Most shops end up at their hourly rate one of two ways: they guess based on what a competitor down the road charges, or they inherited a number from years ago and never actually revisited it. Neither of those is a rate, it's a guess wearing a rate's clothing, and guessing is how shops stay busy while somehow never getting ahead.
Your actual rate should come from your actual costs, not the shop across town. Two shops can look nearly identical on the outside and still need very different numbers once you account for what each one is really carrying.
Why Copying a Competitor's Rate Doesn't Work
A shop running a paid-off 3-axis mill from 2010 has a completely different cost structure than one carrying payments on a new 5-axis machine. If you copy their rate without knowing their costs, you're either leaving money on the table or pricing yourself out of work, and you won't know which one until the damage is already done.
What Actually Builds Your Rate
- Machine cost per hour. Purchase price, minus salvage value, divided by expected hours of useful life. This is depreciation, not a number you can skip.
- Labor and burden. Wages plus payroll taxes, benefits, and paid time off, not just the number on the paycheck.
- Tooling and consumables. Cutting tools, coolant, and wear items tied directly to running the machine.
- Overhead. Rent, utilities, insurance, admin staff, anything that keeps the doors open regardless of which machine is running.
- Margin. Your actual profit, the reason you're running a business instead of just breaking even on someone else's behalf.
Is your equipment actually earning its rate?
A free valuation tells you what a machine is worth right now, useful context if your rate calculation is telling you it's not pulling its weight.
Get My Free Equipment Valuation →Calculating Machine Cost Per Hour
Take your purchase price, subtract expected salvage value, and divide by expected hours of useful life, typically 15,000 to 25,000 hours for a well-maintained VMC or lathe.
| Machine Type | Typical Machine-Hour Cost |
|---|---|
| Manual lathe | $15–$25/hr |
| 3-axis VMC | $25–$45/hr |
| 5-axis mill | $50–$80/hr |
| Swiss lathe | $40–$65/hr |
This is your cost to run the machine, not what you'd quote a customer. That gap matters, it's where labor, overhead, and margin come in.
Adding Labor and Overhead
Labor burden for a small shop typically runs around 23% above gross wages once payroll taxes, workers' comp, and benefits are factored in. A machinist earning $25 an hour on paper often costs closer to $30 an hour once burden is included.
Overhead gets calculated by totaling annual costs not tied directly to a specific job, rent, utilities, admin salaries, insurance, then dividing by total annual labor or machine hours to get an hourly overhead figure.
Worked Example
| Cost Component | Hourly Amount |
|---|---|
| Machine cost (5-axis mill) | $65 |
| Labor + burden | $32 |
| Tooling & consumables | $8 |
| Overhead allocation | $18 |
| Break-even cost | $123/hr |
| Margin (25%) | $31 |
| Quoted hourly rate | $154/hr |
Notice the break-even number alone isn't your rate, it's the floor. Everything below that line and you're paying to work, not earning from it.
When Your Rate Is Telling You Something About Your Equipment
If a machine's true cost per hour keeps eating into your margin no matter how you adjust the rate, that's not always a pricing problem, sometimes it's an equipment problem. An older machine with high maintenance costs or low utilization can quietly drag your break-even number up until the rate you'd need to charge stops being competitive.
Worth pulling the actual number on what that machine is worth before deciding whether to keep pricing around it or move it out of the equation entirely.
Crunching the real numbers on a machine?
A free valuation gives you a real figure to weigh against what it's actually costing you to keep running.
Get My Free Equipment Valuation →FAQ
Should every machine in my shop have its own rate?
Ideally yes, at least for major equipment. A blended average rate across very different machines can make some jobs unprofitable while overcharging others.
How often should I revisit my shop rate?
At least annually, and sooner if material costs, labor costs, or your equipment mix change significantly.
What if my calculated rate is way higher than competitors?
Worth investigating why, older paid-off equipment, lower overhead, or different labor costs can all explain a real gap. It's also worth confirming your competitors aren't simply underpricing themselves into trouble.
Does this same math apply to quoting individual jobs?
Yes, this hourly rate becomes one input into a full job quote, alongside setup time, material, and job-specific complexity.
Want to know what a machine's actually worth?
A free valuation gives you a real number to weigh against what it's costing you to run.
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