There are many elements that make up an estimate and subsequently a quotation to a potential customer. Accurate hourly charge out rates are an essential part of the estimating process and recovery of costs such as machines, labour and overheads, in addition to the direct costs, is necessary to have a profitable business.
What does an hourly rate consist of? The answer is likely to vary depending on the size and conditions of your business. Within manufacturing there are a large number of common factors affecting hourly rates that need to be considered in order to recoup costs and make profit. The purpose of this blog post is to provide an introduction to the process of calculating these figures and subsequently to provide you with the means to determine whether your current estimating procedures are suited to your company’s requirements.
The first consideration has to be your Overhead Cost. Some major overhead costs to consider could be indirect labour (e.g. administration employees) and annual facility costs. Some smaller but still sizeable details could include liability insurance, oils and chemicals and non-chargeable transport.
Once your overheads have been reviewed, the Cost of Equipment should be assessed next. For the items of equipment you have, consider the type, cost and payback periods to calculate a breakdown of your machine cost per annum/plant item, including any interest or maintenance charges. If the Cost of Equipment is calculated for individual machines/pieces of equipment these need to be added together. Annual power consumption costs, annualised tools and/or durable equipment costs should then be added on top to calculate your Total Cost of Equipment per annum for the business.
The third consideration is the Cost of Direct Labour. This includes the number of employees who run machines/equipment, labour costs per hour (including National Insurance and pensions), their working weeks per annum, average hours per week as well as the maximum number of pay weeks and maximum paid hours per annum. These figures then allow you to calculate your saleable hours, applying an estimated efficiency percentage too if needed.
Properly reviewing and calculating all of the above enables you to calculate your Overhead Hourly Rate for the business. This hourly rate is the amount required per hour of productive work to cover the business costs.
Finally you can calculate your Sales Hourly Rate, the amount you wish to charge for each of your productive hours for each cost centre or the business as a whole, in one of two ways; either profit margin as a percentage of revenue or as a percentage mark-up on costs.
Once set to an acceptable level, the Sales Hourly Rate for each resource in your business can be individually quoted, together with the additional costs such as materials, external treatments or supplies to form an accurate quotation. This can be done manually or utilising a specialised business tool, such as PSL Datatrack production control software.
Without accurate figures it is very difficult and time consuming to compare estimated versus actual costs to determine whether or not a product is being manufactured economically and profitably. Ensuring that your prices accurately reflect your costs is vital to the competitiveness and profitability of your entire business.
PSL Datatrack has its own hourly rates guide which expands upon each of the elements above and provides some illustrations to highlight the importance of getting each factor correct. If you would like a copy of the guide, please contact us.