forged dollar sign

How to Figure Your Hourly Shop Rate or Day Rate

forged dollar signWhether you want to charge a day rate for your labor or an hourly rate, this post is a good exercise to help you figure out what to charge to keep your bills paid, how to set your income goals, and grow your maker business.

As makers and artists, our process is not always easily figured by the day, or by the hour. We often have down time waiting for glue and finishes to dry. Many painters will paint the back ground on one painting then set it aside to dry, while it is drying they work on a different painting. As a result some projects may take 8 hours to create but is created over a course of several days. If this is how you work it may be better to price a project, as an hourly rate over a day rate method. Since this is how I work, for this article I will be referring most often to figuring an hourly rate. If you want to charge by a day rate you can easily multiply how many hours you work in a day to get your day rate.

If you are unsure of how many hours it will take you to complete a project, refer to my article about how to figure and keep track of your time so you can make an educated estimate on how long a project will take.

Billable hours v.s. Non Billable hours

The first step to figure your shop rate is to separate what hours are billable to the client and what hours are spent on non-billable task. Non billable task would include things such as marketing, accounting, updating your website and social media sites. Basically any activity you do for your business that one would not normally charge a client for or figure in as part of their bid. Billable hours are the tasks you do directly for your client, such as painting, sanding, assembling, etc.

To figure out how much time you spend on each you need to pay attention and keep track of what you do day to day. For example, every morning I spend 2 hours, responding to emails, promoting my business on social media, bidding new work, and accounting tasks. The rest of my day I spend in the shop working on clients jobs. For this example let’s say I work a 40 hour week. Therefore, 10 hours a week are spent on non-billable tasks and 30 hours a week on billable task. Assuming we will take 2 weeks off for vacation, we will end up with a total of 50 weeks we can bill for at 30 hours per week. That gives us a total of 1,500 billable hours (30 billable hrs. X 50 weeks = 1,500 billable hrs.)

Now that we have an estimate of how many hours we are able to bill clients for each year we need to make a salary goal. How much do we want to make a year, for this example I am going to use $100,000 a year salary, because everybody wants to make a six-figure income. You need to come up with a realistic goal for yourself.

To find how much to charge an hour we need to divided our goal by our total yearly billable hours. $100,000/1,500 billable hrs. = $66.67 an hr. By only dividing by our billable hours we account for getting paid for the non-billable hours we work, assuming we work the 40hr week. If we bill for 30 hours a week at the $66.67 an hour we will hit our goal of $100,000 salary by the end of the year.

Figuring Your Overhead

However, we are not done, $66.67 an hr. this is only our base rate, we have other expenses such as overhead. For every hour we are working in our shops we have to pay for the heat and lights being on, and we have to pay rent/mortgage on the shop space. We may have insurance costs and other overhead costs that need to be payed for. To run a successful business these cost need to be figured in and billed as part of our hourly shop rate.

Below is a chart on how to calculate your overhead.
Since this article is geared towards small makers and artists, I have configured the chart to track overhead as a home based business. If you are operating your shop in a location outside of your home you will want to change most of the percentage to 100%
How to calculate overhead for your maker business(Total overhead of $8,132.02 / $1,500 Billable hrs. = $5.42 of overhead an hr. Then add $5.42 to our base hourly rate to of $66.67 to get $72.09 an hr to bill to your customers)

The above chart is just an example You can download a free Excel file complete with all the formulas you need to input your own numbers.

How to come up with the numbers for your chart.

If you are using your garage as your maker space it would be unrealistic to figure out how much electricity you are using for just your garage versus the rest of the house. To estimate these kinds of costs we will use the IRS’s formula for home business deductions to estimate the costs that are shared with your home.

In this example we have a 2000 sq. ft. house. Most house listings do not include the garage square footage in their estimates so you will need to add the garage square footage to your homes total square footage. For this example you have an 800 sq. foot garage, so your total sq. footage is 2800.

Assume you use the entire garage for your maker business. To find the percentage of your home you use for your business divide your makerspace aka the garage by the total square footage of your house, 800/2800=0.29 so you use 29% of your home as your business. (this formula is included in the free download)

Below are some examples of overhead expenses you should include.

Mortgage/rent

You may be thinking, even if I didn’t have a business at home I would still have to pay the same amount of mortgage/rent on my garage. Why would I add it as part of my hourly rate? Why would you not. If you didn’t have your business in that space you could use it for something else. Parking your car in the driveway, out in the weather is most certainly adding wear and tear to the paint job. Those freezing cold nights are affecting the battery in a negative way. All that crap you have in the storage unit you are renting could be stored in the garage. These are the hidden costs that affect you personally, and should be accounted for.  Add your yearly mortgage costs to the chart.

Electricity

Because putting a separate meter on just your garage to track your electricity usage would not be practical, use the same IRS formula to estimate your electricity costs. Add up your yearly electricity bills and them to the chart.

Natural Gas.

There is a good chance you use gas to heat the spaces in your home as well as to heat the hot water, that you use to clean up those paint brushes and other supplies. Include this on your chart.

Trash Service 

Running a home based business creates more trash than a normal house hold. I typically add a 42 gallon contractor bag of just sawdust from the dust collector to my weekly trash pickup. Trash needs to be added to your overhead cost.

