# Calculating Overhead & Shop Rate



## lblankenship (Aug 25, 2017)

Hey guys,

I just submitted my first official quote for my business and I wanted to get your thoughts regarding overhead and shop rates.

I'm a one man shop and operate out of a one car garage on our property so in reality my overhead isn't too crazy. The only fixed costs for overhead I have are insurance and electric, everything else is variable like screws, glue, maintenance, etc.

I've read through plenty of articles on pricing your work on here and other sites. One really good one I saw on here this guy mentioned calculating fixed overhead vs administrative overhead (% of fixed overhead). However, I have trouble doing this as I can't definitively say I will work 25 hours every month since this is a very early and part-time business.

I also saw other places say to do your overhead at 15-20% of your cost of materials & labor and that's why I went with for this quote. However I'm now wondering if that makes the most sense so here's what I'm thinking.

*Example bid:*
$100 materials + $140 labor ($35/hr @ 4 hours) * .2 = $48 Overhead

*Example bid 2:*
$300 materials + $140 labor ($35/hr @ 4 hours) * .2 = $88 Overhead

However wouldn't my overhead technically be the same for both of these bids? The only difference is the cost of materials. I guess you could argue a higher material cost doesn't always mean more expensive materials but could also mean a higher quantity of materials used.

Now if I add a profit of 20% to both of those my totals would come out to be:

Bid 1: $345.60 (Profit of $33.60)
Bid 2: $633.60 (Profit of $105.60)

Now when trying to calculate my shop rate (labor cost, overhead & profit divided by # of hours) it seems I won't ever have a consistent shop rate and it will vary from project to project.

Bid 1 Shop Rate: $61.40
Bid 2 Shop Rate: $71.00

Is this method of calculating overhead too from the hip? I'm wondering what your thoughts are on this and if you think this could lead to overcharging for overhead costs.

In the past doing non-commission pieces I would model everything up so I know exactly how much material and can estimate my hours. I prefer this approach rather than just having a $50 shop rate plus materials because even after taking out a $35 hourly labor rate there's still $15 out there to be considered overhead/profit and no real straight forward way to put how much in each bucket appropriately. If you have a set shop rate of $X is that typically how you operate?

That was way longer than I expected and I hope I got my point across as to what I'm asking for guidance on. Thanks in advance for your advice. I really appreciate it.


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## JeffHeath (Dec 30, 2009)

I'll be happy to try and help you, as I've been self employed for 30 years. I honestly can say I have no idea what you're talking about, though.

It sounds like you are trying to come up with some phantom way of calculating an overhead expense of your business that doesn't actually exist.

My advise to you is to try and not over complicate the accounting. As you said, you have fixed costs, and variable costs. The more you work in your shop, the more your costs will go up, but hopefully, so will your commissions.

Focus on what you can charge for whatever your product is (cabinets or furniture, or


> ?


), and subtract your actual hard costs for your workshop, utilities, glue, screws, etc….and whatever is left is your labor. If you're not making enough, and you can't work faster, then you need to charge more to survive.

Don't let the accounting get in the way of making your business work. Calculate your exact costs, and know what they are, and account for them. You will very quickly be able to adjust your fees if need be.


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## John Smith_inFL (Dec 15, 2017)

Blankenship: what have you placed your bid on ?
what kind of projects will you most likely be doing in the future ?

.

.


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## lblankenship (Aug 25, 2017)

> I ll be happy to try and help you, as I ve been self employed for 30 years. I honestly can say I have no idea what you re talking about, though.
> 
> It sounds like you are trying to come up with some phantom way of calculating an overhead expense of your business that doesn t actually exist.
> 
> ...


Here is an article from Rockler that is pretty much the method I am attempting. I looked around at various methods though to see the advantages and disadvantages of each and I just sort of fell on this method.

https://www.rockler.com/how-to/set-price-woodworking-projects-home-workshop



> Blankenship: what have you placed your bid on ?
> what kind of projects will you most likely be doing in the future ?
> 
> .
> ...


