Pricing Pitfall #2: Miscalculating Labor Costs

by Jane Button on February 13, 2011

 

Miscalculating Labor Costs or Charging Too Little or Nothing for Your Own Labor:

 

If you have a small manufacturing business or cottage industry, a huge miscalculation I see all too often is miscalculating labor costs or forgetting to pay yourself what you would have to pay someone else and factor this into your Cost of Goods model. 

 

This happens for a few reasons.

 

Number one: You may think you know what a manufacturer will charge you for your production, but in fact your costs were based on estimates and not the true costs. This could be due to production changes, the quantities you ordered (not meeting minimums) or perhaps you got an estimate that is now out of date. Rule of thumb here is to have a written agreement with your contractor with quantities. You do not want surprises when it comes to your calculations.

 

Number two: Not paying yourself if you are making the product your self. Too many artisans and cottage industries are under the mistaken notion that since they are making the product they are saving money or don't need to add it in to their costs. NOT TRUE! You must add into your costs what you would have to pay someone else to do what you are doing in making your product. If you don't you will never make money and you will never grow bigger. You will have a hobby and not a business.

 

It pays to talk to other contractors and have them give you an estimate of what they would charge for making your goods.  Don't just take it for granted that however much time it takes you to manufacture is the same time and money that it would take someone else. It could be far less.

 

You may also want to do a time study on how long it takes to make your goods. Spend a few hours with no distractions so you know exactly how much time each activity takes in your production process. And better still is to have more than one person working at the same time so you can really tell what the productivity rate is. This way you know what you can pay per piece rather than per hour.

 

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