Quantcast
Jump to content

Start LLC for $0 at IncFile


Start LLC for $0 at IncFile


Start LLC for $0 at IncFile

Effective labor rate


Recommended Posts

Curious how many other shops are paying attention to their 'effective labor rate' in their shop. I heard that industry standard is 90% of your 'standard flat rate'. That sounds great, but I wonder how realistic that really is. Also, how do you personally go about raising effective labor rate at your shop? Did you cut hours paid to technicians for certain jobs? Raise labor rates on menu items?

Link to comment
Share on other sites



Mitch Schneider's book, Managing Dollars with Sense, gives a perfect layout of exactly what you're talking about here.

The formula is this:

Productivity = Billed hours / hours available to work (Example: 34.8 billed / 40 hours per week = .87 or 87%)

Average Shop Productivity = Sum of billed hours / Sum of total hours for all techs (Example for 3 techs: (26 + 34 + 44) / (40 + 40 + 40) = 104 / 120 = .87 or 87%

Effective Labour Rate = Labour Rate x Average Shop Productivity (Example: $95 x 87% = $82.65)

These number will fluctuate daily, even hourly.

 

So yes, what you heard is correct, 90% is a good average shop productivity, compared to the majority of independent shops which are below 70%.

Many shops are actually closer to 55% according to the book - can you survive on barely more then HALF of your labour rate??? ($95 x 55% = $52.25)

Productivity = Profits, plain and simple!

 

Industry standard from what I've read, is 110% nowadays (average 9 hours billed in an 8 hour day per tech) to have a truly profitable shop.

The book outlines multiple methods for you to figure out what you should set your labour pricing at based on your shop's numbers, rather then basing off other shop rates in your area.

 

As for increasing productivity, you need good techs, but also good front counter processes (efficiency is purely on the tech's shoulders, but productivity has just as much to do with your service writer, shop layout, tooling etc)

I don't think cutting hours paid for certain jobs actually pertains to this calculation, nor would I feel this would be the morally right thing to do to try to be more profitable. (Profitability should be win-win for your shop and your techs)

Raising labour rates on menu items would have the desired effect (higher labour rate for that job), but I strongly believe that improving productivity would have a far more drastic effect then raising pricing on certain jobs, as it would apply to every tech and every RO.

Link to comment
Share on other sites

Productivity is important, but it's equally important to manage the profitability of the work you are doing. We all have loss leaders like oil changes and state inspections. You have to make sure you are getting these done with the cheapest labor possible. We struggle with the master tech who doesn't want to give up the oil change that's on a big ticket so we end up paying him $30 per hour to do lube tech work.

Link to comment
Share on other sites

Mitch Schneider's book, Managing Dollars with Sense, gives a perfect layout of exactly what you're talking about here.

The formula is this:

Productivity = Billed hours / hours available to work (Example: 34.8 billed / 40 hours per week = .87 or 87%)

Average Shop Productivity = Sum of billed hours / Sum of total hours for all techs (Example for 3 techs: (26 + 34 + 44) / (40 + 40 + 40) = 104 / 120 = .87 or 87%

Effective Labour Rate = Labour Rate x Average Shop Productivity (Example: $95 x 87% = $82.65)

These number will fluctuate daily, even hourly.

 

So yes, what you heard is correct, 90% is a good average shop productivity, compared to the majority of independent shops which are below 70%.

Many shops are actually closer to 55% according to the book - can you survive on barely more then HALF of your labour rate??? ($95 x 55% = $52.25)

Productivity = Profits, plain and simple!

 

Industry standard from what I've read, is 110% nowadays (average 9 hours billed in an 8 hour day per tech) to have a truly profitable shop.

The book outlines multiple methods for you to figure out what you should set your labour pricing at based on your shop's numbers, rather then basing off other shop rates in your area.

 

As for increasing productivity, you need good techs, but also good front counter processes (efficiency is purely on the tech's shoulders, but productivity has just as much to do with your service writer, shop layout, tooling etc)

I don't think cutting hours paid for certain jobs actually pertains to this calculation, nor would I feel this would be the morally right thing to do to try to be more profitable. (Profitability should be win-win for your shop and your techs)

Raising labour rates on menu items would have the desired effect (higher labour rate for that job), but I strongly believe that improving productivity would have a far more drastic effect then raising pricing on certain jobs, as it would apply to every tech and every RO.

 

I have not read his books, so this is just me asking an honest question. I see the book was written back in 2003. Do you feel like the figures provided in the book apply to a shop in 2014?

Edited by mmotley
Link to comment
Share on other sites

The figures are dated, but the formulas are still the same.

The book actually used $65 as an example labour rate, far below most shops nowadays.

 

The 110% productivity standard is from other recent (2012+) sources. At the time of the book's printing, it called for 100% productivity.

