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Reply by clin

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Posted on Calculating Overhead & Shop Rate

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clin

1121 posts in 1880 days


#1 posted 05-07-2019 04:58 PM

There’s way too much in this to cover in a post in a forum. I’ve had my own non-woodworker business for 30+ years now and have experience in this area. Overhead is typically a percentage of hours worked, not cost of materials. If a cost changes with materials, it is a cost of the material, not overhead.

Be sure to spread the overhead over the number of hours you can actual bill to projects. You probably spend a lot more time doing things not specific to a job than you might think. Things like shopping for supplies, bookkeeping, cleaning the shop, maintaining tools. If you really track this, having only 50% of your time be actually working on a specific project is probably not too far off. That means the other part of your time is part of overhead.

Doing all this based on yearly costs (rent, insurance etc.) and yearly hours is common.

However, I agree with sgcz75b (that rolls of the tongue doesn’t it). In the end, you’re selling items. Your not a shop contracting out your time. If you do it that way, in the end you’re little more than an employee and could just as well work for someone else.

So all of the calculations should just be a way for you to estimate a cost for producing an item. A reality check so you make sure to charge enough. But you shouldn’t let that determine what you sell it for. That should only help you find the MINIMUM amount.

If you do custom, one-off jobs, there are always unknowns. My experience was that my first time estimate was always my most accurate. After that I was just justifying why I could do it in less hours and regretting it later. There’s almost always something that comes up unexpected and wastes your time.

In these cases you will have jobs that go smoothly and you make easier money. Other times you will have jobs that eat your lunch. So just suck it up when you charged too little, and don’t feel guilty when it goes easier than expected. Hopefully it will balance out in the end, and with experience you will reduce the errors you make.

When it comes to items that you produce regularly, keep in mind that you will get more efficient producing them. Your production time will drop. That doesn’t mean you should lower your price. Let the market dictate that. If the market will allow you to sell it at 10X the price you can produce it for. Sell it for that price. If the market dictates your minimum price is still too high, then sell something else.

I assume your plan is to make very high quality items. People will pay for quality, but oddly charging too little can affect their perception of quality. Often you will make more money selling fewer items at a much higher markup. You’re never going to compete with mass produced goods, so I wouldn’t even try.

Keep in mind that if you don’t lose some sales due to having too high a price, then your prices are too low.

-- Clin


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