Setting a Shop Rate for Labor Time

      Business owners describe the methods they use to value and charge for shop time. November 19, 2005

Question
I am a 1 man shop located in CT, just starting out. I do custom woodwork and installation (cabinets, shelves, furniture, mantels, this sort of thing). My work is not high end and not low end. I know what my shop rate needs to be to make this business work. I have crunched the numbers, figured in the labor and overhead, etc. the way it has been described here so many times. I figure I need to make about $50/hour to be just making it. What is the going shop rate for this kind of work in CT? Do you have different shop rates for each process, like milling, finishing, install, etc? If so, what are they? Like I said, I know what I need to make an hour in order to make this work - I am just not sure if I am in the right ballpark. If I am too high or too low, I need to reassess my numbers and look at my process in more detail. I know my competition is out there answering this question, but I need to know where I am. Any info will be greatly appreciated.

Forum Responses
(Business and Management Forum)
I've got a small shop in Southeastern CT. I do mostly high end (beaded FF, inset doors, Blumotion, etc.). The necessary hourly rate is obviously an individual thing based on your particular overhead, etc. If someone walks in the door, my shop rate is currently $50/hour. I charge my GC $45 for both installs/shop. But 90% of my work is fixed price contract. When bidding, I estimate at $55, then mark up.



There are two trains of thought on calculating per hour charges. They both start off with the overall yearly cost of doing business plus profit. Profit is what you make for working on the business and salary is what you make for working in the business. Make sure your salary is included in your operating costs, then add on profit.

Here are the two different ways.
1. You can calculate every single hour it takes to process a project including meetings, proposals, billing, materials ordering, materials handling, parts processing, loading and delivery, install, shop cleanup and maintenance, and bill for every single hour. Calculating this way will make sure you cover all the bases and have an accurate proposal. However, this is a major pain and time killer to get a proposal together. The following is how I bid. This is based on tracking time spent on every single man hour it takes to run the business and figuring out how many man hours actually go into building a project - "billable hours".

2. Take all the hours from the first way and separate the hours that are actually spent on just building the project and calculate the percentage of time spent building compared to overall time.

Example:
Phone calls, meetings, proposal writing, drawings, cutlists, etc. - 14 hours
Materials ordering, unloading, and billing - 3 hours
Actual hands on construction and finishing hours - 60
Clean shop. Load and deliver job - 3 hours

This is a total of 80 hours spent on the project. However, the actual time spent to build - "billable hours" - is only 60 or 75% of the total time. Or, for every hour you actually work, you need to bill for 1.33 hours. So, based on your calculations of $50 an hour, you bill out at $66.67 per hour for working hours.

Everyone's situation will be different and every project will fluctuate in how many actual buildable hours there are. In our case, when averaged over a year for every 40 hours put in, only 30 hours are spent actually working on a project. So this is the way we bid, and we do "free deliveries". Customer is happy and does not need to know that operating costs for delivery have been figured into the hourly rate.

At the moment our rate is $75 an hour. We are in NJ. I think costs would be pretty comparable to CT.



It is impossible to state what your shop rate should be. If you only have a band saw, it would have to be very low or you would never get a job. If you have a CNC machine, it would have to be much higher to cover your capital investment. You can only sell your work for so much money - it really is market value driven. The best pricing method is to price your work by the units you produce. For example, x dollars per box, door, drawer, face frame, installation, etc. As you purchase more equipment, your selling price will remain the same. Your hours to build will go down and your hourly rate will go up. This will also provide a big incentive for you to increase your efficiency and thereby increase your rate. This will mean, in the beginning, your hourly rate will be low, but as you grow, your hourly rate will increase past the $50.00 per hour mark. Hope this helps. Pricing is the hardest thing I do.


I'm also in NJ, targeting and doing very high end work. (It's important to *do* high end work.)

My contracts say that any additional work not included in the contract will be billable at $125.00 per hour plus materials. (Surprisingly, lots of people pay it.)

I seldom estimate using this figure, though. I use a linear foot/subjective pricing/what-are-you-willing-to-spend? type of guideline. I always ask for a budget, explaining that I can fill this wall with cabinets for $5,000 or $50,000. I continue to explain that without a budget, I am unwilling to even discuss design (which I will charge for), and perhaps they should contact someone else. My presentation and appearance is professional and polished (wedding ring, Rolex, nice clothes, etc.). Try to schedule meetings in the evening with both decision makers. Don't show up in the work truck (unless it's very presentable) - it's the first impression you'll make. Even your wife's minivan looks better than a beat up pickup truck. Play hard to get and exclusive, target the high end stuff. If you believe you're worth more than the competition (I don't believe I have any, and that any job is mine if I want it), then prospective customers will believe it, too. They'll also be willing to spend more to get you.

I was a one man garage shop 7 years ago and dreamed of the day I might own an edgebander. I've got one now, and I own the building it sits in, lots of other cool tools (shopping for a CNC router), employ 3 people (I need 2 more), and work on residential projects in excess of $250,000. We are booked through 2005.

My point is this: a "shop rate" is just a number. In order to grow your business, you have to make more than "enough to get by." I often say that I'm not building cabinets, I'm building an empire.



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