Labor and profit - Same thing?

[Matt Campbell]

LOML and I are in disagreement about this. She thinks labor and profit are the same thing, and I should not charge profit. On the other hand, from my research profit is separate and should be between 20-40% of materials and labor. So I charge profit. What are your thoughts? This whole business/pricing side of custom-making furniture for a living is the hardest part.

[David DeCristoforo]

"Labor" is what it costs you do do the job. "Profit" (not to be confused with "overhead") is money "left over" at the end of the job that you are free to use as you see fit.

[J.R. Rutter]

You are right Matt. Whether you think of it as an extra high labor rate or profit, you should pay yourself for your time and have money left over.

[Neal Clayton]

LOML and I are in disagreement about this. She thinks labor and profit are the same thing, and I should not charge profit. On the other hand, from my research profit is separate and should be between 20-40% of materials and labor. So I charge profit. What are your thoughts? This whole business/pricing side of custom-making furniture for a living is the hardest part.

do artists charge by the time it takes them to paint, sculpt, etc? or do they charge what they think the art is worth?

if i pay someone to make a custom item for me, i'm prepared to pay more for it. if i want the cost of the item + a set margin, i'd go to ikea.

in fact if i hire a contractor to do something that i either don't know how to do myself or don't want to do myself, and he starts talking about how something "can't be done" or "would cost too much" i pretty much cut it short right there and look for someone else. he's either embarrassed about the cost due to not being able to accomplish what i want, or he's more concerned with how many checks he has in his pocket on friday than the quality of his work.

[Anthony Anderson]

do artists charge by the time it takes them to paint, sculpt, etc? or do they charge what they think the art is worth?

if i pay someone to make a custom item for me, i'm prepared to pay more for it. if i want the cost of the item + a set margin, i'd go to ikea.

he's either embarrassed about the cost due to not being able to accomplish what i want, or he's more concerned with how many checks he has in his pocket on friday than the quality of his work.

Or possibly, he/she has wasted so much time estimating/designing a client's request, and then only to realize that the potential client, "did not really want to pay that much", that he just recognizes what will be more profitable for him/her, and which requests will more than likely be a waste of time. Just the same scenario, from another perspective. And yes, everyone should worry about making a profit, especially an artisan. That is the fruits of their labor, coupled with enormous pride in their work. Regards, Bill

[Frank Hagan]

A lot of people selling their labor do so on a "time and materials" basis, and for those folks who do it as a sole proprietor, "labor" does equal profit. A plumber (with no employees) is an example of this category. But, the plumber really hasn't added much value to the equation. If the plumber takes a faucet, and charges $80 an hour to install it, the faucet is worth the installed price of a faucet.

A woodworker is more like the foundry that makes the faucet. Both take raw material, use specialized tools, rare skill and esoteric knowledge, and create something worth far more than the time and materials to create it. $100 of bronze, stainless and plastic becomes a $400 faucet, just as $300 of wood becomes a $1,200 table.

I don't think a craftsman should think of himself as a time and materials person. Part of the equation has to be how much something is worth. Then you can decide if its worth making it considering the amount of time, the cost of materials, and if it meets your profit or gross margin goals.

[Ben Franz]

Separating costs, labor and profit is crucial in managing any business but especially a small one. Your pricing structure needs to factor in direct costs (related to the specific job), indirect costs (overhead, if you will), an appropriate hourly rate for the business owner and a reasonable profit for the business itself. The profit is the reward for the risk of doing business and can be used by the owner to grow the business or taken out for personal use. The Journal of Light Construction has, over the years, printed a few articles about this topic and the math involved. Many of the ideas can be generalized to any small business.

Pricing of custom woodwork is always going to be subjective since the aesthetic appeal of a piece is a huge factor in determining what any particular buyer would be willing to pay. Any creative effort has this problem. My $.02.

[Don Bullock]

"Labor" is what it costs you do do the job. "Profit" (not to be confused with "overhead") is money "left over" at the end of the job that you are free to use as you see fit.

David is correct. If you are into woodworking to make money, you have to show a profit or you won't make any money.

In another post you stated:


I should add that I'm doing this for a living now.

