A machine hour rate is the cost of running a particular machine for one productive hour. It is the foundation of accurate quoting and job costing in machining, fabrication, moulding, printing and any process where machines do most of the work. Yet many manufacturers use a single shop-wide hourly rate — or a rate set years ago that nobody has revisited. This guide walks through calculating machine hour rates properly.
Why one rate for all machines doesn't work
A CNC turning centre, a five-axis machining centre, a manual drill and a laser cutter have very different purchase prices, power consumption, tooling costs and maintenance needs. Using one rate means simple jobs on cheap machines are overpriced and complex jobs on expensive machines are underpriced. Over time, you win the jobs you lose money on and lose the jobs that would have been profitable.
Step 1: Estimate productive hours per year
Start with how many hours the machine actually produces in a year — not calendar hours. For example: 2 shifts × 8 hours × 300 working days = 4,800 available hours. Subtract planned maintenance, expected breakdowns and idle time. If historical utilisation is around 75%, productive hours are about 3,600. This number divides all the costs, so being realistic matters more than anything else.
Step 2: Depreciation
Annual depreciation = (purchase cost + installation − residual value) ÷ useful life in years. A machine costing 100 units with residual value 10 and a 10-year life has annual depreciation of 9 units. Some businesses also include financing cost (interest) in this element.
Step 3: Power
Power cost per hour = average running load (kW) × tariff per kWh. Use average actual load, not motor nameplate rating — machines rarely run at full load continuously. Where energy meters exist, actual consumption is best. Add a share of compressed air if the machine uses it significantly.
Step 4: Maintenance and repairs
Annual maintenance cost — preventive maintenance, spares, repairs, service contracts — from maintenance records. New machines often cost less; older machines more. A CMMS that records spares and labour per machine makes this easy. See maintenance software.
Step 5: Tooling and consumables
Cutting tools, inserts, coolant, lubricants, nozzles and other consumables. For some processes, tooling is better charged directly to jobs; for general consumables, an annual estimate per machine works.
Step 6: Space and utilities
A share of factory rent or building depreciation, lighting and other utilities, allocated by floor area occupied by the machine and its working space.
Step 7: Labour (optional)
If the operator is dedicated to the machine, include their annual cost (wages and benefits) ÷ productive hours. If one operator runs several machines, divide their cost accordingly — or exclude labour from the machine rate and cost it separately.
Step 8: Overheads (optional)
Some businesses add a share of indirect overheads — supervision, quality, stores, administration — to machine rates; others add overheads as a separate percentage on jobs. Either is fine if consistent.
A worked example
Consider a CNC machining centre with 3,600 productive hours per year and these annual costs (in any currency unit):
- Depreciation: 9,000
- Power: 15 kW average × 3,600 hours × 0.10 per kWh = 5,400
- Maintenance and spares: 3,000
- Tooling and consumables: 4,500
- Space and utilities: 1,800
- Operator (dedicated): 7,200
Total annual cost: 30,900. Machine hour rate = 30,900 ÷ 3,600 ≈ 8.6 per hour. Without the operator, the rate is about 6.6 per hour. The numbers are illustrative; your own figures will differ.
Common mistakes
- Using available hours instead of productive hours.
- Using nameplate power instead of actual load.
- Forgetting tooling and consumables.
- Never updating rates after power tariffs or wages change.
- Ignoring that utilisation changes — when a machine is underused, its rate rises.
Utilisation and the rate
Because fixed costs (depreciation, space) are spread over productive hours, rates fall as utilisation rises. Improving OEE on expensive machines lowers their effective cost per hour — one reason OEE matters financially, not just operationally.
Using rates in quotes and job costs
In quotes, estimated set-up and run times are multiplied by each machine's rate. In job costing, actual booked times are multiplied by the same rates. The comparison shows where estimates are off. See quotation guide and job costing.
Machine groups
For shops with many similar machines, group them — "CNC lathes up to 250 mm", "VMCs 3-axis", "press brakes" — with one rate per group. This keeps costing simple without losing accuracy.
Reviewing rates
Review rates annually, after major investments, and when tariffs or wages change. A sudden change in a machine's actual maintenance cost is also a signal to update.
How software helps
Costing software stores rates per machine or group, applies them automatically in quotes and job costs, and can calculate actual utilisation and maintenance cost from shop-floor and maintenance data — making rate reviews quick and evidence-based. See production costing software.
Talk to us about building costing into your production system.
Frequently asked questions
Should operator wages be included in the machine hour rate?
Either approach works if applied consistently. Including the operator gives one rate per machine-hour; excluding it lets you cost labour separately when one operator runs several machines.
How often should rates be updated?
At least annually, and whenever there's a significant change in power tariffs, wages, machine investment or utilisation.
What utilisation should we assume?
Use realistic expected productive hours, not theoretical maximum. Overestimating hours makes rates too low and jobs look more profitable than they are.
Can different machines of the same type share a rate?
Yes, grouping similar machines simplifies costing, as long as their costs are comparable.
Do rates need to change for second and third shifts?
Fixed costs spread over more hours lower the rate; some businesses use one blended rate, others separate rates when shift costs differ.
