How can the rates of machined items be negotiated logically?
- Arvind Dang
- May 14
- 11 min read
This article includes the following aspects.
What are the various machining processes?
What influences the costs of machining -Technical & commercial aspects?
Approach for negotiating machining costs based on an illustration
How to estimate and apportion Plant and machinery costs?
How to compute manpower costs for machining?
How to compute cutting tools’ “costs /hour “ for machined items-
How to compute Manufacturing variable costs /hour for “ machined items”?
How to estimate Marketing variable costs?
How to compute overheads?
How to estimate vendor margin and Taxes?
How to estimate machining costs/unit (equipment + manufacturing variable +man -power+ cutting tools)?
Pitfalls & Negotiation Strategy for Machined items –with Win-Win Mindset.
1What are the various machining processes?
1.A list of 18 machining processes applicable in manufacturing and engineering industries is as follows:
Turning, Milling, Grinding, Boring, Reaming, Threading, Broaching, Hobbing, Shaping, Shaving, Grooving, Sawing, Punching, Shearing, Lapping, Honing, Chamfering, knurling & so on
2.The above 18 machining processes can be performed on general-purpose machines, special-purpose machines, or CNC machines
3.Further, a list of 6 modern machining processes is as follows:
Laser cutting, Water jet cutting, Plasma cutting, Electro discharge, Electron
beam (EBM), Electrochemical (ECM)
4. The processing engineer designs the machining sequence & processes.
5. Engineers design the sequence, combining the above processes with the use of appropriate cutting tools, jigs, and fixtures.
6. This presentation will focus on negotiating rates for conventional processes using the general-purpose machines and first-principle costing.
7. A similar approach can be applied to other types of machining processes
8. In any industry, castings, forgings, or bar stock produced using different technologies from raw materials like steel, non-ferrous metal, etc, are some examples of machined items as mentioned in my last two articles dated Apr 21 & Apr 22, 2025
Image of casting Item after machining
2. What influences the costs of machining- technical aspects?
Technical aspects | Description and influence on |
Type of Machines Used | · Lathe, milling, drilling, grinding & so on —Different base costs and productivity. · Manual vs semi-automatic: Cycle times. Machine age and condition: Downtime and frequency of tool changes. |
Machining parameters | · Material Removal Rate -Cutting speed · Feed rate and depth of cut: Tolerances and surface finish: Multiple passes and speeds. |
Cutting tools | · Tool material: HSS, carbide, ceramic, having different life, cost, and performance characteristics. · Tool geometry and coatings: Affects chip removal, heat dissipation, and wear resistance. · Tool change frequency: · Standard vs special tools: Operations times and initial costs
|
Jigs & fixtures | · clamping type: Manual, pneumatic, or hydraulic—impacting loading/unloading time. · Complexity of fixtures: Precision fixtures reduce part rejection but increase the upfront cost. Changeover time: It affects batch production efficiency, especially for small batches. |
Operator skills & productivity | · Skill level: influencing cycle time, rework, and tool life. · Supervision required:. Consistency: Higher skill levels contribute to consistent quality, reducing inspection and rework costs. |
Batch set uptime | · Setup time per batch: Longer setups increase the per-piece cost. · Repeatability: Frequency of changeovers and process standardization Economies of scale: Larger batches dilute setup, fixture, and programming costs over more parts |
Material type and machinability | · Material hardness: affecting cutting speeds and frequency of tool changes. · Chip formation: Materials that form long or tough chips may require special chip breakers or frequent cleaning. Machinability rating: affecting tooling and cycle time costs. |
Quality and inspection requirements | · In-process and post-process inspection: · Surface finish measurements: Documentation : |
Please refer to my enclosed videos on YT as below.
For more details, please click the link below & enroll in my Udemy course, which includes five practical illustrations for negotiations, along with 13 ready-to-use resource templates to enable you to acquire skills to negotiate logically and more confidently.
2. What influences the costs for machining-commercial aspects?
Quantity or number of pieces
Rates of Raw Material Type & Size (eg, Raw casting, raw forging, or Raw bar stock ) and their availability- In case material is in the scope of machining, Vendor
Skilled Labour availability and rates
Competition
Payment terms
Customer-specific requirements: Traceability, packaging, labelling
vendor relationships,
2. Approach for negotiating machining costs -5 templates
Five resource templates, RT1 to RT5, have been proposed to capture nine cost elements in our illustration, as shown below.