You can't make a living at anything without making a profit. While your wife may feel bad that the piece you made for your friend is expensive she has to understand that you have to make a profit on what you make to pay the bills at the end of the month. In the case of woodworking for a living your labor is where you make most of your profit. Your time and effort (labor) is where you make the money. Don't forget to add in all the other costs, i.e. utility bills (machined use electricity), machine depreciation, etc. when you figure in your actual cost for making things.

[Tom Veatch]

... labor and profit are the same thing...

Think of it this way, Matt. If you were in business and had an employee to produce your product, you would pay that employee his/her wages plus buy materials, pay utilities, equipment depreciation, facility maintenance, employee benefits, etc. If all you charged for your product was what it took to cover your payroll plus the other business expenses, would your business be making any money?

That doesn't change just because you may be the only employee. If your pricing schedule is set up to do nothing more than make payroll and pay expenses, why put up with the headaches and aggravations of running your own business. Hire yourself out, work for wages, and let some other poor fool suffer the headaches and aggravations.

[Matt Campbell]

Think of it this way, Matt. If you were in business and had an employee to produce your product, you would pay that employee his/her wages plus buy materials, pay utilities, equipment depreciation, facility maintenance, employee benefits, etc. If all you charged for your product was what it took to cover your payroll plus the other business expenses, would your business be making any money?

That doesn't change just because you may be the only employee. If your pricing schedule is set up to do nothing more than make payroll and pay expenses, why put up with the headaches and aggravations of running your own business. Hire yourself out, work for wages, and let some other poor fool suffer the headaches and aggravations.


Exactly what I said to LOML.

[David DeCristoforo]

There needs to be a clarification here between "earning a living" and "making a profit". Let's say you work for one month and at the end of that month you have covered all of your expenses for that month. You paid for the materials, your shop rent, utilities, insurance, everything. Plus you ate for that month as did your family and you all had a roof over your heads and some gas in your tank and clothing to wear. You paid all of your personal expenses (phone bill, power bill, etc.) but at the end of the month you had no money left. You have not made a profit. You have earned a living. Theoretically, you could continue like that forever given that you could find steady work. But you will never be able to move from that spot unless you actually make profit that you can use to improve your situation. Buy better tools for example or build your business or buy advertising (re-investing your profits). Or take a vacation or buy a jet ski or whatever. There is a not so subtile distinction here.

[Andy Pedler]

So are you in business or are you doing a favor for a friend? There's your difference, plain and simple.

If you look at this in a cold economic point-of-view (which you must, if you are really running a business), you want to charge your customer the maximum amount that they are willing to pay for the piece, regardless of how long it takes you make it. It is the market value of the piece being sold that determines the price. Anything less and the buyer is getting a bargain, which doesn't sound like a good business strategy.

This is similar to the old saying about the difference/similarity between an employer and an employee. The employer's goal is to get the most work for the least pay from every employee. The employee's goal is to get the most pay for the least work. A balance is naturally struck where both parties wind up at the equilibrium point (unless you throw in unnatural influences, such as labor unions in this example...but your example of pricing a piece of work is a much simpler scenario than that).

Now, if you aren't really doing this as a business and just an extension of your favorite hobby, then by all means make cool stuff for friends and sell it to them for the price of the lumber and maybe a new router bit or some tool maintenance. But if this really is a business, you need to try to think about things unemotionally.

[Tim Null]

Here is my take on this.

I run a company that does worker's comp evaluations of medical reports.

I am uniquely qualified for this, having been on the committee that wrote the schedule to use the AMA Guides in California.

So I have expertise that very few have. I charge my clients based on how many reports I reiview and how fast they want it done.

It may take me 5 minutes to review a simple report, I charge $95.00 for that.

They are paying for my expertise, not how long it takes me. If they could do it themselves, they would not need nor hire me.

If it takes me 30 minutes to review that same report, I still charge $95.00 since that is my rate for a single report.

But most take closer to 5 minutes, not 30. So I have factored in my time, materials, (I pay a typist) and most importantly, my skill. That is the "X" factor.

I can charge what I do because the market will bear it and my expertise is worth it, based on the hundreds of clients I have who use my services several times a week.

I also carve custom adult airgun stocks as a side business. A stock usually runs $225.00.

Materials run about $115.00. So labor and profit are $110.00 on an item that takes at least 20 hours to complete.

