Burden of labor rate and quoting production work.

lendaddy · 07-22-2006, 08:12 AM

I have a customer that I am quoting some work for. It's standard industrial production stuff utilizing their production cell. They couldn't get it to run efficiently and were going through a lot of tooling. So they wanted us to take the cell in house and sell them the product back.

We took the cell, made a few modifications and have it running very well with great reliability. So now I'm ready to finalize a quote and my "inside contact" over there was going to slip me their internal costing numbers to help me out with what I could charge.

He comes back with $0.17 per part at a rate of 950 per shift. That's only $20.xx per man hour?!? That's pathetic. I hinted that this was quite low and he said that they have confirmed their Burden of Labor rate at this $20.xx number.

Without getting into the obvious factors such as covering overhead, tooling breakage/downtime, floorspace value and [gasp] profit that need to be added to this number to mimic reality, I don't believe for a second that their BoL rate is only $20.xx an hour.

I don't know about you other guys that work in manufacturing/industrial production, but my jobs need to generate about $45-$50 per man hour to break even. Where are you guys on a man hour/break even number? (This number does not included materials obviously, just the revenue generated from the production charges.)

So now I am faced with a dilemma, I can run at 2-3 times the rate they were getting so I can quote it at that price and make a little money. But we were so happy with our improvements we were hoping for a little cash cow (rare these days

) or I can roll the dice and quote higher with my supporting data. They are a great customer and easy to talk to, so that's not a problem. But...they are pretty structured and may not be able to sway from their internal numbers regardless of reality.

Anyway, just a bit of a rant I guess and I'm always interested in hearing how other businesses relate in these terms.

widebody911 · widebody911's Garage

Tell 'em to get bent. Basically, it sounds like they want to outsource the problem to you just like they would to China or Elbonia.

lendaddy · 07-22-2006, 08:20 AM

Quote:

Originally posted by widebody911
Tell 'em to get bent. Basically, it sounds like they want to outsource the problem to you just like they would to China or Elbonia.

LOL, I should have mentioned that they are already my biggest customer and their "getting bent" is not an option

Moses · 07-22-2006, 08:26 AM

Basic fact; You are doing a good job and you need to make a living. I would give them your price and be unapologetic. Quality comes with a cost. Don't get caught trying to compete with Elbonese labor!

lendaddy · 08:46 AM

Quote:

Originally posted by Moses
Don't get caught trying to compete with Elbonese labor!

Damn those Elbonese

Thanks and you're right. The tricky part will be relating my costs and their errors without dropping the dime on my inside contact.

I'm going to go play 18 and give it some thought.

Milu · 07-22-2006, 08:41 AM

Quote your price and be done with it. They outsourced to lose the problem and I wouldn't trust their numbers anyway.

dad911 · 07-22-2006, 08:48 AM

You are correct. I need to charge at least 3 times an employees hourly rate to profit(home construction).

wrecktech · 07-22-2006, 09:51 AM

Seems to me that the reason they went to you was because they couldn't do it for their figures either. The body shop rate where I am is $42 an hour. Hard work or easy work it is $42 an hour. You should do accordingly.

asphaltgambler · 12:26 PM

You should be able to charge fair market for what you do and hopefully make a fair profit. If you're not making a fair profit it's a huge waste of your time and company's resources.

For what? Future business with these guys? If you win the bid, solve their problem but have either little or no fair profit to show, how have you grown your business? If you do that you're just trading dollars and giving away your company's talent. They on the other hand have their problem solved and now go on to generate a profit. Now they have the expectation that next time you will solve their problems at "cost" to your company.

At the very least I would bid initialy to what ever profit margin is the norm. If you have a good relationship / contact and feel you may get a second chance to counter bid, bid appropriately higher

I had a friend who owned a small trucking company. When business started to go downhill, he lowered his price per mile to the point he was just about breaking even. That is of course if absolutely nothing went wrong, which was rare. So he was moaning and groaning one day about how bad things were. I asked him if he was doing OK. He said he was almost losing money on every run he was making lately. So I told why even send the rigs out then?
His reply " I need the money!! ...............WTF??