Costing the job

Every company already knows its total costs — they are in the accounts at the end of the year. Costing exists to push those totals down to the level of a single job, before the job is agreed, so a decision can be made while it is still reversible. Without it, a business can be profitable overall while systematically losing money on a third of what it makes, and never find out which third.

1. 01Establish the material cost

   Start from the finished dimensions, add machining allowance, then work out the stock size you can actually buy. A part needing 46 mm of round bar is bought as 50 mm, and you pay for the 50. Include the offcut you cannot use, and price the material as it will be purchased — per bar, per sheet, per kilogram — not as a theoretical volume.

2. 02Build the routing and get the cycle times

   List every operation in sequence with the machine it runs on and the time per part. For a new part these are estimates from similar work; for a repeat they should come from what actually happened last time, not from what was estimated last time. The difference between those two numbers is where estimating either improves or repeats itself.

3. 03Separate what happens once from what happens every time

   Setup, programming, first-off inspection, tooling and fixtures happen once per batch or once ever. Cycle time, material and handling happen per part. Divide the once-per-batch costs by the batch size — and be sure that is the batch size the customer will order, not the annual volume.

4. 04Add outside processes at quoted prices

   Heat treatment, plating, painting, non-destructive testing, calibration. Get a written price for the actual quantity, note its validity period, and include the carriage in both directions. Outside processes also carry lead time, which belongs in the delivery promise as much as the cost.

5. 05Recover overhead

   Machine hour rates normally carry the factory overhead already — building, power, maintenance, depreciation, indirect labour. Sales, administration and management costs are recovered on top, usually as a percentage. Applying both a loaded machine rate and a second general overhead percentage without checking is the most common way to double-count and price yourself out.

6. 06Add scrap, yield and contingency deliberately

   If the process yields 97%, you must start 103 to ship 100, and the material and the operations up to the point of loss are consumed by all 103. Add contingency as a stated, separate line for the specific risk you are carrying — a new process, an unproven tolerance — rather than quietly inflating the cycle times.

7. 07Write down every assumption

   Batch size, material grade and source, drawing revision, tolerance interpretation, lead time, packaging, delivery terms, tooling ownership, price validity. This list travels onto the quotation. Without it there is no way to tell, six weeks later, whether the price still applies to what the customer ordered.

8. 08Convert cost to a recommended price

   Apply the target margin, then sense-check the result against what the part is worth and what it has been sold for before. Costing produces a floor; the market produces a ceiling; the price sits between them and is a commercial decision, not an arithmetic one.

The point
Two lines carry the whole risk. Setup at £0.73 per part assumes a batch of 250 — at a batch of 50 it becomes £3.64 and the price is wrong by a fifth. And the material assumes 3-metre bar at today's price. Both belong on the quotation as stated assumptions, not in the estimator's spreadsheet.

• MistakeSpreading setup across the annual volume instead of the batch

  Why it happens: The customer says 5,000 a year, the estimator divides a four-hour setup across 5,000 parts, and the setup contributes pennies. The customer then orders 250 at a time — twenty setups, not one.

  What to do instead: Cost the batch the customer will call off. If the pattern is unknown, present a price break table so the quantity assumption is visible to the buyer rather than buried in your arithmetic.

• MistakeCosting material from the finished size

  Why it happens: The model gives a part volume, the estimator multiplies by density and price per kilogram, and the number looks right. Nobody pays for a part-shaped piece of steel; you buy bar stock and throw some of it away.

  What to do instead: Cost from purchasable stock size including cut-off, facing allowance and the unusable remnant. On sheet work, cost the nest, not the part.

• MistakeDouble-recovering overhead

  Why it happens: The machine hour rate already includes factory overhead, and then a general overhead percentage is applied on top of the whole cost. The company quietly becomes uncompetitive and blames the market.

  What to do instead: Write down once, on paper, exactly what each rate contains. Every element of cost should be recovered exactly once, and someone should be able to point at where.

• MistakeUsing last year's rates

  Why it happens: Machine hour and labour rates get set during a budget exercise and then never revisited, while power, wages and maintenance all move. The rates drift from reality in one direction only.

  What to do instead: Recalculate rates annually at minimum, and re-run them whenever a major cost moves. Date-stamp the rate set used on every estimate so you can tell later which prices were built on which assumptions.

• MistakeHiding contingency inside the cycle time

  Why it happens: The estimator is nervous about a tolerance so quietly adds 20% to the machining time. Production then beats the estimate every time, the estimate is believed to be accurate, and nobody learns anything.

  What to do instead: Show contingency as its own line with a stated reason. It can then be argued about, reduced deliberately, and removed on the repeat order.

• MistakeNever comparing the estimate to what actually happened

  Why it happens: The job runs, the hours are booked, and nobody puts the two side by side. The same optimistic cycle time is used again on the repeat order, and again on the one after that.

  What to do instead: Review estimated against actual on a sample of completed jobs every month. The value is not in the individual variance but in the pattern — the operations that are consistently underestimated are a fixable problem.

• MistakeForgetting freight and packaging

  Why it happens: They are small, they belong to somebody else, and the drawing does not mention them. On a low-value high-volume part they can be several percent of the price.

  What to do instead: Include packaging, pallets, and carriage on the delivery terms actually being quoted. If the terms are not stated, ask before pricing rather than assuming ex-works.

• Estimating or should-cost model
• ERP or MRP for routings, rates and historic actuals
• Material supplier price lists
• Time study or shop-floor data collection for actual cycle times

Direct cost

Cost traceable to the job itself — material, the labour and machine time that converts it, bought-in processes.

Overhead

Cost of running the business that cannot be traced to one job — building, management, sales, administration — recovered across all work by an agreed rule.

Machine hour rate

The cost of running one machine for an hour, normally including its share of building, power, maintenance, depreciation and indirect labour.

Setup

Work done once per batch regardless of quantity: tooling, programming, first-off. The reason unit cost falls as batch size rises.

Yield

The proportion of parts started that are good enough to ship. A 97% yield means starting 103 to ship 100.

Should-cost

An independent build-up of what something ought to cost, used to test a supplier's price or your own.

Contribution

Price minus variable cost. What each unit contributes towards fixed costs before any profit exists.

Nesting

Arranging parts on a sheet or bar to minimise waste. On sheet work the nest, not the part, is the real material cost.