I quote a wall mounted media console. The console is 48"(W)x10"(H)x14.25(D). The console would be made of 1/2" maple ply doubled up to be near a 1" overall thickness then the edges would be covered with 1/4" thick maple strips. The console has one partition with an adjustable shelf and the whole thing will be mounted to the wall on a french cleat. I've added a picture of my rendering. Example bid 1 is what the quote I came up with for this piece.

$100 materials + $140 labor ($35/hr @ 4 hours) + $48 overhead + $33.60 profit = $345.60 pretax.

My plan is to focus on indoor residential furniture (dining/coffee/side tables, built in cabinetry, benches, chairs, book cases, etc.). However, I'm not against doing outdoor furniture or branching out into working for more commercial type clients. The later just wont be my focus starting out.


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## sgcz75b (Jan 21, 2019)

In my career in creative arts, I never bid any job on my time. I bid on the project.

I loved bidding against those who tried to calculate their time. They always lost.

I could bid $2000 for a project and it might take me four hours or less to do.

Those that bid their time, if they got the project, consistently screwed themselves.

I ran my business for twenty years until I retired at 56 (though I still consult for clients of my choosing). Those that charged for their time ran their business into the poor house in about 4 years. No one who was in the same business as me when I started was in the same business when I retired. Not one.

Bidding on your time in a self-employed business is a sure road to financial failure.

Of course, you may be different and I might be wrong, but experience tells me otherwise.


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## CWWoodworking (Nov 28, 2017)

I think your formula is ok. Just be open to adjusting.

But it's gonna be hard to figure out if your charging enough to "make it" full time without being full time.

There is the monthly unexpected almost every month for me. Something always is braking/needs replaced. You won't get this till your going through serious material. At least I didn't.

If you want to do this full time, you may want to spend some time focusing on where your orders are going to come from. Doing small odd jobs to the public is a rough business IMO. I think it's hard to get a constant flow of work.

Good luck.


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## sgcz75b (Jan 21, 2019)

There's the business of being great at your trade.

There's the business of being great at business.

Mediocre tradesmen make good money because they are great at business.

There are master craftsmen who make works of art and starve because they suck at business.

If you're not better at the business side than the trade side, you'll constantly be chasing every dollar, going deeper in debt, and living life on the edge of ruin.

I'm not saying these things to discourage you, but to point out what exuberance often overlooks.


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## lblankenship (Aug 25, 2017)

> In my career in creative arts, I never bid any job on my time. I bid on the project.
> 
> I loved bidding against those who tried to calculate their time. They always lost.
> 
> ...


So what was the reason behind your bids? You mentioned the project but anything specific about it? Level of effort? How cool/interesting the project was?

How was it when you started out? Did you find you couldn't be as selective because you had to pay the Bill's? Then after building yourself up in the market you could choose to be more selective?



> I think your formula is ok. Just be open to adjusting.
> 
> But it's gonna be hard to figure out if your charging enough to "make it" full time without being full time.
> 
> ...


Good to know. Yeah I have also been trying to think on that as well. There's a local woodworker close to me who mentioned he started doing residential stuff but it wasn't consistent enough and now he primarily does work for businesses.


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## sgcz75b (Jan 21, 2019)

So what was the reason behind your bids? You mentioned the project but anything specific about it? Level of effort? How cool/interesting the project was?

"People needed certain services. I was good - good at my craft and good at selling myself. I had a portfolio of outstanding work that I had created without a client on my own. If the money was right I made the project interesting."

How was it when you started out? Did you find you couldn t be as selective because you had to pay the Bill s? Then after building yourself up in the market you could choose to be more selective?

I did primarily commercial work. I researched clients before meeting with them. I knew their style. I did my homework. I knew who they had hired before me and what that person charged. I knew my competition's weaknesses. I never looked hungry. I dressed for the meeting, was professional, and did all I could to signal my abilities. It worked 50-60% of the time, and that was enough to make me completely debt free at age 44 and able to retire at 56.

I also turned down projects when I smelled a client who would nickle-and-dime me to death. I fired clients who didn't pay within 60 days, or were a bitch to work with. I never let a client dictate my standards. If you do word gets around and you become the low-price whipping boy. Charging too little is far worse than charging too much.

When you charge by time, the client thinks they own you and will constantly be checking on you as you're on THEIR clock. Fry cooks at McDonald's charge for their time.

