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Thread: Labor and profit - Same thing?

  1. #1

    Labor and profit - Same thing?

    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.

  2. #2
    "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 DeCristoforo

  3. #3
    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.
    JR

  4. #4
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    Quote Originally Posted by Matt Campbell View Post
    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.

  5. #5
    Quote Originally Posted by Neal Clayton View Post
    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

  6. 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.
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  7. #7
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    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.

  8. #8
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    Quote Originally Posted by David DeCristoforo View Post
    "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.
    Last edited by Don Bullock; 12-04-2008 at 11:47 PM.
    Don Bullock
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  9. #9
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    Quote Originally Posted by Matt Campbell View Post
    ... 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.
    Tom Veatch
    Wichita, KS
    USA

  10. #10
    Quote Originally Posted by Tom Veatch View Post
    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.

  11. #11
    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.
    David DeCristoforo

  12. #12
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    Are you running a business or...

    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.

  13. #13
    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

  14. #14
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    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.

  15. #15
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    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.

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