How to Calculate Your Shop Rate (With Worked Example)

Most shops set their hourly rate once, years ago, by asking what the shop down the road charges. Then the laser gets upgraded, wages go up, a second shift starts, and the number on the quote no longer has anything to do with what an hour actually costs. This guide shows how to build the rate from your own books, the way an estimator can defend line by line.

To calculate a shop rate, add up a year of overhead, direct labor and machine costs, divide by the hours you can actually bill (not 2,080 per person), then divide by one minus your target margin. Do it per work center, not as one blended number, because a $1M fiber laser and a manual saw cost very different amounts per hour to run. The worked example below takes a 25-person fab shop from its annual costs to five work-center rates.

What is a shop rate?

A shop rate is the price per hour a shop charges for time on a work center, set so that the hours you sell in a year cover labor, machines, overhead and profit. A blended shop rate is one rate for the whole shop. A work-center rate (also called a machine rate or burden rate) is a separate rate for each machine or cell, such as the laser, press brake, weld cell, CNC mill and manual assembly bench.

The rate is a cost-recovery tool, not a market price. Your market tells you whether you can win at that rate; your books tell you whether you can survive below it.

Blended shop rate vs per-work-center rates: which should you use?

Use per-work-center rates whenever your machines differ a lot in cost. A blended rate is fine for a shop where every hour looks the same, such as a small manual weld shop. As soon as one machine costs ten or twenty times more than the rest, a blended rate quietly moves money from one kind of job to another.

• Laser-heavy jobs (flat cut parts, nested blanks) get underpriced, because the blended rate spreads the laser's depreciation, service contract and assist gas across welders and assemblers.
• Labor-heavy jobs (weldments, hardware, kitting) get overpriced, because they carry a share of machine costs they never use. You lose those bids to shops that price them correctly.
• Your job mix decides whether you make money, not your rate. If you win more of what you underprice and lose more of what you overprice, a blended rate can cost you margin every year while looking reasonable.

How do you calculate a shop rate? The formulas

Every work-center rate is built from the same four parts: labor cost per billable hour, machine cost per billable hour, overhead per billable hour, and margin.

Billable hours = (Paid hours - PTO and holidays) x Utilization
Labor per hour = Loaded wage x Paid hours / Billable hours
Machine per hour = (Depreciation + Maintenance + Power and gas) / Work center billable hours
Overhead per hour = Overhead pool / Total shop billable hours
Cost rate = Labor + Machine + Overhead
Sell rate = Cost rate / (1 - Target margin)

1. 1

   Build the overhead pool

   Take last year's P&L (or this year's budget) and total every cost that is not direct labor, not material bought for a job and not tied to one machine: indirect salaries, rent, insurance, software, utilities, general supplies, professional fees.

2. 2

   Load the direct labor

   For each operator, take the hourly wage and add payroll taxes, benefits and workers' comp. A burden of 25% to 40% on top of wage is a common range for US fab shops.

3. 3

   Cost each machine

   For each work center, add annual depreciation (purchase price over a realistic life), service contracts and repairs, tooling, power and gas the machine burns whatever job is on it.

4. 4

   Count billable hours honestly

   Start from paid hours, take off PTO and holidays, then multiply by utilization: the share of the remaining hours that get charged to a job. Setup, waiting, rework, cleaning and training are not billable.

5. 5

   Allocate, add margin, check

   Spread overhead across billable hours, add each center's labor and machine cost, divide by one minus your margin, then sanity-check the rates against what you know you win and lose.

Worked example: shop rates for a 25-person fab shop

These are example figures for an invented shop; use your own. The shop has 25 people: 17 direct operators on the floor and 8 indirect staff (owner, two estimators, office, purchasing, quality, shipping, maintenance). It runs a fiber laser, two press brakes, a four-station weld cell, a vertical machining center and a manual and assembly area with a saw, drill press, deburr and hardware insertion.

