How to Calculate Your Shop Rate (With Real Numbers)

Why your shop rate matters

Your shop rate is the hourly cost of running a machine or workstation. It's the number you plug into every quote for every operation. If it's too low, you're quoting jobs below cost and losing money on work you think is profitable. If it's too high, you're losing bids to competitors.

Most small shops set their rate once — usually by asking around or copying a competitor — and never recalculate. Meanwhile, labor costs went up 12%, insurance increased, and they added a machine payment. Their rate is stale, and every quote they send is based on numbers that are months or years old.

The components of a shop rate

A shop rate has three layers:

Direct labor: What you actually pay the operator, including wages, benefits, payroll taxes, and workers' comp. A machinist earning $28/hour actually costs $35-42/hour when you add the burden. This is the number most shops underestimate.

Machine cost: Depreciation or lease payments, maintenance, tooling, coolant, electricity, and consumables for that specific machine. A 5-axis CNC costs more per hour to run than a manual bridgeport. They should not have the same rate.

Overhead allocation: Rent, utilities, insurance, administrative staff, shop supplies, and everything else that keeps the lights on but doesn't directly make parts. This gets divided across your productive machine hours.

Step-by-step calculation

Here's the math with real numbers for a typical CNC milling center:

Step 1 — Available hours: 2,080 hours/year per shift (40 hrs/week × 52 weeks). Subtract holidays, maintenance, and downtime. Realistic productive hours: ~1,800/year.

Step 2 — Direct labor: Operator at $30/hour × 1.35 burden multiplier = $40.50/hour fully loaded.

Step 3 — Machine cost: $3,000/month lease + $500/month maintenance + $200/month tooling + $150/month consumables = $3,850/month × 12 = $46,200/year ÷ 1,800 hours = $25.67/hour.

Step 4 — Overhead: Total annual overhead $180,000 (rent, utilities, insurance, admin) ÷ total productive hours across all machines (say 5 machines × 1,800 = 9,000 hours) = $20.00/hour.

Shop rate for this CNC mill: $40.50 + $25.67 + $20.00 = $86.17/hour.

Round to $87 or $90 for simplicity. This is your cost rate — what it costs you to run this machine for one hour. Your billing rate adds margin on top.

Common mistakes

Using one rate for all machines. A Swiss-type lathe and a manual drill press do not cost the same to operate. If you use a blended rate, you're overcharging for simple work (losing bids) and undercharging for complex work (losing money). Calculate a rate for each machine or at least each machine category.

Forgetting the burden multiplier. An operator's wage is not their cost. Benefits, payroll taxes, workers' comp, and vacation time add 30-45% on top. A $25/hour employee costs you $32-36/hour.

Using 2,080 hours as your denominator. Nobody runs a machine 40 hours a week, 52 weeks a year. Between holidays, maintenance, setup time, and downtime, realistic productive hours are 1,600-1,900 per year. Using 2,080 makes your rate look lower than reality.

Never recalculating. Recalculate annually at minimum. When insurance renews, when you add a machine payment, or when you give raises — your rate changed. Update it.

From cost rate to billing rate

Your cost rate is what it costs you. Your billing rate is what you charge. The difference is your margin.

If your cost rate is $87/hour and you want a 35% gross margin, the formula is:

Billing rate = Cost rate ÷ (1 - target margin) = $87 ÷ 0.65 = $133.85/hour.

Note: this is NOT the same as adding 35% markup. A 35% markup on $87 is $117.45 — which gives you only a 25.6% margin. Markup and margin are different numbers. Margin = (Price - Cost) / Price. Always calculate from margin, not markup.

Typical billing rates for small job shops in 2026: manual machines $75-110/hour, standard CNC $110-150/hour, 5-axis or specialty $150-225/hour. If your rates are significantly below these ranges, your cost rate calculation is probably missing something.

How to use your shop rate

Once you have accurate rates per machine, quoting becomes mechanical:

1. Build the routing — list every operation in sequence 2. For each operation: (setup hours × billing rate) + (run time per piece × quantity × billing rate) 3. Add material costs 4. Add outside services (heat treat, plating, etc.) 5. Total = your quote price, and you already know your margin

This is exactly how Midrung's quoting engine works. You set your billing rate per machine once. When you build a quote, you add operations with setup and run times, and the margin calculates live. No spreadsheet, no guessing, no formula errors.