Hourly Shop Rate, Overhead, and Labor Burden

      Shop owners discuss the factors that go into setting a profitable hourly shop rate. February 11, 2009

Question
Does anyone know what a good hourly rate to charge in my shop? I know that there are a lot of variables, I am in east Tennessee. Because I am doing this part time now and it’s just me the overhead is rather low, but I do not want to be accused of being an "undercutter".

Forum Responses
(Business and Management Forum)
From contributor W:
Assume that on Monday you were going to do this full-time. You would most likely have overhead to cover so you would need to account for all of your costs like rent, utilities, insurance, equipment repairs and maintenance, etc.

You would also have to account for your time whether you spend it in the shop or on the phone or with a customer. If you have employees, you would also have to account for their time, both productive and non-productive.

These costs must be covered as well as others that I will leave for you to figure out. Once you have those costs totaled and in hand, figure the number of hours you work a year.

Most normal people work somewhere around 2,080 hours a year. Some work more, others work less. Take your total annual costs and divide that by your total hours worked. This will give you an hourly rate that will cover your costs, but won't make you any money. Making money is an art/science, so there are variables that you will have to deduce on your own.

Shop rates vary between $40/hr for small garage shops who don't know how to make money or who are charitable-minded, to $125/hr for large production shops. The swing is substantial and too many variables make it difficult for anyone to tell you what you should be charging except for your customer, who will always tell you that you charge too much.

So, grab a piece of paper and a pencil and start figuring. At the end of the day, you will see just how valuable your skill is, who knows, you may make some money. The alternative is that you spend a great deal of time making a product that you lost money on, but made someone else very happy.

To add further confusion as to why it is difficult to use someone else’s shop rate, if you are a small shop and are charging $50/hour and it takes you 100 hours to build a product, your bill is $5,000.00. On the other hand, a production shop charges $80/hour, but the same project only takes that shop 30 hours to make, who just gets the order and who made money?



From contributor K:
Charge as much as you can. Every area has a different threshold. Ultimately you have to decide how much you want to make in a year doing what you’re doing. Be generous, you should make more than you would make working for any cabinet shop in your area.

Divide that number by 2,000 hours. This gives you your hourly wage. Figure out your overhead per hour just as contributor W laid out. Add the two together and that is your shop rate. Multiply that by 20% and that is what you should charge. The extra is profit and is vital to your success. You shouldn't be self employed if you don't make this. It's not worth the risk and headaches. Don't cheat yourself. Don't worry about the big shops.

Use your low overhead advantage right now to get the work, you need the experience and you'll work hard for these people. You are worth whatever you decide you’re worth and that is the bottom line. Ask yourself this question - can you afford to hire yourself? If not, you need to charge more. You should be able to afford your product.

The first couple of years will be lean but if you approach this with a business sense you will grow quickly and enjoy the woodworking much more.



From contributor A:
Theoretically you can bill 2,000 hours per year. However due to wasted time, meeting with customers, office hours, setting up machinery, maintenance, and etc you should base your hourly rate on a realistic 1,500-1,750 hours per year.

So if you wanted to bill 100k in labor per year you would be at $50/hr at 2000hr/year or $66 at 1500hr/year.

The real world is somewhere between these two scenarios for most small one man shops. My point is everyone is always thinking billable hours. Non billable hours eat into the hourly rate tremendously. The true shop rate takes everything into account.



From contributor J:
You're absolutely right. I'll bet 1,500 to 1,750 is a bit over the top. It was for me when I was working by myself. I love to talk too much and have never disciplined myself to throw salesmen out that I'm not going to buy anything from anyway. Then there's the cell phone and of course the computer (WOODWEB). My most productive hours were, and still are, when everybody else is sleeping.


From contributor A:
Everything you mentioned falls into the misc. stuff that we often waste time. I was referring more to the appropriate non billable like bookkeeping, shop maintenance and the like. The misc. stuff either brings you down to 1,500 hours or you work 50 hours every week. WOODWEB doesn't pay my bills directly, however it has been one of my best investments of time.

I am so glad I found this thread. I hate computing overhead in the above stated fashion, but did figure it out. It was bad. Our overhead rate went from $19.99 per hour in 2001 to $22.00 in 2004, but now since we have been working 32’s times 11 men it decreases work hours to divide by – from 23 K to 15K which brings overhead to $35.00 per hour. I feel bad that number is so high.



From contributor J:
Most of your calculations should boil down to average percentages (or something close). Whatever your hourly rates are you add between 7% - 18% for workers compensation - 16.30% is the average fixed overhead for 2008 (you may not have this if your independent). 16.00% is the average overhead rate for 2008. Profit is typically 15%.


From contributor O:
Here’s an example:

One person labor $40.00/hour
Workers Comp 16.20% $6.48
Fixed Overhead 16.30% $6.52
Overhead 16.00% $6.40
Profit 15% $6.00
Fully Burdened Rate $65.40



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