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Joe, sounds like this shop is paying techs more hours than it is charging the customer. Effective labor rate is labor hours billed/sold to customer divided by labor dollar sales. 100 hours of labor sold/$10,000 in labor sales = $100 ELR. Production doesn't fit in the equation.



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Edited by chasauto
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Production doesn't fit in the equation.


That's not true.


Effective Labor Rate is your total labor sales for a given period divided by the number of hour sold, that is true. Joe had it reversed but if you understand his mistake and that he does know what he's talking about, he is absolutley correct.


But the answer I read that Joe's friend was seeking was what his NEEDED labor rate was. That does involve producttion. The greater your production, the greater your ELR is and the lower your posted labor rate needs to be to cover just your expenses let alone provide a return on investment. So in determining your required posted labor rate, your production absolutley fits into the equation. Not just fits, but is required.

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I've found if you take the geometric mean of say 30 shops in your local area the number will show you where the shop needs to be. If it's $50/hr or $150/hr it doesn't matter. Customers like familiarity, if your shop is above their perceived average labor rate but do above average work it will be justified. Price yourself near the bottom percentile and you invite bottom feeders, towards the top percentile brings in better but more demanding clients. Price yourself above the franchised dealers and you might have empty bays.


With a target labor rate in mind that suits what the market will bear and where you want to fit in, one can reverse engineer the tech pay rates and work on production and overhead. When I first opened I simply took the total shop overhead (total of all expenses including officer salary, except depreciable assets), divided by 80 hours a week (total reasonable labor production we are capable of) and came up with a number. I added a percentage to keep the labor rate in line with my local expectations and provide the shop with labor profit.


Notice that parts are excluded from this calculation. Parts profit adds purely to the bottom line, and it works because I can't estimate or control what parts I'll sell in a future month/year/quarter/whatever. I can control labor.


So in a nutshell the labor dollars keep the lights on and provides paychecks for everyone, the parts matrix keeps the shop moving forward and adds a cushion.


I think my method is pretty good, it keeps me from cheating the techs out of labor and underselling our time because I need to keep the labor hours up near 100% productivity. It removes the idea of free diagnosis. If I'm paying a guy to work on a customers car the shop is billing for it, with few exceptions. If techs aren't keeping up they can't hide behind the parts profit, produce or get retrained at the donut shop.

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