Job Shop Quoting

How to Build a Shop Rate for a Job Shop Quote

Shop rate = total annual cost of operating a work center / annual productive hours. Here is how to calculate it, what to include, and how shop rate drives your quoting accuracy.

Shop rate, sometimes called the fully burdened rate, equals annual machine cost plus annual direct labor plus annual overhead allocation, divided by annual productive hours. For a CNC turning cell with $45,000 of annual machine cost, $78,000 of direct labor, and $36,000 of allocated overhead, total annual cost is $159,000. At 1,900 productive hours per year, shop rate is $159,000 / 1,900 = $83.68 per hour. This is the rate the cell must recover just to break even. Every quoted job routed through that cell should cover at least that amount before profit.

Productive hours should be planned run time minus planned stops and unplanned downtime, not gross shift hours. For example, 2 shifts x 250 days x 7.5 hours gives 3,750 gross hours. If 15% is lost to changeovers, PM, and breaks, available hours drop to 3,188, and another 10% downtime brings productive hours to 2,869. Labor cost should use burdened labor, not wage only, and overhead should reflect actual support cost assigned to the work center. These inputs usually come from payroll, equipment cost records, and the annual operating budget.

The biggest mistake is using gross shift hours in the denominator. That understates shop rate by 20% to 30% and leads to steady underquoting. Another common error is using one blended shop rate for all assets. That hides the fact that old manual equipment, standard CNC cells, and multi-axis machines consume very different cost structures. Shops also allocate overhead using only floor space, even though throughput, inspection load, and scheduling effort often track more closely with labor or machine value. Bad rate logic makes you win the wrong jobs and lose the right ones.

Use shop rate to build quotes that recover the real cost of the work center. If the rate says a turning cell costs $84 per hour to run, a 30 minute routing cannot be sold as if it costs $25 of shop time unless material or downstream process is carrying the margin. The result also helps you test utilization scenarios. If better scheduling or less downtime raises productive hours, the same fixed cost spreads across more hours and the break-even rate falls. That gives operations a clear financial reason to improve uptime and setup performance.

Review shop rate annually and any time labor, depreciation, rent, or utilization changes materially. Related metrics such as win rate by work center, actual margin by routed machine group, and absorption variance help confirm whether the rate still reflects reality. For many shops, the right answer is at least three separate rates: manual or low-tech, standard CNC, and high-value multi-axis. A precise shop rate improves quote quality, customer mix, and capacity planning at the same time. It is one of the most important numbers in a job shop cost system.

Published 2026-05-28.