Before you begin
Bring four weeks of time records and monthly operating costs, or use the fictional example. Dollar figures are illustrative and are not recommended rates.
What this lesson covers
- Separate available time from recoverable job time.
- Calculate a rate with one defined cost base.
- Avoid counting the same overhead twice in a quote.
Recommended preparation
No earlier lessons are required. Start with the planning information listed above.
01 / Key concepts
How it works
The hour spent at the bench must help support the hours spent answering enquiries, maintaining tools and ordering stock. Start by defining which costs your rate recovers. Then use realistic recoverable job hours. An internal recovery rate helps calculate cost; it is not automatically a market price or an accounting wage.
- Recoverable hours
- Hours allocated to customer work through which the chosen costs are recovered.
- Loaded recovery rate
- An internal hourly allowance covering the explicitly listed labor and operating costs.
1. Record time honestly
For each week, separate making, design, customer communication, purchasing, maintenance and administration. Decide which job-specific tasks are costed directly and which are recovered through the rate. Finishing wait time occupies calendar space but is not automatically hands-on labor. Do not assume every available hour can be sold.
2. Define the monthly recovery target
List the compensation allowance and business costs that your internal rate must recover. Include only the chosen categories: perhaps utilities, rent allocation, insurance and maintenance. Keep direct materials, delivery and separately charged machine costs outside that pool. SBA's cost and break-even guidance explains why identifying fixed and variable expenses matters; the hourly method here is an original planning application.
Source: U.S. Small Business Administration — Plan your business
3. Divide by plausible job hours
Divide the monthly recovery target by realistic recoverable hours. Use a lower-hours scenario as well. If the rate exceeds what the chosen product can support, improve the process, change the offer or reconsider the capacity plan. Simply using more optimistic hours hides the shortfall.
4. Carry the definition into every estimate
Write what the rate includes beside it. Multiply all direct job hours by the rate, then add only costs outside that rate. Add your chosen profit allowance after building the cost base. Keep a separate cash forecast for payment timing and ask your accountant how compensation, tax and profit should be recorded in your business.
Key points
- Separate available time from recoverable job time.
- Calculate a rate with one defined cost base.
- Avoid counting the same overhead twice in a quote.
02 / Worked example
A 120-hour month does not mean 120 billable hours
Illustrative internal model: monthly compensation allowance $2,400 plus selected overhead $600. Of 120 available hours, 80 are recoverable job hours. Direct materials, sales tax, profit and other unlisted costs are excluded.
| Measure | Calculation | Result |
|---|---|---|
| Recovery target | $2,400 + $600 | $3,000 per month |
| Base rate | $3,000 ÷ 80 | $37.50 per job hour |
| Low-hours case | $3,000 ÷ 60 | $50 per job hour |
| Eight-hour project | 8 × $37.50 | $300 before excluded costs and profit |
03 / Business exercise
Apply the method
Use your own shop information or the illustrative scenario. Prepare drafts and check assumptions before making purchases, publishing posts or contacting customers.
- Classify one month's hours and identify the tasks recovered through your rate.
- List the exact cost categories inside and outside the recovery target.
- Calculate normal- and lower-hours scenarios.
- Apply the rate to a small project and check every cost line for duplication.
Common mistakes
- Dividing by all waking or available hours.
- Treating a loaded rate as pure take-home pay.
- Adding the same rent or machine allowance twice.
Take it further
Recalculate after three completed jobs. Separate slow first-time setup from recurring time before changing the baseline.
Business action checklist
Record your evidence and next decision as you work through each action.
- Classify one month's hours and identify the tasks recovered through your rate.
- List the exact cost categories inside and outside the recovery target.
- Calculate normal- and lower-hours scenarios.
- Apply the rate to a small project and check every cost line for duplication.
04 / Review questions
Review the key decisions
Consider each question, then compare your answer with the explanation. Return to the worked example whenever you need it.
1. At $3,000 recovery and 100 job hours, what is the internal rate?
View hint
Divide the cost pool by recoverable hours.
View explanation
$30 per hour for this defined cost pool, before excluded costs and profit. Confirm that 100 hours are realistic.
2. Can you compare two shop rates without their definitions?
View hint
One rate might include more costs.
View explanation
No. Compare included labor, overhead, machine costs and assumptions before comparing the numbers.
05 / Project notes
Notes for your next project
Check off the topics you have reviewed and record the evidence, assumptions and next actions for your business. This is your personal learning record.
Record: Cost pool, hours evidence, recovery rate, included categories, exclusions and next review date.
No notes recorded. Use this space for your observations.
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Check each topic above to mark the lesson as reviewed. You can browse any lesson at any time.
Put the lesson to work
Use the relevant tools below with your own figures. Dashboard destinations require sign-in and may depend on your plan. External social accounts and publishing are managed in their own platforms.
Sources & further study
WoodWorkCalc writes the exercises and illustrative examples. Named historical cases are attributed separately. These sources support the principles identified in the lesson; their publishers do not endorse WoodWorkCalc. Guidance and platform features can change. Sources retain their own copyright and licensing terms.
- U.S. Small Business Administration — Plan your business (opens new tab)
Market research, startup-cost planning and the fixed-cost/contribution break-even formula. WoodWorkCalc supplies the original shop scenarios and calculations.
U.S. Small Business Administration. Plan your business. Accessed September 14, 2026.