But the market will not pay more than what I charge. So I cannot really be compensated for my time and skill.

Obviously my first business pays the bills....LOL

If your woodworking is good enough to add a profit margin above your time and people are willing to pay for it, then you should add it in.

My ..02

TimN

[Radek Kowalski]

The way I was taught to break it down is like this.
Direct Costs (Labor, materials)
Overhead Costs (Shop, tools, office)
Profit

This method works for me. Nice and simple.

[Steve Rozmiarek]

Good advice so far, but I'll add one thing, think of your business as an investment. What rate of return do you want out of your investment? You are in essence your own "fund" manager, growing your own investment, which gives you a lot of responsibility. Realistically, if you can't beat a normal investment's rate of return, you are wasting your own time and money.

Only you can pick what your goals are, but I would guestimate that a normal return on investment goal for a small business like yours should be 10% to 20%. I go a bit higher in mine.

Figure this number by using a balance sheet, or more simply, add up what you've put into your business to start out, and at the end of the year, figure out what you owe and own, and compare numbers. You should gain net worth.

Startups are tough though, and it is common to loose money for a short time to get to a position to make money. This MUST be planned though. Don't let sentimentality get in the way of the cold hard financial facts.

[Rick Fisher]

Think of your woodworking business as a seperate individual. You are the employee. The business pays you and makes a profit.

If you arent making a profit, go work for someone else. You should make more profit than wages IMO.

The single biggest issue facing small business is failure to charge the right amount. Your woodworking business should be able to pay you a wage for a few months or more, without any business ...

Treat the profit and labor as two seperate components and you will have a real business.

[chris dub]

Profit is the compensation to the owner for the risk of being in business. You should keep your profit in the bank for the business, pay the owners for thier risk or use it to reinvest in the growth of the business. Or it covers you in the down time so you can still eat. That's how the automakers are loosing money but are still "in business". They are living on yesterday's profit. But the workers are all still getting thier paychecks to pay thier bills.

[Rich Engelhardt]

Hello Matt,

What are your thoughts? This whole business/pricing side of custom-making furniture for a living is the hardest part.
SCORE - Service Corps of Retired Executives.
They offer free business advice to small business people.
Excellent source of information of all sorts, from accounting to sales to marketing to you name it.

[Drew Eckhardt]

LOML and I are in disagreement about this. She thinks labor and profit are the same thing, and I should not charge profit. On the other hand, from my research profit is separate and should be between 20-40% of materials and labor. So I charge profit. What are your thoughts? This whole business/pricing side of custom-making furniture for a living is the hardest part.

Labor is a fair wage fo the work in question. When Yo Co employs you it pays its share of FICA+medicare and witholds your share. After that you pay income taxes.

Profit is what's left after you've paid for all the expenses. You, Inc. distributes it to the company owners (which may be just you). When You Co opts to be taxed as an S-corp the profit is taxed at the share holders' ordinary income tax rates with no FICA+medicare surcharge.

Smart companies price goods to maximize the product of profit per unit and number of units sold. In some cases the potential profit isn't enough to make it worth your while.

Talking to an acountant about this could save you thousands of dollars in taxes.

[Derek Hansen]

My 2 cents.

For your own accounting purposes, I say you can think about it however you want. However, when you are invoicing the client, I think it should all be built into your labor rate. Whether you split it into "labor" and "profit" or not, it's all money that goes into your pocket.

If I was a customer of a 10 hr project for example, and you charged $40/hr labor plus a $150 profit, I would asking questions like "aren't you making profit from the $40/hr I'm paying you" and thinking "hmm, I wonder if he would do it for a little less profit". I honestly would rather just see a $55/hr labor rate.

[Matt Meiser]

In the consulting industry, at least at the firms I've worked for, billing is done as Derek describes. We bill clients X per hour for a time and materials job or X total for a lump sum job. The hourly rate on a time and materials job includes labor (salary, benefits, etc.) overhead (office, electricity, phones, computers, marketing, management, etc.) and yes, a profit margin.

[Peter Gavin]

From an IRS perspective, a Schedule C business (i.e. not a corporation) cannot deduct the owner's labor costs when calculating profit. In other word labor is considered profit.