Internet

How are you posting your YouTube videos and promoting your business without the internet? This is also a part of your overhead.

Phone Bill

You have to have the ability to call customers and vendors and they need to be able to call you. This is overhead.

Insurance

As your business grows you are going to want protection incase anything goes wrong. Even if you don’t have insurance yet, it’s a good idea to charge for it like you need it so you can afford it when it comes time. Call an insurance company tell them what you plan to do for business and get a quote. This is a direct business expense not a portion of your household expenses and should be added to your overhead costs as 100%

Homeowners/ renters insurance

Many homeowners and renters insurance policies cover insuring a hobby business’s tools in case of theft and fire. They may also cover the unfortunate event if something in your shop where to ever burn your house down. Figure this as a percentage of your overhead. Depending on how your mortgage is structured this may already be included in your monthly payment.

Ongoing direct business expenses

You need to make enough money to cover all your expenses so be sure to charge for all direct business expenses at 100% in the above chart.
Examples of this includes:
Web Hosting/domain registration fees, Bank fees, subscriptions such as Photoshop, or Microsoft office. Whatever else you pay for on an ongoing basis to keep your business going. Excluding materials or items you bill directly to your customer, materials need to be a separate line item when figuring your project costs for customers.

The above are just examples, be sure to think through your business needs and add to or subtract items on the chart based out your particular situation.

At the bottom of the chart I have shown how to convert your overhead into an hourly charge to be added to your hourly rate.

Add Profit

Now that we have identified all the overhead of costs and figured them out by the billable hours we can add it to our base hourly rate; overheard per hr. + base rate = almost their.

Almost their? Yes, there is still more. The biggest mistake most small business owners make is confusing the money they pay themselves as profit. Your salary is a business expense even if you are a sole proprietor. If you pay yourself a salary and use your salary to pay your living expenses, are you going to have any money left over to reinvest in your business? How are you going to grow your business? What are you going to do if that drill or other power tool brakes and you don’t have any money to buy a new one? How are you going to increase productivity, if you don’t have money to upgrade that contractor table saw to a cabinet saw? This is what adding a profit to your products and labor is for; use it to grow your business, and save it for a rainy day.

How much profit you can add will be determined by how fast you want to grow your business, and what the market can bear? If you crochet doilies, to decorate peoples coffee tables, and it takes you a full day to crochet one doily at a day rate of $1000 plus materials. You could be in trouble, and you need to re-think the product you are selling, how you make them, how you market them, and what you are able to charge for a day or hourly rate.

Let’s be honest, unless these doilies are signed by famous people or made of gold thread spun by Rumpelstiltskin, you are not likely going to be able to sell many at a $1,000 plus. This is where a lot of businesses fail. They are not honest with themselves, and think they can sell their products and services at a higher rate than what the perceived value is.

I plan to write a post on perceived value in the future, but let’s finish this post off with a few real world examples.

What’s Your Minimum 

Now that you have your new hourly rate based on your goal of what you want to make as a salary per year, plus your overhead costs and profit. You may be thinking that nobody is going to pay that high of a rate.  So let’s look at the other extreme. What is the minimum you need, to pay your bills and sustain a reasonably comfortable standard of living?

To figure this out, you need to look at all your expenses. There are some really simple household accounting software such as quicken, that will help you track your expenses so you can see where your money goes. How much goes to food, rent, the electric bill, childcare etc. Use those numbers to make a household budget for the year. These yearly expenses that keep you alive is your bare minimum salary. Be sure to figure in your income taxes, the IRS is like the honey badger.

To figure your barebones hourly rate take your yearly household expenses and divide by your total billable hours, then add your overhead costs. (this formula is included in the free download) This is your bottom line hourly rate. You should never take a job that does not at least pay this rate or you will not make enough money to pay your bills.

Now Let’s Put it all together

This is typically how it goes in building custom furniture. A client approaches you and says they want a coffee table built and they have a $1000 dollar budget. You figure the materials at $300, leaving you $700 for labor and profit. Because you read my last post about keeping track of your time you know it will take you about 20 hours to build this project. Based on our example, your goal is to make $102.98 an hr.  However, charging that an hour for this job blows the customers budget but $700 divided by 20 hours is $35 an hour which is above your minimum labor requirements. Now you know it is safe to take the job on if you have an opening in your schedule.

Of course if you spend 20 hours working for less than $102.98 you won’t reach your goal unless you start working longer than a 40 hours a week. In the real world it is unlikely that you will have the ideal profit margin on every job. You have to make a decision on what you think is best for your own circumstances at the time. I hope this article will help give you the tools needed to make those decisions.

These goals are not set in stone, a business plan is not set in stone.  Simply use them as a guide and change them to set new goals based on the data you gather as you grow your business.

A lot of artists make the mistake of just figuring materials times 2 or times 3.5 or whatever unscientific method they use. These methods do take into account any growth for your business, does not take into account the actual hours involved in making a product, or any overhead expenses that needs to be payed for. Those method can bankrupt you and your maker business if not careful. The method I laid out in this article is the method I use in my business and as of writing this article I am 6 years in and have had steady growth in my business.

Whether you’re a hobbyist or want to be a full time maker your time has value, and what you make has expenses, be sure to charge accordingly for them
Download the free chart with formulas

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