Sn | Cost element | Computation Template no | The resource template (RT) number where computed costs are to be taken |
1 | Plant & machinery | RT1 | Template RT4, col 2 |
2 | Cutting Tools | RT2 | Template RT4, col 9 |
3 | Manpower | text | Template RT4 col 7 & col 8 for skilled/unskilled
|
4 | Manufacturing variable including Jigs/Fixtures | RT3 | Template RT4 col 3
|
5 | Marketing variable costs | text | Template RT5 , Row 2 |
6 | Overheads | text | Template RT5 , Row 3 |
7 | Margins | text | Template RT5 , Row 5 |
8 | Taxes | text | Template RT5 , Row 6 |
9 | Throughput time | text | Template RT4 col 5
|
Raw material costs can be added as per working in my two articles dated Apr 21 & Apr 22, 2025 on my website.
Who should negotiate?
A team of competent professionals with the necessary skills (out of 40 we shared in my 9th Blog posted on 11th Apr 25 on YT and LinkedIn) must negotiate the rates and terms.
The computation of costs is demonstrated in the following paragraphs and resource templates RT1 to RT5.
These five blank templates can be directly used by professionals to populate data and negotiate machining charges.
4. How can we estimate and apportion plant and machinery costs?
Resource Template –RT1
Cost element | Basis /assumption (@8hours/day x 300 days x 2 shifts basis | Estimated cost/year-Rs | Cost/hr –Rs/hour |
Col 1 | Col 2 | Col 3 | Col 4= col 3 divided by 4800 |
M/C Depreciations | Assume the equipment cost (set of lathes) for meeting production demand =Rs 99,60,000 Depreciation @10% considering a 10-year life and straight-line method, working hours /year 4800 | 9,960,00 | @208
|
M/C maintenance | Maintenance and repair for equipment, supplies, and overhauling spares +oils &lubricants Assume costs towards the above (say 12% approx) to be applied over 4800 hours | 1,20,000 | @25
|
Financing cost | Annual Interest @10% on loan amount on loan, say borrowing of Rs 70,80,00 (approx 71% of investment) taken -costs to be applied on 4800 hours | 708000 | @146 |
Total | This is to be captured in resource template – RT 4 col 2 |
| Rs 379/hour |
Based on a similar approach, in the following template, the cost/ hour for the other three operations is:
Milling=Rs 419/ hour, Boring=Rs 579/hour, Grinding=Rs 779/hour
( Calculations on a similar basis )
5. How to Compute Manpower Costs –for Machining?
The negotiating person must ascertain the various cost elements at the vendor's end and estimate the costs and expenses incurred by the vendor, including employee costs, overhead, and marketing variable costs, among others.
Estimating manpower rate – Assumptions for this illustration –applicable in each shift
1. Rates for Skilled: Rs 300/Hour, based on Rs 60,000 per month and the number of hours per month permitted (8 hours/day x 25 or 200 hours per month, at Rs 60,000/200 hours).
2. This is to be taken to the resource template – RT 4 col 7
3. Rates for unskilled: Rs 150/ Hour based on Rs 30,000 per month and the number of hours per month permitted, 8 hours/day x 25 or 200 hours per month ( Rs 30,000/200 hrs)
4. This is to be taken to the resource template– RT 4 col 8
5. For simplicity of understanding, rates for each type of skilled manpower have been considered the same; however, these may differ for specific types of machinists, such as lathe operators, milling machine operators, and grinding machine operators, among others.
Automation reduces labor involvement.
6. How to compute the cutting tools' “cost per hour” for machined items?
How to calculate the “cost per hour” of cutting tools for machined items?