In the real world however, you may prefer to break out a labor and profit segment. You could simply figure out what would be a fair wage for the type of work you do (if you were working for someone else) and add an amount above that to reflect your profit needs. You could calculate it as a % of the invewtmetn in the company (paying yourself a rate of return on your invested capital) or a management fee for the work you do that is not directly related to your 'job', or any number of any schemes.

The one thing I would Not do, however, is seperate out the Labor and Profit items on your invoice. I don't beleive in sepating out labor form materials etc anyway unless it is absolutely necessary. I think you should say you will build this item for this cost and leave all the details to yourself.

Pedro

[Thomas Williams]

Labor is a component of production. The value or money earned by someone's labor would be their wage. An accounting profit is the difference between the selling price and the total cost of production. So if you build your neighbor a piece of furniture, and charge for it, the amount you receive over the material and other costs would be only your wage.
By the way, IRS considers it income.

[Art Mulder]

She thinks labor and profit are the same thing, and I should not charge profit. On the other hand, from my research profit is separate and should be between 20-40% of materials and labor. So I charge profit.

Lots of interesting discussion in this thread on the difference between profit and labour...

But what about the big picture? Matt, if people are paying your price and giving you business, then why would your wife want you to charge less?

All other arguments aside, doesn't everyone charge what the market will bear?

For that matter, if you've got business lined up for the next 6 months (for example), then maybe you should charge more. ;)

[Jim Becker]

Labor is the cost/price of the services you provide in a given time period and doesn't directly represent "profit". There is no profit until your costs, including labor at whatever rate is appropriate, are covered. You certainly have the option of gifting your labor to someone and that's likely what your spouse is really suggesting you do. That's one of the reasons I'll never take "commissions" from a family member, not that I take them from anyone else, either. (No time) There tends to be this automatic expectation that because they are family/close friends, your time shouldn't count in the cost of producing something...

[Hank Knight]

There are two ways to bill for you work: "Time + Materials": and "By the Piece" or "Fixed Price". When you go to the fine furniture gallery to purchase a hand made piece, it's price is marked on the tag. It's one fixed amount, not $X for Materials plus Labor at $Y/Hr. In that case, the profit is built into the total price for the piece, but the purchaser has no idea whether it took the craftsman 30 hours to build or 300.

If you contract to do a job on a time and materials basis, the hourly rate you bill for your work should take into account your skill/proficiency level and a reasonable profit. It's hard to separate these two concepts (skill level and profit) and most people just lump the two together, with the more experienced craftsman commanding a higher hourly rate.

In my business - law practice - I normally bill my work on an hourly rate basis. My hourly rate includeds my overhead and takes into account the fact that I've been practicing law for 30 years and it's higher than a first-year lawyer right out of law school. This takes into account that it will probably take me less time to complete the project than a less expereinced lawyer and (hopefully) I bring more value to the task by virtue of my experience. Sometines I sell my work on a fixed fee basis: I'll do this job for X dollars. When figuring what I'll charge for a fixed fee, I figure my hourly rate for the estimated number of hours it will take me to complete the project. If the first year lawyer is going to do the job, I figure more hours at his lower rate plus some of my time to review his work product. This calculation will give me a fixed fee for the job. Billing this way is something of a gamble. If it takes me longer to complete the project than I anticipated, I lose money. On the other hand, if I complete it in less time than I estimated, I come out ahead.

It's similar with selling a piece of custom woodwork. You can charge for it on a time and materials basis or on a fixed fee basis. If you're contracting in advance to produce the work for a fixed price, you're like me agreeing to to complete a project for a fixed fee. You're assuming the risk of unanticipated difficulties that will complicate the task, and might choose to build some cushion into the price for such contingencies to protect yourself. If you're pricing the piece after you've built it, there's less risk - you already know how long it took to build and what it cost you. But in any case, in charging for your work, you need to cover your costs then pay yourself for your time and your experience and include in your rate a reasonable profit for your work. That's why you're selling your work. Don't give it away.

My $.02

Hank

[Cliff Rohrabacher]

doesn't that depend on how you do your accounting?

