The blended rate problem
Many machine shops cost their work at a single hourly rate. It covers the operator, the machine and the overheads, and it is simple to use: hours on the job, multiplied by the rate.
It worked well enough when one person stood at one machine for the whole job. Modern work does not look like that. A five-axis machine runs a long cycle while its operator sets the next job, loads a second machine or deburrs the last batch. Bar-fed lathes run into the evening with nobody there at all.
With one blended rate you have to choose which hours to count, and both choices are wrong.
A worked example
Take a job that runs for 10 hours on a five-axis mill. The operator is only needed for half of that. Suppose your true costs are:
| Rate | Hours | Cost | |
|---|---|---|---|
| Labour | £28 an hour | 5 | £140 |
| Machine | £35 an hour | 10 | £350 |
| Overhead | £15 an hour | 10 | £150 |
| Total | £640 |
Now cost the same job with a blended rate of £78 an hour, which is simply the three rates added together:
- Count the machine hours: 10 × £78 = £780. The job looks £140 more expensive than it was. Quote on that basis and you lose work you could have won.
- Count the operator's hours: 5 × £78 = £390. The job looks £250 cheaper than it was. Quote on that basis and you win work that loses money.
Neither figure is a rounding error. They are different answers to the question "did this job pay?"
Three rates, two kinds of hour
The fix is to keep the pieces separate:
- a labour rate for the person, applied to the time they actually spent on the job
- a machine rate for the machine, applied to the time it was running the job
- an overhead rate for the building, the power and everyone who does not book to jobs, usually recovered on machine hours
Each work centre gets its own. A manual bench has almost no machine rate and a full labour rate. An unattended lathe is the other way round.
Where the hours come from
Separate rates are only as good as the hours behind them, and nobody keeps two timesheets by hand. In practice you need:
- Bookings at the machine, so start and stop times belong to a job and an operation.
- A way to say how attended a machine is. If one operator normally minds two machines, their labour is shared between the jobs running on them.
- Unattended running. When an operator leaves a job cutting and moves on, the machine time carries on and the labour stops.
- Time that is not on a job, such as setting, cleaning and meetings, kept out of job costs and visible in its own right.
What changes when you do it
- Quotes for long-cycle work get sharper, because you stop charging a full operator to a machine that mostly runs itself.
- Hand-intensive work stops hiding, because its labour is no longer diluted by a cheap blended rate.
- Investment decisions get easier. The case for a pallet system or a bar feed is the labour hours it removes. You can only see that if labour is measured separately.
- Estimate against actual means something, element by element. Over on material is a purchasing conversation. Over on labour is a method conversation.
Start small
You do not need perfect rates to begin. Split the rate you use now into three sensible parts for your main work centres, start capturing attended and machine time separately, and review after a quarter. The first surprise is usually which jobs were carrying the rest.