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Calculating Overhead & Shop Rate

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Forum topic by lblankenship posted 05-06-2019 09:15 PM 1366 views 0 times favorited 27 replies Add to Favorites Watch
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lblankenship

53 posts in 1132 days


05-06-2019 09:15 PM

Topic tags/keywords: pricing quoting estimate costs overhead hourly rate rates

Hey guys,

I just submitted my first official quote for my business and I wanted to get your thoughts regarding overhead and shop rates.

I’m a one man shop and operate out of a one car garage on our property so in reality my overhead isn’t too crazy. The only fixed costs for overhead I have are insurance and electric, everything else is variable like screws, glue, maintenance, etc.

I’ve read through plenty of articles on pricing your work on here and other sites. One really good one I saw on here this guy mentioned calculating fixed overhead vs administrative overhead (% of fixed overhead). However, I have trouble doing this as I can’t definitively say I will work 25 hours every month since this is a very early and part-time business.

I also saw other places say to do your overhead at 15-20% of your cost of materials & labor and that’s why I went with for this quote. However I’m now wondering if that makes the most sense so here’s what I’m thinking.

Example bid:
$100 materials + $140 labor ($35/hr @ 4 hours) .2 = $48 Overhead

Example bid 2:
$300 materials + $140 labor ($35/hr @ 4 hours)
.2 = $88 Overhead

However wouldn’t my overhead technically be the same for both of these bids? The only difference is the cost of materials. I guess you could argue a higher material cost doesn’t always mean more expensive materials but could also mean a higher quantity of materials used.

Now if I add a profit of 20% to both of those my totals would come out to be:

Bid 1: $345.60 (Profit of $33.60)
Bid 2: $633.60 (Profit of $105.60)

Now when trying to calculate my shop rate (labor cost, overhead & profit divided by # of hours) it seems I won’t ever have a consistent shop rate and it will vary from project to project.

Bid 1 Shop Rate: $61.40
Bid 2 Shop Rate: $71.00

Is this method of calculating overhead too from the hip? I’m wondering what your thoughts are on this and if you think this could lead to overcharging for overhead costs.

In the past doing non-commission pieces I would model everything up so I know exactly how much material and can estimate my hours. I prefer this approach rather than just having a $50 shop rate plus materials because even after taking out a $35 hourly labor rate there’s still $15 out there to be considered overhead/profit and no real straight forward way to put how much in each bucket appropriately. If you have a set shop rate of $X is that typically how you operate?

That was way longer than I expected and I hope I got my point across as to what I’m asking for guidance on. Thanks in advance for your advice. I really appreciate it.


27 replies so far

View Jeff Heath's profile

Jeff Heath

107 posts in 3928 days


#1 posted 05-06-2019 09:36 PM

I’ll be happy to try and help you, as I’ve been self employed for 30 years. I honestly can say I have no idea what you’re talking about, though.

It sounds like you are trying to come up with some phantom way of calculating an overhead expense of your business that doesn’t actually exist.

My advise to you is to try and not over complicate the accounting. As you said, you have fixed costs, and variable costs. The more you work in your shop, the more your costs will go up, but hopefully, so will your commissions.

Focus on what you can charge for whatever your product is (cabinets or furniture, or ?), and subtract your actual hard costs for your workshop, utilities, glue, screws, etc….and whatever is left is your labor. If you’re not making enough, and you can’t work faster, then you need to charge more to survive.

Don’t let the accounting get in the way of making your business work. Calculate your exact costs, and know what they are, and account for them. You will very quickly be able to adjust your fees if need be.

-- Jeff Heath

View John Smith's profile

John Smith

2695 posts in 1021 days


#2 posted 05-06-2019 10:20 PM

Blankenship: what have you placed your bid on ?
what kind of projects will you most likely be doing in the future ?

.

.

-- there is no educational alternative to having a front row seat in the School of Hard Knocks. --

View lblankenship's profile

lblankenship

53 posts in 1132 days


#3 posted 05-07-2019 01:08 AM


I ll be happy to try and help you, as I ve been self employed for 30 years. I honestly can say I have no idea what you re talking about, though.

It sounds like you are trying to come up with some phantom way of calculating an overhead expense of your business that doesn t actually exist.

My advise to you is to try and not over complicate the accounting. As you said, you have fixed costs, and variable costs. The more you work in your shop, the more your costs will go up, but hopefully, so will your commissions.

