Establishing a shop rate

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When adding an employee to your business, how do you adjust the shop rate? June 24, 2001

I have had a one-man shop for the past 9 years. My son will be joining my business this year. When figuring a rate for a job, do I now charge the shop rate times 2? Or is there another way I should do it?

Forum Responses
Just going with 2x the rate would be too much. If you charge someone for material and "shop rate" time, your shop rate needs to cover the expenses of your shop, not just your wage. Otherwise, who's paying for tools, electricity, insurance, etc? You are, out of your profit! Figure out what it costs to run your shop for an hour (a lot of this has got to be a rough guess).

rate = gross cost divided by hours

From the original questioner:
I did not ask the question clearly. I am not asking how much to charge. When going from 1 person working on a job to 2 people working on a job, how should this be billed or figured for estimates? When working out on a job site, say I charge $26 an hour for myself and when working in the shop, say I charge $50 per hour. When my son starts working on the job site, say I charge $16 per hour for him. When we both work in the shop do I add the $24 to the $16? If he is working in the shop on a job by himself, I would bill out $41. If we are both working on the same job, do I charge $91, $61 or an amount in between?

This is a tough one. First, if you have two people working on a job, one would presume it would get done in half the time. Wrong. And some things in the shop cost the same no matter how many guys are working. The cost per hour for you and your son would only increase by his wage and insurance cost. Shop rate is shop rate no matter who's there. You want to profit right? In the field, the client expects to pay the help less than the boss. And per man per hour seems to work best there.

I would establish "published rates"

Foreman - Field X dollars
Journeyman - Field X dollars
Laborer/Helper - Field X dollars

Then do the same for the shop, then bill the number of hours for each classification. I would also establish overtime, and double time rates. I included these rates in our contracts so there is no dispute when you are asked to work at night or overtime. Most of my contracts require rates. We also have machine time rates. If you pay on a merit system, theoretically if you pay someone 80% of the journeyman rate, they would take 25% longer to complete the same task. This way, you set your rates for your highest paid employees and if your merit system is accurate, your billing and estimating will work. There are many jobs where we go over on hours estimated but not on labor dollars.

I think your rates are a little low, but that's a policy decision. With the two of you, you are not covering "shop overhead" when you are in the field, but there is no one in the shop recovering shop overhead either. If I were you, I would use either the shop rate or a blend that works for you.

I think this is a great place to outsource some labor. Hire an accountant. You are going to need help in sound guidance of the financial functions and growth of your enterprise. A good and involved CPA can advise you and plot a future that includes your success and eventual retirement. The CPA as a part-time outsourced "employee" is not fixed overhead and has knowledge with numbers as you have knowledge in your trade.

Hours worked on a project should be billed at dollars per man hour. You might adjust the dollars for your son to account for less experience, but not too much. You still need to oversee everything.

Most CPA's seem pre-occupied with tax accounting.

A CPA is not just a person who computes your taxes! If a small business, for whatever reason, elects to have a "tax person" work for them to aid in filing taxes once a year, that is fine. If you want help in managing, running and profitably guiding your business growth and profit retention, hire a CPA, not a "tax person". Is your "tax person" a Certified Public Accountant or a bookkeeper?

I reviewed this subject with a business advisor from an Economic Development office, and she had an interesting twist. If you go to a garage to have work done, you pay $XX/hour. If doesn't matter who works on your auto, that's the rate. I know this doesn't translate as well as it should to the wood industry. It seems that we are always called to the mat on how much each person is billed.

Consider this: If you work time and materials, it can be a real chore to bill out different rates. You have 2 guys, each with 2 rates = 4 different prices for billing. Add another price level or employee and the list of rates can get out of hand.

If you're on the job, you have to remember that your shop still costs you money. Property taxes, equipment costs and inventory are still there at the end of the month, whether you were in the shop or not. You may feel that you're more efficient at the shop, and therefore worth more, but cutting your rates for installation is just leaving money on the table.

I have wrestled with this issue for the last 6 months, and have compromised by having one rate for myself, and one for each of the 2 employees. The rate is the same in the shop as it is on the job site. It has made billing a whole lot easier. I haven't heard any complaints from customers over the rate schedule, probably because we're very close to our estimated labor dollars on projects.

The only way to set your rates is to look at your yearly costs - charge enough to cover costs with a profit. If your customers don't think you're worth the price, you have to cut your costs, not your income.

As a backup to the suggestion to detail the man hour costs:

Last fall I had a first--refusal to pay on completion of a job. I took it to small claims court and the judge ruled that since I quoted $33 per hour as a rate, and I had a second person with me, that the customer who refused to pay for the additional person was within her rights. (Like I'm going to bring 5 guys on the job and only charge $33/hr). I guess this needs to be fully detailed prior to starting any job.

It was a split invoice job and she paid in full for both of our time on the first invoice. Then on final billing, she not only wouldn't pay for the help, but went back on the first invoice and deducted the help's hourly from what she owed me (my personal charge) for the second billing. It sure seemed that she set the precedent for accepting the terms by paying the first bill, yet the judge let her go back and change her mind on the terms.

Your original question is best solved with a shop rate that is billed for actual hours worked.

The main value of a CPA in this is to establish what are allowable costs with respect to tax law and what return on your investment is actually occurring. Are you making money or not? And if you are technically profitable, is that what you really want? Or do you want, as a business, to make money?

A huge problem in our industry is that shop owners in some way marry wages into their idea of profitability. Wages are expenses and along with all other costs, fixed and periodic, must be recovered before any profit is planned.

Profit is what you get above all those costs. I know companies in other industries whose shop rate exceeds $440 per hour. This rate seems unthinkable for woodworkers, but that is our fault, not our customers. Shop rate must take all fixed overheads (rent, insurance, utilities, etc.) and add in all standard costs, wages, taxes, impounds (Social Security workmen's comp, employee insurance programs, etc) and then add in sundry things like trucks, forklifts, etc. Divide this by the hours your business is open and you have a real shop rate. If you do the math you will understand why your shop rate needs to be higher than it is.

A list of my articles at WOODWEB's Knowledge Base can be generated by typing "Elvrum" in the search box found at the top of this page. Ditto Tony Noel's articles (type in "Noel"). For those interested in this topic, there is some definite "required reading" to be found in the Knowledge Base.

Jon Elvrum, forum technical advisor

First you need to figure out your rate based on the number of employees you have to cover overhead. You charge the rate per man per hour. Example: with a shop rate of 40/hr, if you have 2 men work on the job, you charge 80/hr. Remember to state 40 dollars per hour per man.

Be as efficient as you can, and charge as much as the market will bear. Don't give away the efficiency you've worked hard to achieve, capitalize on it!

Remember to charge in your overhead for hours lost per week (such as run here for this, stop and fix that, that phone ringing at the wrong time, etc). Most guys will lose out on some of their profit because of this. When your son works 40 hours a week, you may get 32 hours of work out of him if you're lucky.

I see a lot of guys charge less to install their work and I have no idea why they do this. Do they suddenly loose their skills when they go on a job site?