Charging by the project means I give them a completed project. No discussions about time.

I also studied business for hours every day for 6 months prior to starting. There were others who were just as talented, but I was talented at my craft and the business end. That's what made the difference.

No offense, but the fact you're coming to an online woodworking forum to get opinions on what and how to charge tells me you have a great deal to learn about business. That's amateurish at best and amateurs in business get eaten.

Spend more time studying business than you do in the shop. Or work in the shop, enjoy it, but don't attempt to make a decent living at it.

It's all up to you.


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## CWWoodworking (Nov 28, 2017)

I started out trying to sell direct to public. It was a disaster and I quickly realized their was no money in it, in my area. Other areas maybe different.

I lucked out and had a wholesale opportunity plopped on my lap as I was getting out of selling direct. Used my old ties in the furniture industry and created/found a niche. It still took(takes) a ton of work to get business. Honestly sales is the only thing I worry about.


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## Scap (Aug 7, 2018)

> Now if I add a profit of 20% to both of those my totals would come out to be:
> 
> Bid 1: $345.60 (Profit of $33.60)
> Bid 2: $633.60 (Profit of $105.60)
> ...


 I can't help with your base question, but wanted to point out that you're shorting yourself on profit if you do the markup method.

Instead, calculate the margin you'd like to make.
Take your cost and divide that number by (1-percent profit expressed as a decimal) for actual margin.

Example 
20% profit margin on $100 is 100/(1-0.20)= $125.00
36% profit margin on $100 is 100/(0.64)= $156.25

Profit margin is calculated off (sale price minus cost) divided by sale price x 100.
If you're adding 20% to cost, your margin is 16.67%

Also, the 20% values you listed above don't jive with the sell price from what I can tell.
20% on $345 should be $69 and $633 would be $126.60


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## lblankenship (Aug 25, 2017)

Thanks everyone for the responses so far. This is all really helpful, I want to try and get started off on the right foot so I appreciate all of your insight.



> I started out trying to sell direct to public. It was a disaster and I quickly realized their was no money in it, in my area. Other areas maybe different.
> 
> I lucked out and had a wholesale opportunity plopped on my lap as I was getting out of selling direct. Used my old ties in the furniture industry and created/found a niche. It still took(takes) a ton of work to get business. Honestly sales is the only thing I worry about.
> 
> - CWWoodworking


That's good to know, when you started out did you attempt selling custom made to order pieces or did you have an inventory of items that you made and then sold almost like a storefront setting? I feel like a storefront inventory type approach is just asking for disaster especially when starting out so I was wanting to stick with making pieces as the orders come in.



> Now if I add a profit of 20% to both of those my totals would come out to be:
> 
> Bid 1: $345.60 (Profit of $33.60)
> Bid 2: $633.60 (Profit of $105.60)
> ...


Interesting. Yes, I think I might have entered the wrong $. I was typing a lot and I think I miscalculated. Here is the formula I did to come with my quote.

materials + labor + overhead + profit = Sale Price

$100 + $140 + $48 + 57.60 = $345.60

Overhead is (materials + labor) x .2

Profit is (materials + labor + overhead) x .2

I looked at is as my total cost to make the piece was materials + labor + overhead which in this case was $288 then multiplying that by .2 for 20% would give me a clear 20% profit after I have covered all expenses and paid myself. However, now looking at what you're saying I guess I did a 20% markup rather than "profit".

Thank you for bringing this to my attention. It probably would have taken me awhile to realize this.


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## Scap (Aug 7, 2018)

> I looked at is as my total cost to make the piece was materials + labor + overhead which in this case was $288 then multiplying that by .2 for 20% would give me a clear 20% profit after I have covered all expenses and paid myself. However, now looking at what you re saying I guess I did a 20% markup rather than "profit".
> 
> Thank you for bringing this to my attention. It probably would have taken me awhile to realize this.
> 
> - lblankenship


No worries. I resell for a living, so markup vs margin got "real" for me real quick when my paycheck was suddenly 100% commission.

Another aspect to consider is that overhead may be a somewhat fixed value, but it's a variable percentage of each project.

Let's say you have a fixed overhead expense of $1000 a month (lights, payroll, CPA). But you're only doing a single $1000 project this month. The overhead is 100% for that project. Next month you do a $10,000 project, now overhead is only 10%.

