Discussion Shop/labor/machine rates

[White Haus]

I'm wondering if you guys can help me out with something I've been struggling with for a while and I'm at a dead end.
We're having a close look at our expenses and overhead, and just wanting to make sure we're charging enough to cover our overhead and make enough profit. The previous thread about install rates was somewhat helpful but I'm more concerned about in-house labor and equipment rates than anything.
In the past we've worked around the "shoot from the hip" approach which seems to be common in our industry but I want to get some accurate numbers going.

Let's say, for example, our annual overhead (including all expenses/salaries etc. - everything but COGS) is $250,000.
Break that down to 49 working weeks a year x40 hours a week = 1960 working hours a year.
Annual overhead of $250,000 + 40% target profit goal = $350,000 / 1960 hours = $178.57 / hour.
(I came across this 40% profit idea in a couple of spots - not really sure how this compares when you factor in markup on COGS and other factors, but going with it for now)

So we know our "shop rate" should be $180ish an hour. Okay so that's good.

Now where I'm lost, is how does that "shop rate" factor in billable hours per person or piece of equipment? We can't just bill $180/hr on all our projects. Or can we?

There are some hours where no equipment or people are billing out, and there are times where we have 2 employees and 4-5 pieces of equipment running & billing out.

With some adjustments and exceptions, we bill out at roughly $90/hour per person, then $60ish/hour for printers and $95/hour for CNC. Some jobs will require 1 person and 1 piece of equipment, and some will require 2 people and 4 pieces of equipment.

Is it just a law of averages that needs to be applied here?

We quickly ran some numbers and figured out the average amount that we bill out per week (labor + machine time) and it came in a hair higher than what we would need to meet our "shop rate" goal of $180/hr.

Is that good enough? How closely do you guys monitor and adjust this in your shops?

My gut tells me that our rates are pretty close to where they need to be, and that I'm overthinking this, but I it also bugs me that it seems so complicated. We're also not really factoring depreciation on the equipment etc....but then again a majority of our equipment is paid off.

Thoughts? Comments? Suggestions? Insults?

Thanks in advance, I welcome and appreciate any thoughts on this. I know it's been discussed before but I couldn't find a final answer that helped me wrap my head around this.

 

[Texas_Signmaker]

I guess if it were me I'd look at what my profit margin was at the end of the year. (Or monthly) If you are where you need to be then I guess you're doing it right. From what I've heard around here.. 20% seems to be the norm. You MUST be taking in equipment depreciation / replacement into account. I put a small percentage away in a separate account dedicated to equipment repairs / replacement. That way when something expensive takes a shit, the $ is there and it's no big deal...just a part of business. I hear you on making it too complex though...but billing everything at one flat rate might cause you to loose bids on some things, and leave $ on the table for others.

 

[White Haus]

I guess if it were me I'd look at what my profit margin was at the end of the year. (Or monthly) If you are where you need to be then I guess you're doing it right. From what I've heard around here.. 20% seems to be the norm. You MUST be taking in equipment depreciation / replacement into account. I put a small percentage away in a separate account dedicated to equipment repairs / replacement. That way when something expensive takes a ****, the $ is there and it's no big deal...just a part of business. I hear you on making it too complex though...but billing everything at one flat rate might cause you to loose bids on some things, and leave $ on the table for others.

Thanks for the reply, much appreciated. When you mention 20% profit margin - are you talking net? I guess I could talk to our accountants about depreciation schedules etc. for equipment but I feel like that would be more for tax purposes, they have no idea how long well maintained print equipment can last. We don't set aside money for annual/emergency maintenance on the equipment but always have money to cover it every year and expect it to be roughly $x every year, barring any catastrophic failures.

 

[Texas_Signmaker]

Thanks for the reply, much appreciated. When you mention 20% profit margin - are you talking net? I guess I could talk to our accountants about depreciation schedules etc. for equipment but I feel like that would be more for tax purposes, they have no idea how long well maintained print equipment can last. We don't set aside money for annual/emergency maintenance on the equipment but always have money to cover it every year and expect it to be roughly $x every year, barring any catastrophic failures.

Yes, Net. I don't have a separate shop so my Net is much higher, but from what I can recall in earlier threads it seemed that most were around 20% if I remember correctly. I had a conversation with the owner of one of the large shops in my market and he was around 20% Net too. That's after everything (including his wage) is all said and done.

 

[victor bogdanov]

For me it depends on how busy we are, when very busy I don't do any discounts, prices go up a little when I quote, if not busy I'd rather do a job at a discount than risk not getting it due to price.

 

[White Haus]

Yes, Net. I don't have a separate shop so my Net is much higher, but from what I can recall in earlier threads it seemed that most were around 20% if I remember correctly. I had a conversation with the owner of one of the large shops in my market and he was around 20% Net too. That's after everything (including his wage) is all said and done.

Thanks. That's a nice healthy margin, something to aim for I guess. There are definitely some months were we hit that but on average (on a normal year) we're around 10-15% net at the end of the year.

 

[White Haus]

For me it depends on how busy we are, when very busy I don't do any discounts, prices go up a little when I quote, if not busy I'd rather do a job at a discount than risk not getting it due to price.

Thanks. I know where you're coming from but looking for something a bit more sophisticated than adjusting prices based on current workload.

