Required Shop Rate for Target Profit Calculator
Most job shops pick a shop rate by looking at what the shop down the road charges. This calculator works the other way: it starts from what it costs to keep the shop open, divides by the hours you can realistically bill, and grosses the result up for the profit you want. The utilization sweep shows how fast the required rate climbs when billable time slips.
Your numbers
Operators, machinists, welders, assemblers who run billable work.
2080 is 52 weeks x 40 hours, before vacation and holidays.
Payroll taxes, health, 401k, workers comp and paid time off as a percent of wages.
Rent, utilities, depreciation, tooling, supervision, quality, office, insurance, software and SG&A.
Share of paid hours that actually land on a customer job after PTO, training, setup not billed, rework and idle time.
Your results
Planning model using fully loaded cost recovery: rate = total annual cost / billable hours, grossed up by 1 / (1 - target profit margin). It assumes overhead is fixed across the utilization range and that every billable hour sells at one blended rate. Real shops run different rates by machine; use a machine hour rate for capital-heavy equipment.
Required rate vs billable utilization
Sweeps Billable utilization of paid hours from 35 to 95, holding your other inputs fixed.
Shop rate from live ERP actuals
Optional: we can review how your ERP stores labor, overhead and job hours and show how to feed this calculation automatically.
Optional. The tool and every export work without this. No spam.
How to use it
Enter the number of direct employees, paid hours, average wage and fringe load from payroll. Then enter annual non-labor overhead from your income statement: everything that is not direct wages but is needed to run the building and the office. Set billable utilization from time-tracking data (billed job hours divided by paid hours). Finally pick the net profit you want as a percent of revenue. The primary result is the hourly rate that delivers it.
- Use last year's actuals for overhead, not budget, if you have them.
- Include owner salary above market pay as overhead only to the extent a hired manager would cost it.
- Re-run it at 5 points lower utilization to see your downside rate.
The formula and its assumptions
Total cost = direct wages + fringe + overhead. Billable hours = people x paid hours x utilization. Break-even rate = total cost / billable hours. Required rate = break-even rate / (1 - target profit margin). The last step matters: a 10 percent margin on revenue needs the price to be 1/0.9 times cost, which is an 11.1 percent markup, not 10 percent. Mixing the two is the most common reason shops under-recover.
Reading the utilization chart
Overhead and wages are mostly fixed in the short term, so each lost point of utilization spreads the same cost over fewer hours. On the default shop, moving from 70 to 60 percent utilization pushes the break-even rate up by roughly one sixth. If your quoted rate stays flat while utilization drops, the difference comes straight out of profit. The two lines on the chart show the gap you are protecting.
Common mistakes
Using paid hours instead of billable hours is the big one: a shop that divides cost by 2080 hours per person assumes every minute is sold. The second is leaving out indirect labor and supervisors, which hides a third of true overhead. The third is applying one rate to everything; a five-axis mill and a bench grinder should not share a rate. In ERP systems this blended number often becomes the labor and overhead rate on the routing, so errors here propagate into every standard cost.
Frequently Asked Questions
What utilization should a job shop assume?
Measure it rather than guess. Billed job hours divided by paid hours commonly lands between 55 and 80 percent for small machine shops, depending on how much setup, programming and rework goes unbilled. Start with your own time-tracking data from the last six to twelve months.
Is the shop rate the same as a machine hour rate?
No. A shop rate blends labor and overhead across the whole facility. A machine hour rate isolates the cost of owning and running one machine, including depreciation, power, tooling and maintenance, and is usually added to or replaces part of the blended rate for capital-intensive equipment.
Why is profit a percent of revenue here?
Because margin is measured against price. To earn a net profit of P percent of revenue, price must equal cost divided by one minus P. A markup of P percent on cost produces a smaller margin than P, so shops quoting a flat markup often miss their margin target.
Should material be included in the shop rate?
Generally not. Material and outside processing are usually priced separately with their own markup. The shop rate recovers labor, overhead and profit on the hours your people and equipment spend, which keeps the rate stable when material prices move.
If your ERP already holds payroll, overhead and job labor data, Netray can wire this calculation to live actuals so the shop rate and utilization update monthly without a spreadsheet.
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