your shop might have similar funky rules - e.g. you have some contract that demands you keep staff/machines/stock on reserve, so they "make money" while simply hanging out ready.
 
Pretty sure material isn't supposed to be part of the hourly rate expense, sounded like you put it in there.
And yes every job should be priced to make some money and looked at once in a while. I've weeded out a few things to make room for better work that earns more.
 
A couple of thoughts. Maybe you are still doing those low margin parts because no one else wants to lose money on them! Filling unused capacity you have to pay for no matter what means even an under performing job improves your total profit. I suggest reading the 'The Goal' for some more insight on this.
 
Pretty sure material isn't supposed to be part of the hourly rate expense, sounded like you put it in there.
And yes every job should be priced to make some money and looked at once in a while. I've weeded out a few things to make room for better work that earns more.

The only material that should be worked into an hourly expense is what you keep in stock that has a low turnover, but is necessary for emergency jobs.

If you buy a $100000 piece of Vespel that needs one hole drilled in it for one job, its going to blow your expenses way out of proportion.
 
IMHO this is were averaging falls flat on its face. Your $50 a hour jobs if only using low end equipment and employees with little consumed power or tooling probably are turning a lot bigger profit than your averaging suggests. I know for a fact some of my lower paying but common as muck jobs are were i make the best returns.

Its one of the key reasons i hate the time and material approach to billing its just not how costs truly add up in the real world!
 
My "shop rate" when calculating a part cost varies with the type of work, material, what machine it's done on and who its for/urgency.
Careful what tooling is part of your base shop rate, and what tooling gets billed on top to a job or you could eat your entire shoprate in tool wear.

Anyway... back to work, turns out there's 30-31 days in a month and its nice to bill every one of them at 10-12hrs/day.
 
I tend not to increase prices on old work unless stock increases. Old work generally fades away and I have usually quoted an initial qty including programming and an initial stock buy. AS time goes on, I am confidant of quantities, so I can buy stock at attractive prices[or use it for multiple jobs] so the stock cost is actually lower than expected.

Is the customer a 'grinder'? Always 'can you do better'? If not, I choose not to be a grinder back, unless the job is a real time sink.
 
If your expenses are $63.00/hr and your charging $50/hr you definitely don't want too much of that work unless you really want to take a whole lot of time off on a permanent basis.

That said...if your guys are all busy making $80/hr and you have an open machine that can run a job at 50/hr pretty much unattended...that's a sweet job.
That sweet job can also keep your material sales up...better pricing on material, gives you something to tack onto a Rush job that comes in, but not quite enough material for a good order...add a few bars for stock as you know you'll use it.
That sweet job can also be used to fill in when you don't have 80/hr work for your guys...or there is a hold, machine goes down...50/hr is 50/hr more then nothing.
That sweet job can keep door open for more 80/hr work with your customer.

If you can figure a way to turn that 50/hr work into 80-90/ hr with new tooling, finding a better process...win win.


Down side is if you need to stop 80/hr work to meet deadlines of 50hr work...that hurts bottom line fast.

I used to do lots of service work, billed it atl east twice the rate of production...it was killing me. Good money, but took me away from 3-4 machines running at production rate...also I was not on top of quotes and programming so we found ourselves is a bottleneck for next day or so...not to mention service work is physically demanding. I'd bust my hump for a couple days, have a fat check and lose a bunch of smaller checks costing me overall.

Now IF I could have done both...sweet icing.

Sometimes you can do those 50/hr jobs in between and stock the parts. Provided you can get a blanket order...machine runs a few hours after hours or a weekend your sitting in shop doing paperwork or maintenance...could be free money...sort of.


Now the flip...if it's actually costing you money to run the job as in your expenses are 63/ hr and your bringing in 50/hr for that work...Maybe it is time to stop that work and devote that time into finding better work...or just go fishing.
 
That $63/hr counted in everything. ALL expenses. That $50/hr job only accounted for job profit divided by time spent. I'm now seeing I'm not really comparing apples to apples. Because if I accounted for materials in that job, that $50/hr job actually turns into a $200/Hr job (lots of metal, little work). So yeah, averages literally mean nothing in this case.
 
There's a non-cash value to the steady jobs. Although they pay below your calculated shop costs, they are always there to pay for your fixed costs. While you would go broke if they were your only jobs, think about your financial situation if they suddenly went away. Would you have work to fill the hole?

You are 100% right, its often called contribution margin and it should be paid attention to. I'll disagree on the non cash bit though, its crucial to cash flow.

Suppose all costs, fixed and variable, work out to $63/h. If you are not going to send an employee home for lack of work, or its just you, your actual variable costs might be very low, perhaps not much more than just consumables, wear and tear and electricity. Suppose they were $10 in hour - IF an hour was otherwise going to be squandered, you'd to better to take an $11/h job than do nothing - it has a $1 contribution.

Obviously you'd go broke if everything was at that rate, but if your dance cards not full, taking on a job with positive contribution is much better than doing nothing.

I've some work that is almost zero contribution, I still do it because its better sending the guys home
 








 
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