Step 1: the overhead pool

Step 2: direct labor and billable hours

Operators average $28.00 an hour with a 30% burden, so the loaded wage is $36.40 and each operator costs $75,712 a year for 2,080 paid hours. Take off 144 hours of PTO and holidays and 1,936 hours remain. At 75% utilization, each operator bills 1,452 hours a year.

Billable hours = (2,080 - 144) x 0.75 = 1,452 per operator
Total billable = 17 operators x 1,452 = 24,684 hours
Labor per hour = $75,712 / 1,452 = $52.14
Overhead per hour = $1,200,000 / 24,684 = $48.61

Step 3: machine cost per work center

Weld wire and shielding gas are left out of the weld cell rate on purpose: they vary with the job, so they are costed per job. Our guide to pricing welding jobs shows how.

Step 4: the work-center rates

Same shop, same year, and the laser needs $230 an hour while the assembly bench needs $129. Quote everything at the blended $148 and the laser loses $82 on every hour it runs, while every assembly hour is priced $19 too high.

What is a typical machine shop or fabrication shop hourly rate?

Rates vary widely by region, equipment and job mix, so treat any range as a sanity check, not a target. In the US you will commonly hear manual fab and welding quoted somewhere around $75 to $150 an hour, press brakes in a similar or slightly higher band, CNC machining hourly rates from roughly $75 to $150 for 3-axis work and more for 5-axis, and fiber lasers well above that. If your calculated rate is far outside what you hear, check your utilization and overhead first; those are where most errors hide.

What are the most common shop rate mistakes?

• Dividing by 2,080 hours. Using 17 operators x 2,080 hours (35,360) in the example gives a blended cost rate of $82.55 instead of $118.25. Billed over the 24,684 hours the shop really sells, that rate recovers about $2.04M against $2.92M of cost: an $881,000 hole before any profit.
• Ignoring utilization. Even after PTO, no operator bills every hour on the clock. Setup, waiting for material, rework, meetings and cleaning all come out. Measure it from your time tracking, and if you have none, 65% to 80% is a common starting assumption for job shops.
• One rate for a $1M laser and a manual saw. The machine cost per hour in the example ranges from $2.30 to $83.63. A blended rate hides that spread and lets your job mix decide your profit.
• Leaving out depreciation. A paid-off machine still wears out and needs replacing. If the rate only covers cash costs, the replacement has to come from somewhere else.
• Confusing margin and markup. A 20% margin means dividing cost by 0.80 ($104.11 becomes $130.14). Multiplying cost by 1.20 gives a 20% markup, which is only a 16.7% margin.
• Counting consumables twice. If general shop supplies sit in the overhead pool, do not add them again on every job. Decide what is overhead and what is costed per job, and stick to it.
• Never updating it. Recalculate at least once a year, and whenever you add a machine, a shift or a raise round.

How do shop rates plug into each quote?

A quote's labor and machine cost is the time each operation takes on each work center, multiplied by that center's rate, summed across the routing. The time comes from your labor standards; the rate comes from the table above. Here is the difference per-center rates make on two parts from the example shop.

The laser part is quoted $41 too cheap, so you win it and lose money. The weldment is quoted $45 too high, so you lose it to a shop that prices welding correctly. Neither error shows up on the quote itself; it shows up a year later in the P&L.

Why should a quoting system store rates per work center?

Because a rate only helps if every estimator uses the same one, on every quote, for every operation. When rates live in a spreadsheet tab or in people's heads, two estimators quote the same part differently, old rates linger after a raise, and nobody can explain a price six months later. Store one rate per work center, attach it to each operation in the routing, and update it in one place when the numbers change.

This is how Customiser works. Your work-center rates, labor standards and material costs live in its Library. When an RFQ arrives, Customiser reads the drawings, routes each part through your own processes and costs every operation at that work center's rate, showing cost, sell price and margin per quantity, with every figure linked to the drawing it came from. The estimator reviews and approves the price before the quote goes out.

Whether you use software or a spreadsheet, the method is the same: build each rate from your own costs, divide by hours you can really bill, price each operation at the rate of the machine it runs on, and recheck the numbers every year. Do that and your quotes stop guessing at what an hour costs.