Cost build-up of a quote in machine building
For estimators, owners and CFOs in machine building, metalworking and contract manufacturing.
Short answer
The cost price of a quote in machine building has four parts: material from the bill of materials including saw and cutting loss, operations (hours per work centre times the hourly rate of that work centre), outsourced work, and mark-ups for overheads and risk. Only then comes the profit mark-up. Calculate an hourly rate per work centre, not one rate for the whole workshop. And note: a 30% profit mark-up on cost is a 23% margin on the selling price.
In short
- Material + operations + outsourced work + mark-ups = cost price. Then the profit.
- Hourly rate per work centre = annual costs of that work centre ÷ hours you can actually book to orders.
- Mark-up is not margin: a 30% mark-up on cost is a 23% margin on the selling price.
- Use the same cost lines in the estimate and the post-calculation, otherwise you cannot compare anything afterwards.
1. What a price is made of
| Part | What it contains | How you calculate it |
|---|---|---|
| Material | The bill of materials: plate, sections, drive, hydraulics, electrical, fasteners | Quantity × unit price × (1 + loss) |
| Operations | Sawing, CNC, welding, hydraulics, electrical, assembly, test, engineering | Hours × hourly rate of that work centre |
| Outsourced work | Blasting, coating, galvanising, transport | Purchase price |
| Mark-ups | Overheads (if not already in the hourly rates) and risk | Percentage of direct costs |
| Profit | What you want to earn | Percentage of the cost price |
Below is a fictional order: a frame with a hydraulic drive. Change quantities, prices, hours and mark-ups and see straight away what happens to the cost price and margin.
Calculator: cost build-up
Material
€9,173- Plate – S355 – 10 mm (kg)€1,814
- Square tube – S355 – 100 × 100 × 6 mm (m)€756
- Ball bearing – 6316-2RS€380
- Hydraulic motor – radial – 800 cc€3,900
- Hydraulic pump – gear – 16 cc€1,450
- Hydraulic hose – 2SN – 1/2" × 2000 mm€510
- Limit switch – roller lever – IP67€130
- Relay – 24 V DC – 4-pole€90
- Hex bolt – 8.8 zinc plated – M16 × 60€63
- Welding wire – G3Si1 – 1.0 mm (kg)€80
Operations · 172 hours
€11,851- Sawing€407
- CNC machining€1,840
- Welding€3,829
- Hydraulics€1,481
- Electrical€1,000
- Assembly and test€2,338
- Engineering€955
Outsourced
€2,250- Blasting and coating
- Transport to customer
Mark-ups
What if, at the same selling price
2. The hourly rate per work centre
An hourly rate is all costs of a work centre per year, divided by the hours you can actually book to orders. Not the hours the workshop is open, but the hours that end up on an order.
The formula
Hourly rate = (labour + machine depreciation + space and energy + maintenance and tooling + share of overheads) ÷ (available hours × utilisation)
With one rate for the whole workshop, a CNC hour costs the same as an assembly hour. Orders with a lot of machining are then quoted too cheaply, and orders with a lot of manual work too expensively. You only see that when you post-calculate.
| Work centre | Costs per year | Productive hours | Hourly rate |
|---|---|---|---|
| Sawing | €76,000 | 1,120 (70% of 1,600) | €67.86 |
| CNC machining | €138,000 | 1,200 (75% of 1,600) | €115.00 |
| Welding | €84,500 | 1,280 (80% of 1,600) | €66.02 |
| Assembly and test | €79,500 | 1,360 (85% of 1,600) | €58.46 |
For CNC the machine depreciation weighs heavily. That is why its rate is almost twice that of assembly.
Calculate your own rate. The difference between 70% and 85% utilisation is bigger than you think.
Hourly rate per work centre
Costs per year
Same costs, different utilisation
- 60%€88.02
- 70%€75.45
- 80%€66.02
- 90%€58.68
Utilisation makes the biggest difference
A work centre that is bookable 70% instead of 85% of the time has an hourly rate more than 20% higher. So use your own bookable hours from time registration, not an average from a table.