You could use a base cost for labor and pay yourself a salary from that letting the corporation you own take it's standard pass through fees and then calculate a profit on top and hand that whole final number to the customer as their cost for an a hour of labor.
Then calculate the cost of materials to your corp., and add handling fees, then, paste profit to that and hand that as a yer another whole number to the customer.
So the Customer sees two numbers: labor and material
You could if you were that picky.

I don't do that in my practice. I charge two ways : (a) full fare ride and (b) discounted. Whichever I charge the client sees either as single unitary number. The client does however, see the full fare ride fee when I discount them. That's only because I want them to know when they are getting a break. I put it in the retainer.

[Chip Lindley]

DITTO Tom! My exact thoughts completely! Ya beat me to it! Profit exceeds any hourly rate I charge, if I am my only employee! Usually a percentage above what time and materials and overhead, which the *competitive market* will bear.

You underprice, you work yourself to death with nothing to show for all that effort. You overprice, you starve. But there are always exceptions, due to the fickleness and trendiness of the general public.

[Kevin Godshall]

Here is my 2 cents, most of it from the hundreds of potential $$$ I've probably lost learning my way around my "sole proprietorship".....

I started small- small tools, small jobs, small pricing - hoping to build a business and a clientele. Well, the everything got bigger- the jobs went from knick knack shelves to bookcases, so the equipment went bigger too. The pricing mentality still wasnt right and that grew but not enough.

I was equating labor rate with profit, however when it came time to buy the new tablesaw, planer, bandsaw, jointer, routers, sanders, etc etc., my labor money (money to live on basically) went into my shop.

If I had planned on profits, over labor, I could have had my shop pay for upgrades, rather than myself and my family. If the day ever comes that I need to hire someone, I want to know that I'm not giving of my own for expenditures, and my employee gets to keep his.

[NICK BARBOZA]

I would consider labor part of the goods produced and profit is on top of that. I'm in commercial construction, and whenever we put out a quote/bid, we will break it down labor, materials and consumables. We will then mark the whole thing up a percentage for OH&P (overhead & profit). This is standard practice in our neck of the woods.

Although personally, when i quote someone for a woodworking project i only give them a lump sum, no breakdown of labor/mat/cons. and if it a person i "like" or am just enjoying the hobby/project, i wont mark up my materials. But if its a job i dont want or a person i dont feel like dealing with, my markup goes pretty high. And if i land a job like that, at least ill make some good money for my time spent.

Also, some people seem to think that profit is a "four letter word." There is nothing wrong with trying to make money. Without profit, you are not successfully running a business.

Good luck.
Nick

[Chris Weishaar]

For your own accounting purposes, I say you can think about it however you want. However, when you are invoicing the client, I think it should all be built into your labor rate. Whether you split it into "labor" and "profit" or not, it's all money that goes into your pocket.

Derek,

I whole heartedly agree with this statement. I work in the architecture and construction business. I am very used to paying O&P to the general contractor or developer. This is pretty much standard for the industry and it represents the time and materials needed to manage and coordinate the sub-contractors. For instance the electrical quote could be $10,000 and I would pay 8% or $800 to the GC for his managing the bid and scheduling and inspecting the work of the electrician.

Now due to time constraints and other issues I have hired a cabinet maker a couple of times for work around my house. When I send drawings to him I am only interested in a total cost the work. The number that I am given includes all time, materials and profit. I then decide if that is reasonable or not. I don't care what the break down of labor and profit is. I hope he is making enough profit to make it worth his time.

In short I would say that breaking out labor and profit as separate items would depend upon what others in your field and area typically do. As a consumer of cabinet work and furniture I am only interested in the overall cost to me and whether the cost is worth it to me. If I saw an estimate that broke out labor and profit I would believe that I then have the opportunity to negotiate the profit portion in order to get a better price. I do that with GC's and develors all of the time.

Chris

[Scott Loven]

I would do the above as a reality check to help me determine my minimum price and then charge what ever I think they would be willing to pay.
Scott

[tim rowledge]

There's a difference between how you see your costs and profits and how your clients should see your charges.

You need to decide on how much your labour is worth and charge that to the project. You need to make a profit on top of that in order to make it worth running the business. You have to pay fixed costs and split them up between projects by some division that makes sense to you.

Your client needs to see a simple, intelligible cost, just like you don't want to see bills from the lumber yard split into labour, profit, land costs, coffee, mileage etc.