Resource Template –RT2
Equipment | Names of Cutting Tools used –a few examples | Assumed Cost/unit of tool-Rs | Estimated life- No of Pieces production | Tool Cost/unit of machined item –Rs/unit |
Col 1 | Col 2 | Col 3 | Col 4 | Col 5= value in col 3 / Col 4 |
Lathe | Carbide Insert Turning, facing, chamfering tools | 300 | 50 | 6 .0/unit |
Milling machine | Milling Cutter End mills for milling machines | 500 | 40 | 12.5/unit |
Boring machine | Boring Tool Inserts for boring bars, boring bars | 400 | 60 | 6.66/unit |
Grinding machine | Grinding Wheel, finishing wheels | 600 | 100 | 6 .0/unit |
This is to be taken to the resource template – RT 4 col 9
High-performance tools have a higher cost but offer better life and speed.
How to compute Manufacturing variable costs /hour for “ machined items”?
Manufacturing Variable cost head | Description of expenses | Estimated annual costs -Rs | Cost/unit –Rs/hr |
Col 1 | Col 2 | Col 3 | Col 4 |
Power Consumption | Charges for powering machinery, equipment, and lighting on the production line and warehouses machine uses 10 kW per hour and electricity costs INR 8 per kWh |
| @80 10 kw x 8 |
Manufacturing Consumables | Consumables like cutting oils, lubricating oil/grease for equipment Estimated costs to be applied over 4800 hours It may include compressed air also | 3,36,000 | @70 Col 3/ divided by 4800 |
Jigs & fixtures cost (An alternate method can also be used linked to batch size) | Specialized holding of tools and parts to be machined respectively , their wear & tear parts replacements Estimated costs to be applied on 4800 hours | 1,00,800 | @21 Col 3/divided by 4800 |
QC Gauges & instruments costs | Vernier calipers, micrometers, Go-no Go gauges, Test lab equipment etc estimated costs say Rs 48,000 to be applied on 4800 hours | 48000 | @ 10 Col 3/ divided by 4800 |
| Total manufacturing Variable costs This is to be taken to resource template – RT 4 col 3 |
| Rs181/hour |
9.How to estimate Marketing variable costs?
Key cost elements for Marketing variable for Machining in our illustration are :
Packaging materials, Protective coatings, Labeling and branding, Costs for freight, Insurance, Warranty, and so on
Marketing Variable costs
1. Let us assume costs/Year =Rs 3,45,660
2. Cost/hour= @Rs 72/Hour (Rs 3,45,600/4800 hours)
3. It works out to be Rs 108 per unit in a similar way, i.e., Rs 72 per hour x 90 minutes / 60 minutes.
4. This is to be taken to resource template – RT 5 , Row 2
10.How to compute overheads?
Overheads include shared services and fixed facility expenses.
Examples are :
Admin & Office Staff, Rent, Software, Security, Testing, Certification, Utilities, and so on
Computing Overhead Costs
1. Let us assume costs/Year =Rs 9,12,000
2. Costs /hour @Rs 190/Hour (Rs 912,000/4800 hours)
3. It works out to be =Rs 285 per unit of the machined part by applying Rs 190/hour on the estimated “throughput time” taken to machine the part of 90 min by the formula Rs 190/hour x 90 min/60
4. This cost /unit shall be considered in the following lecture for estimating the total costs of the machined items.
This is to be captured in resource template – RT 5 Row 3
(1 more row can be added for any other costs like statutory, etc & here assumed nil)
11.How to estimate vendor margin and Taxes?
Vendor margins :
1. These are usually based on the type of technology used in manufacturing, vendor infrastructure, in terms of equipment, processes, tools, jigs and fixtures, location, and competition
2. Hence, it is also charged as % of costs
3. This is to be captured in resource template – RT 5 –Row 5
Taxes
1. GST or other applicable taxes are added at the statutory rate.
2. Should be separated from base cost.
3. This is to be captured in resource template – RT 5 –Row 6
12. How to estimate throughput time for a machined item?
1. Arriving at costs/units over time is crucial as it influences how long the machine will be utilized for processing the workpiece.
2. The process design engineer must determine cycle time (throughput time) for each manufacturing process based on the engineering design of the material to be processed and the machines' capabilities.