So something to consider in your bid matrix would be to look at your overhead amount on your spreadsheet. Does it make sense to use a flat 20% or should you override the amount and enter a flat value?

Also, margins are a moving target. You might only factor single digits margins on a huge job, but small jobs should necessarily have higher margins. Which is why many shops have minimums in place. It's just too expensive to setup for a single one off piece versus a production run.

*These are morning coffee ramblings, so it may not apply to your situation. *

Good luck with your venture.


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## clin (Sep 3, 2015)

There's way too much in this to cover in a post in a forum. I've had my own non-woodworker business for 30+ years now and have experience in this area. Overhead is typically a percentage of hours worked, not cost of materials. If a cost changes with materials, it is a cost of the material, not overhead.

Be sure to spread the overhead over the number of hours you can actual bill to projects. You probably spend a lot more time doing things not specific to a job than you might think. Things like shopping for supplies, bookkeeping, cleaning the shop, maintaining tools. If you really track this, having only 50% of your time be actually working on a specific project is probably not too far off. That means the other part of your time is part of overhead.

Doing all this based on yearly costs (rent, insurance etc.) and yearly hours is common.

However, I agree with sgcz75b (that rolls of the tongue doesn't it). In the end, you're selling items. Your not a shop contracting out your time. If you do it that way, in the end you're little more than an employee and could just as well work for someone else.

So all of the calculations should just be a way for you to estimate a cost for producing an item. A reality check so you make sure to charge enough. But you shouldn't let that determine what you sell it for. That should only help you find the MINIMUM amount.

If you do custom, one-off jobs, there are always unknowns. My experience was that my first time estimate was always my most accurate. After that I was just justifying why I could do it in less hours and regretting it later. There's almost always something that comes up unexpected and wastes your time.

In these cases you will have jobs that go smoothly and you make easier money. Other times you will have jobs that eat your lunch. So just suck it up when you charged too little, and don't feel guilty when it goes easier than expected. Hopefully it will balance out in the end, and with experience you will reduce the errors you make.

When it comes to items that you produce regularly, keep in mind that you will get more efficient producing them. Your production time will drop. That doesn't mean you should lower your price. Let the market dictate that. If the market will allow you to sell it at 10X the price you can produce it for. Sell it for that price. If the market dictates your minimum price is still too high, then sell something else.

I assume your plan is to make very high quality items. People will pay for quality, but oddly charging too little can affect their perception of quality. Often you will make more money selling fewer items at a much higher markup. You're never going to compete with mass produced goods, so I wouldn't even try.

Keep in mind that if you don't lose some sales due to having too high a price, then your prices are too low.


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## lblankenship (Aug 25, 2017)

Thanks Scap & Clin, I think you both made some good points that I will keep in mind. Thanks again to everyone else as well, this has all been very helpful and I feel like I have a better perspective now as I continue forward.


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## RichT (Oct 14, 2016)

I usually shoot for four times cost. I'm working a 90" bathroom vanity order and after ordering the sheet goods, lumber (walnut) and Blum hardware, I'm at 23% of the agreed upon price. Works for me.


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## Knockonit (Nov 5, 2017)

one of the hardest things to calculate is value versus time, especially in a nit pic market.

having been a GC and cabinet shop owner for almost 40 years, its a fine tune that is constantly evolving.

took me quite a while to come up with a formula that works, as i grew, i somehow thought that employees would work with same ethic as me, well that was a bummer, so you have to allow some lee way in labor adjustment.

overhead is complicated, its more than material, labor, insurance, electric. so many things fall in this catagory. 
estimating time, material pick up time, trip charges, tool damage and replacement, even though you don't damage anything or need something additional, a line item for possibilities is necessary.

So in my opinion, work up a value for your time, and effort, include all you can in regards to OH, and place a value on what you thing you should make on this project. Keep in mind, "uncle murphy", will always be looking over your shoulder, and things happen that will increase cost, nature of the beast. the ""profit"" line generally takes that hit.

