Q.
I have had a one-man shop for the past 9 years. My son will be joining my business this year. When figuring a rate for a job, do I now charge the shop rate times 2? Or is there another way I should do it?
Forum Responses
Just going with 2x the rate would be too much. If you charge someone for material and "shop rate" time, your shop rate needs to cover the expenses of your shop, not just your wage. Otherwise, who's paying for tools, electricity, insurance, etc? You are, out of your profit! Figure out what it costs to run your shop for an hour (a lot of this has got to be a rough guess).
Then do the same for the shop, then bill the number of hours for each classification. I would also establish overtime, and double time rates. I included these rates in our contracts so there is no dispute when you are asked to work at night or overtime. Most of my contracts require rates. We also have machine time rates. If you pay on a merit system, theoretically if you pay someone 80% of the journeyman rate, they would take 25% longer to complete the same task. This way, you set your rates for your highest paid employees and if your merit system is accurate, your billing and estimating will work. There are many jobs where we go over on hours estimated but not on labor dollars.
I think your rates are a little low, but that's a policy decision. With the two of you, you are not covering "shop overhead" when you are in the field, but there is no one in the shop recovering shop overhead either. If I were you, I would use either the shop rate or a blend that works for you.
Most CPA's seem pre-occupied with tax accounting.
Consider this: If you work time and materials, it can be a real chore to bill out different rates. You have 2 guys, each with 2 rates = 4 different prices for billing. Add another price level or employee and the list of rates can get out of hand.
If you're on the job, you have to remember that your shop still costs you money. Property taxes, equipment costs and inventory are still there at the end of the month, whether you were in the shop or not. You may feel that you're more efficient at the shop, and therefore worth more, but cutting your rates for installation is just leaving money on the table.
I have wrestled with this issue for the last 6 months, and have compromised by having one rate for myself, and one for each of the 2 employees. The rate is the same in the shop as it is on the job site. It has made billing a whole lot easier. I haven't heard any complaints from customers over the rate schedule, probably because we're very close to our estimated labor dollars on projects.
The only way to set your rates is to look at your yearly costs - charge enough to cover costs with a profit. If your customers don't think you're worth the price, you have to cut your costs, not your income.
Last fall I had a first--refusal to pay on completion of a job. I took it to small claims court and the judge ruled that since I quoted $33 per hour as a rate, and I had a second person with me, that the customer who refused to pay for the additional person was within her rights. (Like I'm going to bring 5 guys on the job and only charge $33/hr). I guess this needs to be fully detailed prior to starting any job.
It was a split invoice job and she paid in full for both of our time on the first invoice. Then on final billing, she not only wouldn't pay for the help, but went back on the first invoice and deducted the help's hourly from what she owed me (my personal charge) for the second billing. It sure seemed that she set the precedent for accepting the terms by paying the first bill, yet the judge let her go back and change her mind on the terms.
The main value of a CPA in this is to establish what are allowable costs with respect to tax law and what return on your investment is actually occurring. Are you making money or not? And if you are technically profitable, is that what you really want? Or do you want, as a business, to make money?
A huge problem in our industry is that shop owners in some way marry wages into their idea of profitability. Wages are expenses and along with all other costs, fixed and periodic, must be recovered before any profit is planned.
Profit is what you get above all those costs. I know companies in other industries whose shop rate exceeds $440 per hour. This rate seems unthinkable for woodworkers, but that is our fault, not our customers. Shop rate must take all fixed overheads (rent, insurance, utilities, etc.) and add in all standard costs, wages, taxes, impounds (Social Security workmen's comp, employee insurance programs, etc) and then add in sundry things like trucks, forklifts, etc. Divide this by the hours your business is open and you have a real shop rate. If you do the math you will understand why your shop rate needs to be higher than it is.
A list of my articles at WOODWEB's Knowledge Base can be generated by typing "Elvrum" in the search box found at the top of this page. Ditto Tony Noel's articles (type in "Noel"). For those interested in this topic, there is some definite "required reading" to be found in the Knowledge Base.
Jon Elvrum, forum technical advisor
I see a lot of guys charge less to install their work and I have no idea why they do this. Do they suddenly loose their skills when they go on a job site?