In this illustration, the following Throughput times have been estimated for manufacturing operations for costing and will be carried to the template, RT4 -column 5
Turning =15 minutes /unit
Milling = 20 minutes /unit
Boring 25 minutes /unit
Grinding =30 minutes /unit
All four operations 90 minutes /unit (15+20+25+30)
The negotiating team must reinforce transparency and rationality
11. How to estimate machining costs/unit (equip. + mfrg. variable + manpower + tools) ? Resource Template –RT4
Process | Equip cost hour rates @-INR | Mrg Variable hour rates -INR | M/C hour rates -INR
| Throughput time Piece –min assumed | Machining Cost per Piece (INR) | Labor Cost per Piece -skilled -@Rs300 /hr | Labor Cost per Piece unskilled- -@Rs 150/hr | Tooling Cost per Piece -INR | Total cost per piece -INR Col (6+7+8+9) |
Col 1 | Col 2 | Col 3 | Col 4 | Col 5 | Col 6 | Col 7 | Col 8 | Col 9 | Col 10 |
Basis Row 1 | Refer RT 1 | Refer RT 3 | Col (2+3) | Process engineer | Col 4 x col 5 | @ 300 x col 5 | @ 150 x col 5 | Refer RT 2 |
|
Turning Row 2 | 379 | 181 | 560 | 15 | 140 (560 * 15 min/60 min) | 75 (@300 * 15/60) | 37.5 (@150 * 15/60) | 6
| 258.50 |
Milling Row 3 | 419 | 181 | 600 | 20 | 200 (600 * 20 min /60 min) | 100 (@300 * 20/60) | 50 (@150 * 20/60) | 12.5 | 362.5. |
Boring Row 4 | 579 | 181 | 760 | 25 | 317 (760 * 25 min/ 60 min) | 125 (@300 * 25/60) | 62.50 (@150 * 25/60) | 6.70
| 511.2 |
Grinding Row 5 | 779 | 181 | 960 | 30 | 480 (960 * 30 min /60 min) | 150 (@300 * 30/60) | 75 (@150* 30/60) | 6
| 711 |
Total Row | assumed |
|
| 90 minutes | Rs 1137/piece | 450/piece | 225/piece | 31.2 say 31 per piece | 1843/piece Take to RT5 row 1 |
How to estimate the total costs/unit for a machined item based on FPC Resource template RT 5
1. Machining cost =Rs 1843 /unit of machined part –including equipment, manufacturing variables, manpower, and tooling costs. Refer to template RT4 in the previous paragraph.
2. Estimated Marketing variable costs =Rs 108/unit as per the computation in the earlier paragraph
3. Estimated overheads Rs 285/unit- as per computation in the earlier para
4. Subtotal=Rs 2236/unit (1843+108+ 285) as above
5. Estimated vendor Margin = % on subtotal to be negotiated (assume Cat 1 item is procured directly by the buyer and given for job work to the vendor performing machining)
6. Taxes on machining = % on subtotal Margin as per statutory norms
7. Total cost of machined item(without Material cost) =Rs 2236 /unit+% margin+ %Taxes as above
Important point
The material costs, of course, will need to be added as per cost estimates, as per the technology of the item to be machined, ie, casting, forging, or bar stock for steel or non-ferrous materials, etc.
12. Pitfalls & Negotiation Strategy for Machined items –with Win-Win Mindset
Aspect | Pitfall | Strategy |
First-Principles Costing Approach | Supplier treats machining cost as a black box. | Ask for breakup of inputs—machine rate/hr, setup time, cycle time, tooling |
Equipment Cost – Machine Hour Rate | Inflated hourly rates. | Benchmark machine specs, depreciation method, and capacity utilization. |
Cutting Tools Cost | Supplier charges high tooling cost per part without justification. | Ask for tool type, life data, and tool change intervals. |
Jigs and fixtures | One-time fixture cost is recovered multiple times. | Insist on amortization over realistic production volume. |
Direct Manpower Cost | Charges for idle labor or unrealistic manning ratios. | Validate against actual shopfloor practice and automation level. |
Manufacturing Variable Costs | Arbitrary addition of variable costs. | Cross-check with standard consumption figures for machine type. |
Overheads Allocation | Double-counting overheads or high markup. | Ask for basis of allocation and standard accounting norms |
Vendor Margin | Unexplained high margin or hidden cost loading. | Benchmark with similar vendors, stress on open-book costing. |
Taxes & Duties
| Confusion between inclusive and exclusive taxes. | Insist on showing taxes as separate line item. |
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