If you are good at what you do and would consider $X/hr a sensible wage then take nothing less *unless* you can't get work at the final cost that it implies. That of course will tell you that no-one else thinks you are worth that much.... Your duty to yourself and your family is to charge as much as you possibly can and maintain a sensible work/life balance. If you can make enough money to feel comfortable whilst working 10hrs a week - good on you! Enjoy the fishing or whatever.

[Neal Clayton]

Or possibly, he/she has wasted so much time estimating/designing a client's request, and then only to realize that the potential client, "did not really want to pay that much", that he just recognizes what will be more profitable for him/her, and which requests will more than likely be a waste of time.

so why wouldn't such a person charge a non-refundable deposit past the initial inquiry to weed out such people?

i don't mind paying for skilled work, and if it takes more time than the person in question can spend, that's fine, tell me "hey this is gonna take too much time, sorry i just don't have that many hours in a day". that's completely understandable. no one appreciates being lied to, and speculating that the person doesn't want to hear the truth doesn't really justify it.

[Gary Breckenridge]

:cool:Labor pays the worker.
Profit pays the owner.:cool:

[William OConnell]

There are two ways to bill for you work: "Time + Materials": and "By the Piece" or "Fixed Price". When you go to the fine furniture gallery to purchase a hand made piece, it's price is marked on the tag. It's one fixed amount, not $X for Materials plus Labor at $Y/Hr. In that case, the profit is built into the total price for the piece, but the purchaser has no idea whether it took the craftsman 30 hours to build or 300.

If you contract to do a job on a time and materials basis, the hourly rate you bill for your work should take into account your skill/proficiency level and a reasonable profit. It's hard to separate these two concepts (skill level and profit) and most people just lump the two together, with the more experienced craftsman commanding a higher hourly rate.

In my business - law practice - I normally bill my work on an hourly rate basis. My hourly rate includeds my overhead and takes into account the fact that I've been practicing law for 30 years and it's higher than a first-year lawyer right out of law school. This takes into account that it will probably take me less time to complete the project than a less expereinced lawyer and (hopefully) I bring more value to the task by virtue of my experience. Sometines I sell my work on a fixed fee basis: I'll do this job for X dollars. When figuring what I'll charge for a fixed fee, I figure my hourly rate for the estimated number of hours it will take me to complete the project. If the first year lawyer is going to do the job, I figure more hours at his lower rate plus some of my time to review his work product. This calculation will give me a fixed fee for the job. Billing this way is something of a gamble. If it takes me longer to complete the project than I anticipated, I lose money. On the other hand, if I complete it in less time than I estimated, I come out ahead.

It's similar with selling a piece of custom woodwork. You can charge for it on a time and materials basis or on a fixed fee basis. If you're contracting in advance to produce the work for a fixed price, you're like me agreeing to to complete a project for a fixed fee. You're assuming the risk of unanticipated difficulties that will complicate the task, and might choose to build some cushion into the price for such contingencies to protect yourself. If you're pricing the piece after you've built it, there's less risk - you already know how long it took to build and what it cost you. But in any case, in charging for your work, you need to cover your costs then pay yourself for your time and your experience and include in your rate a reasonable profit for your work. That's why you're selling your work. Don't give it away.

My $.02

Hank
Well put Hank
Ive been making my living as carpenter working wood for 30 years
I charge by the hour for myself and employees and the rates are different with theirs being lower than mine. I make a profit on their labor
Either way workers compensation, taxes and profit are figured into the hourly rate.
However having said that I find it better to give fixed rates for each job and always up front.

[Frank Hagan]

Well put Hank
Ive been making my living as carpenter working wood for 30 years
I charge by the hour for myself and employees and the rates are different with theirs being lower than mine. I make a profit on their labor
Either way workers compensation, taxes and profit are figured into the hourly rate.
However having said that I find it better to give fixed rates for each job and always up front.

As a consumer, I actually like a contractor's quote for the total job cost, rather than seeing it broken out into materials and labor. It removes the burden of worrying about the guy's workers taking too many smoke breaks that I have to pay for. And I know exactly what its going to cost.

I'm surprised there isn't something like the Construction Estimator books for woodworking projects. Maybe there is (I'm only familiar with the plumbing books out there).