Focus on what you can charge for whatever your product is (cabinets or furniture, or ?), and subtract your actual hard costs for your workshop, utilities, glue, screws, etc….and whatever is left is your labor. If you re not making enough, and you can t work faster, then you need to charge more to survive.

Don t let the accounting get in the way of making your business work. Calculate your exact costs, and know what they are, and account for them. You will very quickly be able to adjust your fees if need be.

- Jeff Heath

Here is an article from Rockler that is pretty much the method I am attempting. I looked around at various methods though to see the advantages and disadvantages of each and I just sort of fell on this method.

https://www.rockler.com/how-to/set-price-woodworking-projects-home-workshop


Blankenship: what have you placed your bid on ?
what kind of projects will you most likely be doing in the future ?

.

.

- John Smith

I quote a wall mounted media console. The console is 48”(W)x10”(H)x14.25(D). The console would be made of 1/2” maple ply doubled up to be near a 1” overall thickness then the edges would be covered with 1/4” thick maple strips. The console has one partition with an adjustable shelf and the whole thing will be mounted to the wall on a french cleat. I’ve added a picture of my rendering. Example bid 1 is what the quote I came up with for this piece.

$100 materials + $140 labor ($35/hr @ 4 hours) + $48 overhead + $33.60 profit = $345.60 pretax.

My plan is to focus on indoor residential furniture (dining/coffee/side tables, built in cabinetry, benches, chairs, book cases, etc.). However, I’m not against doing outdoor furniture or branching out into working for more commercial type clients. The later just wont be my focus starting out.

View sgcz75b's profile

sgcz75b

72 posts in 619 days


#4 posted 05-07-2019 01:23 AM

In my career in creative arts, I never bid any job on my time. I bid on the project.

I loved bidding against those who tried to calculate their time. They always lost.

I could bid $2000 for a project and it might take me four hours or less to do.

Those that bid their time, if they got the project, consistently screwed themselves.

I ran my business for twenty years until I retired at 56 (though I still consult for clients of my choosing). Those that charged for their time ran their business into the poor house in about 4 years. No one who was in the same business as me when I started was in the same business when I retired. Not one.

Bidding on your time in a self-employed business is a sure road to financial failure.

Of course, you may be different and I might be wrong, but experience tells me otherwise.

-- "A dying people tolerates the present, rejects the future, and finds its satisfactions in past greatness and half remembered glory" - John Steinbeck

View CWWoodworking's profile (online now)

CWWoodworking

1041 posts in 1037 days


#5 posted 05-07-2019 01:27 AM

I think your formula is ok. Just be open to adjusting.

But it’s gonna be hard to figure out if your charging enough to “make it” full time without being full time.

There is the monthly unexpected almost every month for me. Something always is braking/needs replaced. You won’t get this till your going through serious material. At least I didn’t.

If you want to do this full time, you may want to spend some time focusing on where your orders are going to come from. Doing small odd jobs to the public is a rough business IMO. I think it’s hard to get a constant flow of work.

Good luck.

View sgcz75b's profile

sgcz75b

72 posts in 619 days


#6 posted 05-07-2019 01:44 AM

There’s the business of being great at your trade.

There’s the business of being great at business.

Mediocre tradesmen make good money because they are great at business.

There are master craftsmen who make works of art and starve because they suck at business.

If you’re not better at the business side than the trade side, you’ll constantly be chasing every dollar, going deeper in debt, and living life on the edge of ruin.

I’m not saying these things to discourage you, but to point out what exuberance often overlooks.

-- "A dying people tolerates the present, rejects the future, and finds its satisfactions in past greatness and half remembered glory" - John Steinbeck

View lblankenship's profile

lblankenship

53 posts in 1132 days


#7 posted 05-07-2019 01:48 AM



In my career in creative arts, I never bid any job on my time. I bid on the project.

I loved bidding against those who tried to calculate their time. They always lost.

I could bid $2000 for a project and it might take me four hours or less to do.

Those that bid their time, if they got the project, consistently screwed themselves.

I ran my business for twenty years until I retired at 56 (though I still consult for clients of my choosing). Those that charged for their time ran their business into the poor house in about 4 years. No one who was in the same business as me when I started was in the same business when I retired. Not one.

Bidding on your time in a self-employed business is a sure road to financial failure.

Of course, you may be different and I might be wrong, but experience tells me otherwise.

