Do you wonder why some of your best work doesn’t produce a profit worthy of the quality that you deliver? If rework or pricing pressure from the customer is the issue, you know what you have to fix. But what if that’s not the problem? Could it be a flawed shop rate? An inaccurate or out-of-date shop rate can easily destroy all the profit that a job should produce.
Here are three tips that can help you get the profit your work deserves!
Shop rate is a really important piece of arithmetic. Lay out a template to make sure you recalculate yours the same way every time. That way you will know you’ve covered everything that should be included, and you can compare your newest calculation with the prior ones for variances that may indicate a boost in costs that could hurt your margins if not included in your next bid. And of course if you’re not closely tracking labor costs for everything you produce, the result will be largely meaningless.
When you use your shop rate for bidding new work, the rate you bid has to cover everything. So your calculation process should include everything as a part of your shop rate. That means not only direct costs of manufacturing, but also overhead, marketing, selling, general and administrative expenses. AND your profit margin! Think of it this way: your shop rate is the price tag on your products, and your customer is going to pay what’s on the price tag. No add-ons or extras. If you don’t build a profit into your price tag, you’re subsidizing your customer’s profits instead of yours.
Because costs change and employee productivity goes up and down, you should keep on top of your shop rate to ensure that it’s as current as it can be. I strongly recommend a quarterly review against your actual costs and labor productivity. When your financial books are closed and reports done, this calculation takes only a few minutes to do, and the peace of mind it provides is priceless.
As always, I welcome your comments and feedback.
