How to calculate downtime cost per hour
Contribution margin on unrecoverable output, plus incremental labor and fixed event costs — written so a finance partner can follow the working.
A cost of downtime per hour is the conversion factor that turns hours of a failure into dollars. If that factor is wrong, every business case that uses it will be wrong in the same direction. This page is a practical formula, a checklist, and one synthetic example. It is not a universal constant, and it is not financial advice.
The formula
$/h = (margin per unit × units per hour × unrecoverable share) + (idle crew × labor rate) + other time-based costs
Then, for an event:
S = ($/h × hours down) + fixed event costs (overtime premium, freight, scrap, cleanup, contractor mobilization, and similar)
Count contribution margin, not revenue. Count only the share of lost output you cannot recover later in the planning period. If a line can catch up on Saturday, the unrecoverable share is not 100 percent, and the Saturday overtime belongs in the event cost instead.
Checklist
- Units per hour at the constrained resource, not at a theoretical nameplate if the plant never runs there
- Contribution margin per unit (selling price minus variable cost), agreed with finance if you can
- Unrecoverable share of lost output, with a sentence of justification
- Crew that is idle, or redeployed at a real cost, during the stop
- Overtime or contractor hours to recover, and the premium, not the full wage if the wage would have been paid anyway
- Scrap, spoilage, or yield loss caused by the stop
- Fixed event costs: expedited parts, travel, cleanup, disposal, regulatory notification if it applies
- What you are deliberately leaving out (for example, allocated overhead, or reputational loss you cannot quantify)
A synthetic example
A line runs 100 units per hour. Contribution margin is $20 per unit. The lost output cannot be recovered (100 percent). Two operators are idle at $40 per hour each. Overtime is not used. Fixed event costs (a premium freight part and a contractor) are $3,000. The event lasts six hours.
$/h = (20 × 100 × 1.0) + (2 × 40) = $2,080
The site’s published calculator unit test uses a simpler agreed figure of $1,500 per hour, plus the same $3,000 fixed and six hours, so S = $12,000. Either path is valid if the ingredients are written down. What is not valid is switching between revenue and margin mid-memo, or using a blog’s “average cost of downtime” as if it were your plant.
Common mistakes
- Revenue instead of margin. This is the usual overstatement.
- Assuming nothing is recoverable in a plant that routinely catches up, or assuming everything is recoverable in a sold-out plant.
- Double counting overtime and lost margin on the same recovered units.
- Loading in allocated overhead that does not change when the line stops.
- Precision theater — a figure to the nearest dollar when the margin itself is a range.
When you have a $/h you can defend, put it into the RCM ROI calculator or the method. A forwardable write-up is the business-case template, or the business case engagement.
Questions that usually come up
Should I use revenue or margin?
Use contribution margin on output you cannot recover, not gross revenue. Revenue counts costs you did not incur, and it counts production you may make up later in the week.
What if we make up the lost units on overtime?
Then the unrecoverable percentage should be lower, and the overtime premium belongs in the cost. Do not count both a full lost-margin hour and the overtime that recovered it.
Can I just enter a $/hour figure I already have?
Yes. If finance has already accepted a downtime cost, use it and cite it. The calculator has an override field for that.