3. Mark-up is not margin
The most common calculation error in quotes. A mark-up is calculated on the cost price, a margin on the selling price. So the margin is always lower than the mark-up.
| Profit mark-up on cost | Margin on selling price |
|---|---|
| 10% | 9.1% |
| 15% | 13.0% |
| 20% | 16.7% |
| 25% | 20.0% |
| 30% | 23.1% |
| 40% | 28.6% |
| 50% | 33.3% |
Margin = mark-up ÷ (1 + mark-up). The other way: mark-up = margin ÷ (1 − margin). For a 25% margin you need a 33.3% mark-up.
4. How to build up a quote
- 1
Make the bill of materials
From the drawing or a similar earlier order. Every item with an item number, quantity and unit.
- 2
Add the loss
Saw and cutting loss on plate and sections, and waste on fasteners. Use your own figure from post-calculation.
- 3
Estimate the hours per work centre
Per operation: sawing, CNC, welding, hydraulics, electrical, assembly, test and engineering. Use your costing rules and count test and engineering separately.
- 4
Request outsourced work
Blasting, coating, galvanising and transport. A recent supplier price beats an estimate.
- 5
Add the mark-ups
Overheads only if they are not already in the hourly rates, otherwise you count them twice. Plus a mark-up for risk or contingency.
- 6
Set the profit mark-up and check the margin
Look at the margin on the selling price, not just the mark-up.
- 7
Keep the build-up with the order
Then afterwards you can compare per cost line with what it really cost.
5. What if the steel price rises?
With a build-up per cost line, that is a simple sum. In the example above, a 10% rise in the steel price together with 5% higher hourly rates costs €892 of margin. At the same selling price the margin drops from 23.1% to 20.3%. Try it yourself with the sliders in the calculator.
With a four-column spreadsheet such as 'structure, hydraulics, electrical, assembly' you can't ask that question. You don't know how much steel is in it, or how many hours.
6. Common mistakes
- One hourly rate for the whole workshop. Machine hours become too cheap, manual work too expensive.
- Forgetting loss. The net weight on the drawing is not what you buy.
- Test and engineering hidden in assembly. Then afterwards you cannot see where the hours went.
- Counting overheads twice. Once in the hourly rate and again as a mark-up.
- Confusing mark-up with margin. A 30% mark-up is a 23% margin.
- Not keeping the build-up. Without a build-up with the order, post-calculation is impossible.
Frequently asked questions
What is the difference between cost price and selling price?
The cost price is what the order costs you: material, operations, outsourced work and mark-ups for overheads and risk. The selling price is the cost price plus your profit mark-up. The difference between the two, divided by the selling price, is your margin.
How do you calculate the hourly rate of a machine or work centre?
Add up all annual costs of that work centre: labour, depreciation, space and energy, maintenance and tooling, and a share of overheads. Divide by the hours per year you can actually book to orders. Those bookable hours are the available hours times the utilisation.
Should overheads go in the hourly rate or in a mark-up?
Either works, but choose one. If they are in the hourly rate, set the overhead mark-up to zero. If they are in a mark-up, leave them out of the hourly rate. Otherwise you count them twice.
What utilisation should I use?
Use your own figures: hours booked to orders divided by available hours. If you don't have them yet, start with a cautious estimate and adjust after three months of time registration on the order.
How often should hourly rates be updated?
At least once a year, and whenever something big changes: a new machine, a pay rise, a different energy price or a clearly different utilisation.
Sources
Other people's figures and statements on this page come from here. Calculation examples are fictional.
- ECI: Ridder iQ, cloud ERP for manufacturers Example of an ERP with bill-of-materials management and estimating for manufacturers.
About the author
Safouan Bolbaroud · Founder of Agentfabriek
At Agentfabriek, Safouan builds automations on top of the ERP systems of manufacturers and wholesalers. He writes about what needs to be in order before automation makes sense.