 

[Notarealsignguy]

I take, gross payroll and tax, mortgage, all insurance, utilities, machine payment/depreciation, an amount for facility maintenance and break it all down to a weekly cost. Then, break it down to cost per hour, per employee. Keep in mind that if each person works 40 hrs, they're not going to actually bill 40 so don't cut yourself short.
For us, we have 5 shop employees plus me and someone in the office. We work 50 hours a week. So I take that cost (which includes overtime) and divide it by 35 then divide by 5. 35 gives them each 15 hrs/wk screw off time without getting in my pocket. I'm not technically a revenue producing employee and neither is the admin so the shop workers have to cover my cost. I do actually work and bill out my time but that's gravy. If I ever don't want to, then I will still have a paycheck. Most everyone bills out over 40hrs each so there's some more gravy.
As far as cogs, that's not overhead. That's factored into your job. We add a percentage in each bill, like an auto repair place, for shop supplies that don't get picked up in cogs. They are demand dependent, overhead isn't.
Each job has a time sheet and it takes materials and puts a markup on it and then labor hours and marks it up. Then at the end I have an actual cost for the job and a target price at the margins I set.

 

[GB2]

I use a POS software for my printing company, which assigns a machine rate to every piece of equipment and a labor rate to operate the equipment in every process. I think this is in line with your thought process. The formulas to calculate all of this also accounts for overhead and profit but I must say I find it a bit complicated and confusing as to how it works but supposedly it does.

 

[Notarealsignguy]

I use a POS software for my printing company, which assigns a machine rate to every piece of equipment and a labor rate to operate the equipment in every process. I think this is in line with your thought process. The formulas to calculate all of this also accounts for overhead and profit but I must say I find it a bit complicated and confusing as to how it works but supposedly it does.

Can you account for utilization of each machine?

 

[FireSprint.com]

First, let me say that how you figure this out is part of your business's "Secret Sauce" there isn't a truly correct answer here, just what works for you.

I think you're on a good path. It's good that you have a goal of clearing $350k after cost of goods. Your idea of $180/hr shop rate seems pretty good to me. Your breakdown also seems reasonable.

Yes, the law of averages is kind of where we live.

Also, I don't think you are "Overthinking" this. You need to be thinking about this kind of stuff all the time as a business owner. That being said, it does sound like you are overstressing about this a little. You're never going to get it just right, but that why you aim for a 40% profit. That keeps you afloat if you mess up a little.

A couple of points that I'm sure you understand:

1.) If you are operating at 100% capacity across your entire shop, you should be well over your shop rate per hour. Say 2x or even 3x. This is needed to make up for down time and seasonal slow downs.
2.) While the shop rate might be the target on average, keep in mind, it may be a good idea to take a job a well below the shop rate if your alternative is doing nothing during that time. This can help the bottom from dropping out of your averages. For example, we have our published pricing on our website, and we pretty much stick to that all the time. But, if you called, and wanted 5,000 screen printed signs yard signs in January, we might sell you the signs at cost just to keep our screen print team busy. We're paying full time wages, loan payments, and admin costs whether the presses are running or not.

 

[ColorCrest]

Can you account for utilization of each machine?

A “charge out rate” is a data point bound to a component / resource (machine, labor, material) and used as a starting value where a quoted line item’s specifics such as qty, size, etc., determines the utilization. Besides costs of machines (purchase price, financing, service agreements, etc.), some machines also require productivity to be measured as a time parameter to be used in calculations. Good software use charge out rates for every key component of custom, made-to-order products.

So, yes, utilization of machines may be measured and analyzed for each line item quoted, sold, including any instances of variances and exceptions if necessary.

 

[ColorCrest]

Notice the term "costs" is plural. Somebody determined this $18K printer would really cost $27.5K over the three years. Software uses the hourly rate shown here as part of a formula for every line item quoted to arrive at a price of the product which requires the machine.

 

[ColorCrest]

I've posted the attached graphic sometime ago...

 

[White Haus]

Thanks guys, really appreciate the input! Been absolutely swamped but will review all this and report back. Definitely some gold in those replies.

 

[ColorCrest]

Annual overhead of $250,000 + 40% target profit goal = $350,000

One does not typically target the profit on overhead but rather the profit on sales. If you were to add 40% to your overhead of $250,000, your total billing would be $350,000 but the $100,000 would be ~28% of sales and not 40% as you might expect.

EDITED TO ADD: So, is the method to add 40% to overhead a novice or expert "secret sauce" (as FireSprint has mentioned) to appear as a more realistic ~25% profit margin manufacturing business to bankers and lenders who are looking for such percentages? Beats me.

 

[Notarealsignguy]

One does not typically target the profit on overhead but rather the profit on sales. If you were to add 40% to your overhead of $250,000, your total billing would be $350,000 but the $100,000 would be ~28% of sales and not 40% as you might expect.

EDITED TO ADD: So, is the method to add 40% to overhead a novice or expert "secret sauce" (as FireSprint has mentioned) to appear as a more realistic ~25% profit margin manufacturing business to bankers and lenders who are looking for such percentages? Beats me.

COGS is not overhead so I don't see how you could reliably use this method. Depreciation is also an indirect cost which would make this method look good on paper but poor in reality in an equipment intensive business.