QuotedPartAnswers · Updated 2026-10-30
What profit margin should a machine shop make?
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There is no single correct machine-shop profit margin. Set a target after you know whether your “cost” includes loaded labor, rent, quality, quoting time, maintenance, financing and a realistic utilization rate. Worked example: $400,000 revenue less $340,000 fully loaded operating cost leaves $60,000 operating profit, or a 15% margin on sales. A 15% markup on cost would be different: $340,000 × 1.15 = $391,000, only $51,000 profit and 13.0% margin on the $391,000 price.
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Do not confuse markup with margin
Markup is profit divided by cost. Margin is profit divided by sales. If cost is $100, a 30% markup creates a $130 price and $30 profit; margin is $30 ÷ $130 = 23.1%. A 30% margin requires $100 ÷ (1 − 0.30) = $142.86 price. Put the formula name on your rate sheet so an estimator does not apply a markup when management approved a margin.
The target should be measured after the job closes. A quote can carry a healthy markup and still lose money when setup runs long, material yield is poor or a rework event consumes the margin. Keep contribution by job separate from company net profit, which also absorbs office, tax, interest and owner decisions.
| Method | Price | Profit | Result |
|---|---|---|---|
| 20% markup | $120.00 | $20.00 | 16.7% margin |
| 30% markup | $130.00 | $30.00 | 23.1% margin |
| 30% target margin | $142.86 | $42.86 | 30.0% margin |
Build a margin target from capacity and risk
Start with the annual amount the shop must recover and divide by billable hours to get break-even. Add a profit target that funds working capital, equipment replacement and the risk you choose to accept. A repeat aluminum run with proven workholding may need less contingency than a one-off Inconel part with a long outside heat-treat queue. That is a business decision, not an industry average.
If your shop needs $340,000 to operate and wants $60,000 operating profit, the sales target is $400,000 and the margin is 15%. If only 1,600 billable hours are available, the required average sell rate is $400,000 ÷ 1,600 = $250/hour. A lower rate means the plan misses its profit target even if individual quotes appear busy.
Price the job, then review the promise
For a 10-piece bracket, assume $160 setup, $35 material each and 20 minutes run time at $120/hour. Cost is $160 + (10 × $35) + (10 × 20/60 × $120) = $2,060, or $206 each. A 25% markup gives $257.50 each and $515 total profit. If actual setup is 240 minutes instead of 160, the job loses $160 of expected contribution before any scrap. Record that variance and fix the standard for similar work.
Use a minimum charge where the setup would otherwise be hidden in a tiny part price. Quote quantity breaks from the same cost model; never lower a rate to hide a one-time setup that should be spread across the lot.
What to do next
Choose the margin definition, write the annual cost list, set a documented utilization assumption and review the result quarterly. Then look at completed jobs by customer, machine and part family. If the target is missed, decide whether the cause was rate, sold hours, scope, rework or overhead; changing markup alone can hide the real problem.
Illustrative annual target
- • Fully loaded annual operating cost $340,000; target operating profit $60,000.
- • Revenue target = $400,000; available billable hours 1,600.
| Measure | Value |
|---|---|
| Revenue target | $400,000 |
| Operating cost | $340,000 |
| Operating profit | $60,000 |
| Margin | $60,000 ÷ $400,000 = 15% |
| Required average sell rate | $400,000 ÷ 1,600 = $250/hour |
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