Guidelines for Calculating Machining Hourly Rate

We tout this fact all the time in our marketing ... at Kentech Inc. we are MACHINISTS ... we cut chips, we programmed, we ran shop floors for years ... then we became software engineers and designers and built software products we saw were lacking during those years. What we refer to as Real World Machine Shop Software. 

As a result, many of our clients come to us to take advantage of that experience ... especially those just starting out. Since quoting and estimating is one of the first tasks a new shop needs to get right ... we get asked quite a lot of questions about these areas. Our KipwareCYC® ( machining cycletime estimating software ) and KipwareQTE® ( cost estimating / quoting software ) titles are two of our most popular titles. One of the "hot" topics we encounter during online presentations of these titles is often concerning the cost to charge for a machining or a shop rate. So we thought it was a good time to add a blog post with some guidelines we feel are simple enough ... but important enough ... that can get you to an accurate figure.

Since many shops will utilize an hourly rate as a basis for charging for machining time, this post is dedicated to some helpful guidelines on how to calculate that machining hourly rate. Below are some points we consider important when calculating the hourly rate for a particular machine. The areas requiring calculations include :

Equipment – Cost Per Hour of Operation ... a common formula :
(machine purchase cost + expected lifetime maintenance cost) / expected hours of operating life.

Direct Labor Cost per Hour ... a common formula :
(total annual labor costs + taxes + benefits + paid time off) / (total annual hours worked – breaks and training time)

Overhead Cost Per Hour  :
Any costs not directly involved in machining a part is overhead. These include costs for administrative staff salary, equipment, furniture, building lease, maintenance and office supplies. Calculate the annual costs of these, then divide by total labor or machine hours for the year. This will be your overhead cost per hour

Once the above costs are calculated … you can use the formulas and guidelines below to arrive at either a
“general” shop hourly rate or an hourly rate based on a specific piece of equipment.

General Machine Shop Hourly Rate ... a common formula :
Average overall shop rate = (average machine cost per hour + labor and overhead cost per hour) x markup

Machine Specific Hourly Rate ... a common formula :
(specific machine(s) cost per hour + labor + overhead cost per hour) x markup

Somewhat simplified ... and usually a work in progress as factors may change. It is important to gather all the figures in the formulas above as best you can ... as accurate as you can ... and to keep tabs on any factors that may change along the way.

Kenney Skonieczny - President
Kentech Inc.

You can check our all our Real World Machine Shop Software at our website :

www.KentechInc.com