- sgcz75b

So what was the reason behind your bids? You mentioned the project but anything specific about it? Level of effort? How cool/interesting the project was?

How was it when you started out? Did you find you couldn’t be as selective because you had to pay the Bill’s? Then after building yourself up in the market you could choose to be more selective?


I think your formula is ok. Just be open to adjusting.

But it’s gonna be hard to figure out if your charging enough to “make it” full time without being full time.

There is the monthly unexpected almost every month for me. Something always is braking/needs replaced. You won’t get this till your going through serious material. At least I didn’t.

If you want to do this full time, you may want to spend some time focusing on where your orders are going to come from. Doing small odd jobs to the public is a rough business IMO. I think it’s hard to get a constant flow of work.

Good luck.

- CWWoodworking

Good to know. Yeah I have also been trying to think on that as well. There’s a local woodworker close to me who mentioned he started doing residential stuff but it wasn’t consistent enough and now he primarily does work for businesses.

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sgcz75b

72 posts in 619 days


#8 posted 05-07-2019 02:06 AM

So what was the reason behind your bids? You mentioned the project but anything specific about it? Level of effort? How cool/interesting the project was?

”People needed certain services. I was good – good at my craft and good at selling myself. I had a portfolio of outstanding work that I had created without a client on my own. If the money was right I made the project interesting.”

How was it when you started out? Did you find you couldn t be as selective because you had to pay the Bill s? Then after building yourself up in the market you could choose to be more selective?

I did primarily commercial work. I researched clients before meeting with them. I knew their style. I did my homework. I knew who they had hired before me and what that person charged. I knew my competition’s weaknesses. I never looked hungry. I dressed for the meeting, was professional, and did all I could to signal my abilities. It worked 50-60% of the time, and that was enough to make me completely debt free at age 44 and able to retire at 56.

I also turned down projects when I smelled a client who would nickle-and-dime me to death. I fired clients who didn’t pay within 60 days, or were a bitch to work with. I never let a client dictate my standards. If you do word gets around and you become the low-price whipping boy. Charging too little is far worse than charging too much.

When you charge by time, the client thinks they own you and will constantly be checking on you as you’re on THEIR clock. Fry cooks at McDonald’s charge for their time.

Charging by the project means I give them a completed project. No discussions about time.

I also studied business for hours every day for 6 months prior to starting. There were others who were just as talented, but I was talented at my craft and the business end. That’s what made the difference.

No offense, but the fact you’re coming to an online woodworking forum to get opinions on what and how to charge tells me you have a great deal to learn about business. That’s amateurish at best and amateurs in business get eaten.

Spend more time studying business than you do in the shop. Or work in the shop, enjoy it, but don’t attempt to make a decent living at it.

It’s all up to you.

-- "A dying people tolerates the present, rejects the future, and finds its satisfactions in past greatness and half remembered glory" - John Steinbeck

View CWWoodworking's profile (online now)

CWWoodworking

1041 posts in 1037 days


#9 posted 05-07-2019 02:22 AM

I started out trying to sell direct to public. It was a disaster and I quickly realized their was no money in it, in my area. Other areas maybe different.

I lucked out and had a wholesale opportunity plopped on my lap as I was getting out of selling direct. Used my old ties in the furniture industry and created/found a niche. It still took(takes) a ton of work to get business. Honestly sales is the only thing I worry about.

View Scap's profile

Scap

128 posts in 785 days


#10 posted 05-07-2019 02:28 AM


Now if I add a profit of 20% to both of those my totals would come out to be:

Bid 1: $345.60 (Profit of $33.60)
Bid 2: $633.60 (Profit of $105.60)

- lblankenship

I can’t help with your base question, but wanted to point out that you’re shorting yourself on profit if you do the markup method.

Instead, calculate the margin you’d like to make.
Take your cost and divide that number by (1-percent profit expressed as a decimal) for actual margin.

Example
20% profit margin on $100 is 100/(1-0.20)= $125.00
36% profit margin on $100 is 100/(0.64)= $156.25

Profit margin is calculated off (sale price minus cost) divided by sale price x 100.
If you’re adding 20% to cost, your margin is 16.67%

Also, the 20% values you listed above don’t jive with the sell price from what I can tell.
20% on $345 should be $69 and $633 would be $126.60

View lblankenship's profile

lblankenship

53 posts in 1132 days


#11 posted 05-07-2019 12:54 PM

Thanks everyone for the responses so far. This is all really helpful, I want to try and get started off on the right foot so I appreciate all of your insight.