It is of my opinion there is no true formula, its what you can work with, and make a dugats with, the market and other vendors will change their formula to become more competitive, but once, you get underway, adjust, and once in that nitch, you can slowly raise the income value to make it more palatable. Its capitilism, if you are of the impression its fun and easy, well, unfortunately it becomes "work"

I'm at 70 times around the sun, and just now thinking i'm gonna retire, and have to say, the OH and P formula has been changing drasticallly to keep up with the markets.

best of luck, nothing like stepping up to the plate and having a great finish.
Rj in az


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## LeeRoyMan (Feb 23, 2019)

1- You have to know what it cost you to make something.
2- You have to know how much what you're making is worth.

Always sell it for as much as it's worth. If it's not worth as much as it costs you, then you can't do the job.
Using any formula will/could as they say, leave money on the table. 
Some things might be cheap to make, but are worth way more than any formula you come up with.

Just because your "overhead" may be cheaper (working from home) than that of a bigger business, doesn't mean you should do the job for cheaper, although you can, it doesn't make you any more money.

You deserve to get as much as it's worth, no matter what it cost to make.


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## wormil (Nov 19, 2011)

Good post Leeroy. Another method is this, find a product that sells, know what it sells for, figure out what it will cost you to make and if you can produce it at a profit.


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## CaptainKlutz (Apr 23, 2014)

> You deserve to get as much as it s worth, no matter what it cost to make.
> - LeeRoyMan





> Spend more time studying business than you do in the shop.
> - sgcz75b


+1 
Price markups are complicated. Every market is different, due competition.
Understanding the market for the products you want to sell is absolute FIRST requirement to making money manufacturing any product.

IMHO - Trying to compete on market priced wood products at cost + markup ends up in total failure, because you can't compete against large companies like Wayfair, or Kraftmaid!

You only succeed in selling wood based products when you can carve out a niche where people will pay a premium for your hand crafted items. Learning the amount of the premium, and successfully managing customer expectations to maintain the premium is only way to have a stable long term business that makes money.

Manufacturing is not easy, but it is easiest part of selling products; providing your costs are lower than your competition.

IME, the actual fixed cost (material plus labor) for most items at retail level is below 25% of listed retail price. Highly profitable companies costs are less than 18-20%. Doesn't matter if product is wood, plastic, or metal; or some electronic combination that makes noises. Remove the retail store front costs by selling direct to consumer, and your costs can be ~40% of sale price, and still make money after subtracting expenses. Doesn't matter if you have one employee, or 100+ people working for you.

If you attempt to look for outside investment from a bank for your business, they will be looking for costs to always be less than 40% of sales price market will pay. Standard business models made since 1900's show you can't make money on your investment with higher costs, unless every competitor has same challenge. For the record, Products requiring massive billion dollar investments for infrastructure (semiconductors) still can not make money if costs are over 50% of price.

Why believe me? Don't I am idiot.
But have been a manufacturing automation geek all my life. Started and closed 2 different hobby business in my younger days, and managed businesses selling from $100K/year to $150M/yr before retirement.

PS - If you are new to retail sales, business markups, and mfg cost calculations; you might want to take some classes at local college. All the above is taught in business, marketing, or economics 101.

Best Luck.


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## RichT (Oct 14, 2016)

> IMHO - Trying to compete on market priced wood products at cost + markup ends up in total failure, because you can t compete against large companies like Wayfair, or Kraftmaid!
> 
> - CaptainKlutz


I do. Quite successfully. Why? Because I can provide a custom cabinet for a semi-custom price. It's taken some time to get going, but I finally can sit back and the clients come to me. My pricing model is pretty simple. Four times cost plus I usually add 10% or so for those unforeseen expenses.

The trick is to get the costs right. That usually involves a few hard lessons.

It feels good to be able to tell a client that you're booked through such and such a date, and they say it's not a problem.


