Establishing Budgeted Hourly Rates Boosts Competitiveness

Automobile mileage reimbursement rates are designed to represent the true cost of driving by acknowledging insurance and maintenance costs as well as gas and oil. Similarly, to understand the true cost of a print job or communications campaign, in-plants need to account for salaries, equipment leases, power use and building rent, as well as materials like ink and paper.

The best practice for capturing these costs is with Budgeted Hourly Rates (BHRs) for each process or piece of equipment in the shop. Best practice further requires BHRs be re-calibrated at least once a year to reflect cost-structure shifts.

The rewards can be significant. BHRs help print providers maintain accurate budgets, competitive bids, fair charges and healthy cash flow. Since price—along with security and turnaround time—is a key metric in determining when a job is produced in-house, accurate BHRs can be fundamental to a print operation's success. And since BHRs provide benchmarks for measuring and improving performance, they help in-plants justify their operations and preempt any management initiatives to diminish their roles.

Here's a brief overview of how to establish effective BHRs.

Getting Started With BHRs

The first step in establishing BHRs is to gather the necessary data about the shop's equipment and operations. We recommend working in a software program, such as the in-plant's estimating or MIS application, or even a basic spreadsheet, such as Microsoft Excel. Software will help organize the data, automate calculations and optimize the efficiency of annual calibrations.

Here's a checklist of the basic data required for establishing BHRs.

• Equipment specifications
• Floor space required (in square feet)
• Electricity consumed (while running and while on standby)
• Actual production speeds measured in operation at your shop
• Monthly lease or payment
• Service and consumables costs
• Direct/overhead costs
• Floor space cost rates
• Insurance rates
• Labor costs
• Electricity rates
• Overhead costs

In addition to these basic cost and metrics, print providers need to calculate their equipment utilization. For non-digital equipment, such as offset presses, the key metric is the number of hours the equipment is available per year. Calculate that figure with this formula:

(Hours/week the shop is in operation x 52 weeks) – (number of annual vacation hours) – (number of annual holiday hours) = number of hours/year.

Digital equipment utilization measurements are derived from average monthly print volume:

(Number of impressions/month) / (print speed/hour) x 12 months = number of hours/year.

Account for Variable Speeds

Keep in mind that digital presses run at different speeds for different paper sizes and weights, so calculations must be added together for each speed band. For example, the Xerox iGen4 prints 110 impressions per minute for 8.5x11˝ sheets, 50 ipm for 11x17˝, and 40 ipm for 14.33x20.5˝. If a shop's monthly volume is 50,000 8.5x11˝ impressions, 110,000 11x17˝ impressions and 250,000 14.33x20.5˝ impressions, equipment utilization is calculated as follows:

50,000 / 6,600 x 12 = 91
+ 110,000 / 3,000 x 12 = 440
+ 250,000 / 2,400 x 12 = 1,250
Or a total of 1,781 hours per year.

Calculating Costs

Use the collected data to calculate costs.

Equipment costs—The monthly loan or lease payment is usually sufficient for printing equipment. In the case of digital presses, do not include service and consumables with the monthly loan or lease payment. Alternatively, some managers prefer using the straight-line depreciation of the equipment as the equipment cost. However, if the depreciation amount is less than the monthly payment, it doesn't give an accurate cash-flow reading.

Floor space—Determine the annual cost per square foot of the shop's floor space. (Annual rent / square footage = annual cost per square foot) Multiply that by the square footage used by each piece of equipment. Include all service and materials storage areas.

Insurance costs—Sometimes insurance is part of the equipment lease. When it's not, we recommend using the actual cost. Short of that, the standard is 0.4 percent of the equipment's book value.

Direct labor costs—Begin with the yearly cost per operator, including all benefits. Then calculate the percentage of time the operator is allocated to a particular machine. Apply that percentage of salary to that machine. If one operator runs two digital presses, 50 percent of the direct labor cost should go to each machine.

Indirect labor costs—Indirect labor costs are those that don't link to the creation of a specific product, but are necessary nonetheless, such as machine maintenance and janitorial services. The standard allocation is 20 percent of direct labor costs. Smaller businesses comprehend indirect labor costs in overhead; larger shops typically allocate them to specific production cost centers.

Electricity costs—From electricity suppliers, get the cost rate per kilowatt hour (kWh) for electrical supply and delivery. From equipment manufacturers get the number of kilowatts the equipment uses in full-power and standby modes. Determine the amount of power consumed when the machine is on by multiplying the kilowatt rating of the machine by the number of hours the machine is on and again by the rate per kilowatt-hour. If the equipment is in standby mode when not in normal production, another calculation determines power consumed in standby. Subtract the number of hours the machine is in "on" mode from 8,760 (hours in a year), then multiply that figure by the machine's standby kilowatt usage and again by the rate per kilowatt hour.

Supplies/repairs/maintenance—The costs of supplies, repairs and maintenance are calculated differently for offset and digital equipment.

• For offset, include all supplies and parts costs based on maintenance schedules and historical usage, plus yearly service contract costs.

• For digital, "click" costs for service and consumables are considered a materials cost when estimating a job and are excluded from the BHR calculation.

Overhead costs—The costs that cannot be assigned to a specific job or program—such as lighting and heating expenses and salaries of administrative staff—are considered overhead. An average overhead allocation cost is 40 percent of total manufacturing costs. To determine a shop's actual overhead percentage to be applied to each cost center, identify all costs that are overhead and the total manufacturing costs for all cost centers, then use formulae:

Total annual overhead cost for the entire operation / Total annual manufacturing cost for all cost centers = Overhead allocation percentage.

Cost center's total annual manufacturing cost x Overhead percentage = Cost center's overhead costs.

If the in-plant does not incur the cost for a BHR line items—for example, if it's covered by another cost center and not charged back—simply enter "zero" and move on.

Calculate Production Costs

BHRs for each piece of equipment in the shop provide a solid foundation for determining the production costs that inform the estimate. To calculate production costs, first determine which equipment is being used and estimate how long. Then multiply the time estimate by the BHR, and add up the totals from each machine. Finally, add the cost of materials. The result is the total production cost.

The same process is used to estimate with BHRs for offset and digital, but the line items are slightly different. For example, the cost of both offset and digital presses can be calculated with BHRs, but digital costs can also be figured using cost per impression, which some find to be a simpler, more efficient calculation. Also, offset incurs time and materials costs for plate making, a process that isn't required in digital.

To be sure your BHRs are accurate, manually calculate that the shop budget is completely covered if all the equipment is operated at the expected utilization levels and the given hourly rate. And keep your BHRs up to date by verifying them at least once a year.

Establishing accurate BHRs helps print operations maintain a healthy cash flow, eliminate pricing errors that can lead to lost work, and improve estimates to make the shop more competitive. It's a fundamental process that should be part of every print service provider's routine.