You know your overall profit margin (roughly). But do you know which jobs are actually making you money?
Most shops don't. They quote based on a standard percentage, do the job, invoice, and move on. Only later—if at all—do they realise that £5,000 job actually made them £200 profit, while the "cheaper" £3,000 job was a £1,200 winner.
This is a problem that kills margins and wastes effort on low-value work.
The Data You Need to Track Profitability
To know if a job is actually profitable, you need:
- Revenue: The amount you invoiced (or expected to invoice).
- Raw material cost: What you actually spent on materials for this specific job. Not an estimate. The actual cost.
- Machine time: Actual runtime on each machine (not estimated cycle time). Hours on 5-axis centre, lathe, etc.
- Operator labour: Hours worked on this job (setup, run, inspection). Don't use standard labour rates—track actual people and time.
- Subcontract costs: If you outsourced any part (heat treat, plating, etc.), the actual cost.
- Scrap: Parts you made that didn't meet spec and had to remake or discard. This is a hidden cost most shops don't track properly.
- Overhead allocation: A fair share of your facility costs (rent, utilities, admin salaries). Most profitable shops use 60–100% of labour cost as overhead.
Once you have this, profitability is straightforward:
Profit = Revenue − (Materials + Labour + Subcontracts + Scrap + Overhead)
Where Most Shops Go Wrong
Estimating Materials Instead of Tracking Actual Cost
You quote a job using supplier prices from your spreadsheet. Material is £150. You invoice the customer £5,000. But when you actually ordered the material, it was £200 (rush charge, wrong specification, market increase).
Now your actual profit is £50 less, but you don't know it because you never recorded the actual material cost.
Ignoring Scrap
You made 10 parts. 9 are good. 1 is scrap (you made an error on the last operation). You still invoice for 10 parts at the quoted price. But you spent labour and machine time on scrap that generated zero revenue.
One shop we worked with had a 5% scrap rate. On a £1M annual revenue, that's £50,000 profit lost to parts that don't pass inspection. But they didn't know it because they never tracked scrap by job.
Using Standard Labour Rates Instead of Actual Time
You quote assuming a lathe job takes 3 hours. You pay your lathe operator £30/hour. So labour cost = £90.
But the job actually took 4.5 hours (the customer's drawing was vague, you had to rework it mid-production). Labour cost is really £135.
If you only track standard time, you're £45 short on this job. Multiply across 10 jobs, and you've underpriced £450 of work you've already done.
Overhead That Disappears Into Thin Air
Most shops have a rough idea of overhead as a percentage of labour. "We use 80% overhead." But 80% of what? Of standard labour? Of actual labour?
If actual labour is 4.5 hours (not 3), and you apply 80% overhead to 3 hours, you've underallocated overhead by £36. Happens on every job where your estimate was wrong.
How to Fix This
Track Actual Material Costs
When you purchase materials for a job, record the actual cost against that job. Not the estimated cost. The real cost.
If you buy from multiple suppliers or prices fluctuate, average the last 3 purchases for estimation. But record actual when you know it.
Track Actual Machine Time
Operators log actual runtime (or your machine has sensors that track it). Not "it should take 1.5 hours," but "it took 1.2 hours because the customer sent a better drawing."
At minimum, your operators should log: job started, job finished, any issues encountered.
Track Scrap & Rework
Every scrapped part gets logged. Why it was scrapped. How much labour/material was lost.
Rework is logged separately from the original job (so you see: original job £2,000 profit, rework £-150).
Allocate Overhead Fairly
Your overhead percentage should be applied to actual labour, not estimated labour.
If a job uses 4.5 hours of actual labour (and your overhead is 80%), overhead = £108 (not £72 based on 3 estimated hours).
The difference: Quote-based profitability (using estimates) might say a job is 40% margin. Actual profitability (using real numbers) might show 28%. That's a 12% gap. If you're quoting 100 jobs per year on the wrong assumption, you could be leaving £50,000+ on the table.
What This Changes
Once you actually measure profitability by job, you can:
- Identify unprofitable customer types. "Rush jobs from this customer are always 25% lower margin. Maybe I should quote higher or stop taking them."
- See which operations lose money. "5-axis work on small parts is always low-margin. We're not set up well for it."
- Improve quoting accuracy. Historical data on actual costs beats guessing.
- Find scrap patterns. "Quality issues on parts from this vendor. Need to adjust inspection or source elsewhere."
- Adjust pricing. If a job category is consistently lower-margin than expected, you're underpricing or underoperating it.
The Tool You Need
You don't need fancy software for this. A spreadsheet with proper structure works:
- One row per job
- Columns: Job ID, Customer, Quote Price, Actual Revenue, Material Cost (actual), Labour Hours (actual), Labour Cost, Subcontracts, Scrap Cost, Overhead Allocation, Profit
- Monthly review to identify trends
But honestly? A CRM or job tracking system that captures this data automatically is worth the investment. You don't want your lead person spending Friday afternoons reconciling spreadsheets.