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## WoodenDreams (Aug 23, 2018)

My rant… Some put too much algebra into the equation. One of my son-in-laws quotes by materials plus 20% (incase he needs more materials) and time spent at a hourly rate. The problem with that is sometimes the customer will complain that it shouldn't have taken him that long, then only pays him materials and half of the labor. Or… Tell him it doesn't have to be perfect. then that's the customer that complains the loudest because it could have been better quality work. Then, pays him half or 2/3's of the bill. With my customer projects, I know I charge more for my projects than some of the other woodworkers in the area. But, I also explain the difference between my work and store bought. and my customers realize the time and effort it takes, and they know I don't use plywood or MDF board. Example, a six sided chest starts at $475, or a paneled sided hope chest starts at $565, I offer additional options of $80 for cedar lining, $35 sliding tray and $35 name plate. This is for a 37" long chest, I add $100 for every 6 inches longer.. As you can see, I'm not cheap. I do tell my customers which furniture stores to go to and their price of $299 for MDF made. Same as my mahogany pet urns for $49, other woodworkers here make theirs from scrap wood and call it rustic for $20… Adult urns I get $139, other woodworkers here make a urn for $100…. What I'm saying is, charge for what you do. Best way to make more is to be efficient, plan your steps to the build on paper (step 1, 2, 3, 4, etc.) and work quicker. I don't charge hourly, but by the project. some smaller projects you can actually have a higher earnings because it's quicker to make. It doesn't hurt to charge more then the next guy, but know what others charge in your area, you'll still stay busy if your known for quality. It doesn't happen overnight. I have a customer waiting list. I call the people on the list when I'm starting their project.


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## WoodenDreams (Aug 23, 2018)

When you add labor, are you factoring true cost of labor. such as FICA, matching, unemployment tax, and did you add the accountant costs to calculate the payroll deductions, and pay the federal or state withholdings…


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## wormil (Nov 19, 2011)

> materials plus 20% ....


Another good practice on custom work is never pass savings on to customers, standardize your cost of materials. If the average price of white oak is $4.75 bd/ft then always use that price unless it changes significantly. If the yard offers a volume discount or has a sale, still use $4.75 as the material cost. This makes prices consistent for repeat customers and makes it simpler for you. I used to sell a custom product and always priced it as material cost + overhead + labor until a customer came back and wanted the same price as the month before when I happened to hit a big sale and got my materials 25% off. Hard lesson learned.


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## robscastle (May 13, 2012)

Ask Amanda Mertz she makes something similar.


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## lblankenship (Aug 25, 2017)

Thanks everyone, definitely some additional information that I have found useful. Personally for my business, it's a single member LLC and in talking with an accountant I would pay my salary by taking draws and not actually paying myself through a payroll. Basically I just withdraw whatever amount I feel is appropriate from the business account, which in my case will be $35/hr. I believe I then report that as income during filing season and pay taxes on that at the end of the year but I'll work through those details with the accountant. I don't really have any plan in the near future to have any employees.

Additionally when I reference estimating my time that is mainly for me to help establish the price I think it will cost me to make the item. This time will never be disclosed to the client for all they know it could take me 4 hours or it could take me 40 hours. However I plan to still provide some sort of rough timeline of delivery so they can get an idea of when to expect to receive the item.



> Another good practice on custom work is never pass savings on to customers, standardize your cost of materials. If the average price of white oak is $4.75 bd/ft then always use that price unless it changes significantly.


I like this idea, I hadn't thought of it like that but I think I will adopt that model and keep a price sheet of my own for certain types of wood and other common materials used for consistency.

I also like the point that was mentioned a couple times about just because I can sell something for a 20% profit doesn't mean I should. It just means that's the lowest/starting point I could sell the item for and still make a decent profit. I will keep this in mind while continuing to research what similar items sell for in my area.

Also I fully understand I have no chance to compete with the likes of wayfair, walmart, target, etc. as I've had to turn people down when just having conversations about me making a desk or something similar for them and their budget being only $250.

I live near a pretty large city and I think there definitely are neighborhoods around of people that can afford higher quality custom pieces. So I think my plan of attack is going to research what the average household incomes are in the surrounding areas and try to start finding the right people to market to. I'd like to think that as I quote more and take on jobs I will get a better understanding of what my actual costs and get better at judging my time which I can then use to help my quoting process.

Thanks again everyone, this has been a tremendous help!


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## pottz (Sep 15, 2015)

> Ask Amanda Mertz she makes something similar.
> 
> 
> 
> ...


i dont think anyone can afford her hourly rate buddy-lol.


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## MSquared (Aug 20, 2018)

DOH!!


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