Over more than 25 years of doing our annual Pricing Survey and studying the ins and outs of pricing custom woodwork, one thing comes up over and over again – low shop rates.

Many custom shops don’t even bother to establish a shop rate, going from project to project with often wildly fluctuating prices. 
We’ve also seen historically lots of really low rates quoted that clearly don’t accurately reflect true overhead costs or long-term profit expectations. 

If you don’t know your costs, you can’t price profitably, so let’s walk through the process of establishing a loaded hourly shop rate that is realistic and works.

First, let’s note that the Pricing Workshop is a new series of articles in 2025 that supplements and replaces our annual Pricing Survey. We’ll talk about the nuts and bolts of pricing custom woodwork and offer tips and techniques for you to improve your pricing. 

 

This program is sponsored by Lockdowel and TradeSoft.

Definitions
To understand what we are talking about, we need to start by defining some terms. A shop rate is an hourly rate that a shop uses as a basic charge for work, but it should be more than just a labor charge. I use the term “loaded hourly shop rate” because I want the rate to load in data that takes into account, your overhead and other key factors that affect your ability to earn enough to not only cover labor but also your full overhead based on the time you have available each day and each week through a full year.

Here are some more important definitions:

• Overhead: All the costs associated with keeping the business open not directly related to production.
• Labor: We’re talking about labor related directly to production. Other labor in the business is overhead.
• Profit: This is an amount you add on to each job or your hourly rate to earn from the business and have the resources to grow the business. It is NOT what is left over after job costs are subtracted.
• Price: What you charge the customer or the act of pricing.
• Costing: Calculating your costs.
• Estimating: Estimating your costs for a project.
• Bidding: Developing a competitive bid as a price for a project that others are bidding on.

Basic formula
Establishing a loaded hourly shop rate is simple math, but some of the numbers can be complex. 

The basic formula for a shop rate is Time/Overhead = Shop Rate. Then you add Profit into the rate or on a project-by-project basis. When pricing custom projects, you can use the rate along with cost estimates to help establish your price.

Let’s work through the steps to create your loaded hourly shop rate.

Time is all the hours available for work. Do you work a 40-hour week (or 60)? Not all of those hours are available for productive work directly related to projects you get paid for. 

You probably have maintenance, shipping and receiving, sales, marketing, bookkeeping, customer relations, and all sorts of activities that don’t directly relate to productive labor. 

Let’s say, for simplicity that you have 10 hours devoted to all of that and 30 hours for production. That means Time = 30 hours a week.

But you and/or your staff don’t necessarily work 52 weeks a year. Subtract non-working days. Those days can’t contribute to the bottom line, but costs such as rent and utilities continue. 

So, for a simple calculation, we will subtract two weeks for non-working days, giving you just 50 weeks.

We could do a whole series of workshops just on overhead, but let’s just summarize by listing some of the most common overhead expenses: rent, utilities (electricity, water, phone, heat, etc.), waste disposal, insurance, machinery lease payments, HR costs, maintenance and repairs, sales, marketing, transportation, sharpening and tooling, software and showroom expenses, and consumables such as glue and fasteners, and even more. 

If you look through your bills for the past year, everything that isn’t directly related to specific, productive work is overhead. 
To make it easy, we’ll say it was $100,000. Here’s how the numbers work out:

Put that in perspective: What that means is your shop needs to earn at least $67 per hour every working day just to pay the bills without making a single thing. This is why we cringe when we see shop rates of less than $50 per hour.

Putting the shop rate to use
Using the shop rate can help you price projects by giving you a baseline. Here’s how it works. 

Take the number of production hours you think the job will take. For our example, let’s say 80 hours. (Note that could be two people working 40 hours each; it’s the total hours invested in production.) Multiply that by the loaded shop rate ($67 in our example). Add the project materials costs. Then add the percentage of profit you want to achieve. Here’s an example:

That price does not take into account the customer-perceived value for the project. 

You will want to adjust the price (up typically) based on market forces and what the customer is willing to pay for the value you offer. 

But this is the bare minimum you can charge for the job without losing money. If the customer won’t pay that much, don’t do the work.

Shop rate variations
Many shops build the production labor into the loaded hourly shop rate to make the math easier. In this case the shop rate would be $92 ($67 + $25). 

Remember, that employee you are paying $25 per hour costs you more in other expenses such as benefits and payroll costs. Building all those costs into your loaded hourly shop rate makes it easier to use and more accurate for pricing.

Anything you don’t account for will subtract from your profit. 

That’s why I always urge shops to invest the time into accurately figuring their overhead and other costs so that they can truly add on profit. 

I hate it when I hear someone say profit is what’s left over. 

Plan for profit to earn the profit you need to grow the business.

All of this leads to the reality today that typical shop rates in custom cabinet shops likely should be more like $100-plus per hour than under $50 per hour. Even if you live in a really “low overhead” rural area, as I do, your overhead numbers will add up way more quickly than you can imagine. Don’t fall into the trap of shortchanging yourself!

So, what’s your shop rate? 

Do you calculate it differently than this? 

Is there something else about the pricing process that really vexes you? I would love to hear from you. You can email me at [email protected].