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This study estimates the net cost to employers of electrical and mechanical engineering apprentices through direct observation which is different from the survey methods used in most previous studies. The estimates are used to compare the on-the-job cost to the employer of two approaches to apprenticeship training. One approach is to send apprentices to the Lithgow Apprentice Training School in place of on-the-job training in the first year. The second is the traditional approach of providing on-the-job training at the workplace in the first year. The study found that the positive impact of the Training School on apprentice performance and the relatively low levels of direct supervision of apprentices has implications for current initiatives to shift apprenticeship training away from TAFE and more to the workplace. The study also suggests that the Training School approach for the on-the-job component of apprenticeship training in the first year could be a means of making apprentices more attractive to employers, and enhancing on-the-job training for apprentices by lowering the cost of apprentices carrying out skilled activities.