I started out trying to sell direct to public. It was a disaster and I quickly realized their was no money in it, in my area. Other areas maybe different.

I lucked out and had a wholesale opportunity plopped on my lap as I was getting out of selling direct. Used my old ties in the furniture industry and created/found a niche. It still took(takes) a ton of work to get business. Honestly sales is the only thing I worry about.

- CWWoodworking

That’s good to know, when you started out did you attempt selling custom made to order pieces or did you have an inventory of items that you made and then sold almost like a storefront setting? I feel like a storefront inventory type approach is just asking for disaster especially when starting out so I was wanting to stick with making pieces as the orders come in.

Now if I add a profit of 20% to both of those my totals would come out to be:

Bid 1: $345.60 (Profit of $33.60)
Bid 2: $633.60 (Profit of $105.60)

- lblankenship

I can t help with your base question, but wanted to point out that you re shorting yourself on profit if you do the markup method.

Instead, calculate the margin you d like to make.
Take your cost and divide that number by (1-percent profit expressed as a decimal) for actual margin.

Example
20% profit margin on $100 is 100/(1-0.20)= $125.00
36% profit margin on $100 is 100/(0.64)= $156.25

Profit margin is calculated off (sale price minus cost) divided by sale price x 100.
If you re adding 20% to cost, your margin is 16.67%

Also, the 20% values you listed above don t jive with the sell price from what I can tell.
20% on $345 should be $69 and $633 would be $126.60

- Scap

Interesting. Yes, I think I might have entered the wrong $. I was typing a lot and I think I miscalculated. Here is the formula I did to come with my quote.

materials + labor + overhead + profit = Sale Price

$100 + $140 + $48 + 57.60 = $345.60

Overhead is (materials + labor) x .2

Profit is (materials + labor + overhead) x .2

I looked at is as my total cost to make the piece was materials + labor + overhead which in this case was $288 then multiplying that by .2 for 20% would give me a clear 20% profit after I have covered all expenses and paid myself. However, now looking at what you’re saying I guess I did a 20% markup rather than “profit”.

Thank you for bringing this to my attention. It probably would have taken me awhile to realize this.

View Scap's profile

Scap

128 posts in 785 days


#12 posted 05-07-2019 01:48 PM


I looked at is as my total cost to make the piece was materials + labor + overhead which in this case was $288 then multiplying that by .2 for 20% would give me a clear 20% profit after I have covered all expenses and paid myself. However, now looking at what you re saying I guess I did a 20% markup rather than “profit”.

Thank you for bringing this to my attention. It probably would have taken me awhile to realize this.

- lblankenship

No worries. I resell for a living, so markup vs margin got “real” for me real quick when my paycheck was suddenly 100% commission.

Another aspect to consider is that overhead may be a somewhat fixed value, but it’s a variable percentage of each project.

Let’s say you have a fixed overhead expense of $1000 a month (lights, payroll, CPA). But you’re only doing a single $1000 project this month. The overhead is 100% for that project. Next month you do a $10,000 project, now overhead is only 10%.

So something to consider in your bid matrix would be to look at your overhead amount on your spreadsheet. Does it make sense to use a flat 20% or should you override the amount and enter a flat value?

Also, margins are a moving target. You might only factor single digits margins on a huge job, but small jobs should necessarily have higher margins. Which is why many shops have minimums in place. It’s just too expensive to setup for a single one off piece versus a production run.

These are morning coffee ramblings, so it may not apply to your situation.

Good luck with your venture.

View clin's profile

clin

1121 posts in 1854 days


#13 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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lblankenship

53 posts in 1132 days


#14 posted 05-08-2019 01:24 AM

Thanks Scap & Clin, I think you both made some good points that I will keep in mind. Thanks again to everyone else as well, this has all been very helpful and I feel like I have a better perspective now as I continue forward.

View Rich's profile (online now)

Rich

5913 posts in 1448 days


#15 posted 05-08-2019 04:09 AM

I usually shoot for four times cost. I’m working a 90” bathroom vanity order and after ordering the sheet goods, lumber (walnut) and Blum hardware, I’m at 23% of the agreed upon price. Works for me.

-- Half of what we read or hear about finishing is right. We just don’t know which half! — Bob Flexner

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