Here is an article from 2012 that uses 113% productivity as it's example (9 / 8 = 112.5%).

http://www.motor.com/magazine/pdfs/022012_10.pdf

  • Like 1
Link to comment
Share on other sites

I'm not sure if I'm missing something here, but I always understood effective labor rate as being calculated another way.

 

Labor sales dollars / flat rate hours paid out to techs

 

This way, it accounted for your .5 hour oil changes, .5 hour tire rotation, etc. and would give you a figure that represented an average labor rate, or effective labor rate.

 

A quick google search for 'effective labor rate formula', and I now have about 3-4 different methods of calculating it, none of which are really similar...

Link to comment
Share on other sites

There is multiple ways to calculate just about anything.

I found your formula in a dealers edge magazine article, so it could apply to independent shops as well.

 

Here is another article from 2004 that shows 2 methods of calculating effective labour rate, but focus on Table 2, not Table 1 which is for hourly.

http://www.motor.com/magazine/pdfs/112004_07.pdf

As a side note, this article uses 138% (bill 11 hours per 8 hour day) as a benchmark, which is somewhat unattainable. Future articles do not use the 135% standard, they go back to 113%.

 

I think the best idea would be to find a formula that you like, and works for your situation.

Hourly and flat rate require different formulas.

Edited by bstewart
Link to comment
Share on other sites

I think the best idea would be to find a formula that you like, and works for your situation.

Hourly and flat rate require different formulas.

I agree. Just to follow up and maybe explain a little more of how I was originally taught effective labor rate, here is a quick youtube video I found...

 

http://youtu.be/2mDzFLgza3k

 

Either way, like you said, it's probably best to find a formula that you like and applies to your situation best and stick to it so you can track it.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
  • Have you checked out Joe's Latest Blog?

    • By Joe Marconi in Joe's Blog
         7
      There are many things to consider when creating a marketing plan. Among them are establishing a budget, what forms of media should be used, and whether traditional advertising, such as TV, radio, and print, is still relevant.  And of course, how much should be allocated to social media and digital advertising?
      All the above are essentials to any marketing plan. However, the first step is ensuring that you have a healthy workplace and that your employees understand your company’s culture and the overall mission and vision. 
      We all know that happy employees create happy customers. No form of advertising can overcome a toxic workplace with unhappy employees. If your employees are not creating an amazing customer experience, your marketing plan will not work.
      Advertising and marketing may bring in customers, but the people in your company creating an amazing customer experience will be the most important component of your marketing plan.  It’s the customer experience that sells work and gives the customer a reason to return. 
      Creating an amazing employee experience, which creates an amazing customer experience, is also the most cost-effective part of your marketing plan. In fact, it cost next to nothing.
  • Upcoming Events

    No upcoming events found
  • Similar Topics

    • By TTP

      Premium Member Content 

      This content is hidden to guests, one of the benefits of a paid membership. Please login or register to view this content.

    • By Joe Marconi
      It's a safe bet that nearly every auto repair shop is looking to hire an employee, most likely a technician.  While I am a big proponent of a plan to recruit constantly, we can never forget about the employees we have right now.
      Do all you can to create a healthy workplace with high morale. Have a one-on-one with all your employees. Find out what they like about working at your repair shop and perhaps more importantly, what they would like to change. 
      Ask your employees what they would do to improve your company. If you have never done this before, you may get the "deer in the headlights" look, but don't worry, keep asking and in time your employees will be a great resource for you. 
      When people feel appreciated and know that their opinion counts, it helps them from looking over the fence for greener grass. 
      What do you do at your auto repair shop to help retain your employees? 
       
    • By Joe Marconi
      As we head toward the end of the year and look to 2023, I thought it would be beneficial for all if we share the biggest challenges that are facing auto repair shops. 
      Is it hiring new employees? Employee retention? The economy?  Technology? Or perhaps, finding the right training for your employees? 
      Let's start the conversation and post your biggest challenge! 
    • By Joe Marconi
      What are your Thanksgiving business hours this week? The balance between time off and responsibilities to our business and customers is a challenge.
      What strategies do you implement and how do you balance the Thanksgiving holiday for your auto repair shop?
    • Advertise your services or products to passers-by attracting them towards your business
    • By Joe Marconi
      Digital Vehicle Inspections (DVI) are becoming more and more common these days. I think this is a good thing. 
      What I am concerned about is how the the DVI report is being used.  I am not a fan of sending the digital report to the customer to be used in place of the service advisor speaking and explaining the results of the report first.  Would a doctor send the MRI, lab tests, and x-rays directly to the patient without the doctor first discussing the results?  In fact, there are times when the doctor never shows the report results. 
      In my opinion, the DVI is a tool, and it's not meant to take the place of good old fashion person to person discussion, which is called customer service.
      Agree? Disagree?  
       


  • Our Sponsors


Grammarly Writing Support


The #1 Writing Tool


Grammarly Writing Support

×
×
  • Create New...