Focus on billed labor at the correct rate and your life will change

The future for the independent sector looks very promising and will prove to be an exceptionally profitable period over the next 10 years compared to the last 15 years, but only for the shop owners who truly understand their client base, their business and their industry.

The supply/demand economic equation will be clearly understood by most shop owners, as the supply of competent technicians has dried up. However, the demand is forever increasing throughout the industry, which will force wage levels to rise quite dramatically over the next five years. Already, we know of some areas where competent technicians are earning within the range of $28 to $35 per hour with a signing bonus and a comprehensive benefit package thrown in, which proves that this shortage is not confined to one area of the country. These levels of wage rates can add to the “brain drain” situation that is affecting our country in every industry.

Finding competent technicians is certainly one issue, but what will happen to our industry and the independent shop itself under this financial scenario?

In the long run, this is excellent for our industry — competent technicians will finally become recognized by the public that they are working in a “profession” rather than a “trade” and that technicians are highly skilled individuals deserving of a professional income. In the short run, it could cause absolute financial ruin, as most shop owners are not aware of all the detailed numbers of their business and how they contribute to the net income of the business. Additionally, most shop owners are not properly versed on how to pass on the right labor costs to their clients. They are running their business based mainly on “price,” trying to tell everyone they are the best, and at the same time, the cheapest. They have failed to educate their clients about the level of expertise that is required to maintain today’s vehicles and that competent expertise has a price tag to go along with it.

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Shop owners must change how they measure their labor revenue component. Rather than measure by one labor revenue department, labor should be broken down into a minimum of three categories, namely, a maintenance/mechanical labor department, a diagnostic labor department and a re-flash labor department. Each labor department has a different skill level of technicians. Each skill set can have different additional payroll costs as well with specific benefit packages included based on the skill required and the loyalty commitment of the technician to the business. As an example only, the maintenance mechanical labor door rate would be set at 4.5 times the top mechanical technicians’ hourly wage (i.e. $21 x 4.5 = $94.50 or $95). The diagnostic labor rate would be set at a minimum of 5.35 times the diagnostic technicians’ wage (i.e. $26 x 5.35 = $139.10 per hour), and the re-flash rate would come in at 6 times the top technicians’ hourly wage (i.e. $26 x 6 = $156). These higher multiplier rate factors over the maintenance rate are necessary not only to cover high-tech equipment purchase/lease costs and their faster replacement costs, but also ongoing software upgrades of said equipment, ongoing diagnostic training, subscriptions required today and also management’s time that must be spent with the client. Management’s time is consumed by educating the client as to the diagnostic process or re-flash process to take place, as well as keeping the client informed and ensuring client confidence in the shop is maintained during and after the process. Until the client vehicle mix of the shop is measured and understood, an interim guideline of a minimum of an additional 20 percent of the labor hours billed through the bays in maintenance billings should be going out at the combined diagnostic rate and re-flash rate. For example, if the shop billed 200 maintenance hours in the month, then an additional 40 hours should have been obtained in diagnostic and re-flash billed hours for a total of 240 hours billed for the month. Understanding your vehicle mix allows you to see where diagnostic and re-flash opportunities lie.

When shop management understands who they are selling to and how to implement the new strategies and sell these additional rates with client satisfaction, the contribution to gross profit of the shop can be tremendous. When gross profit is enhanced, net profit is enhanced. Management expertise now drives future growth of the business and the future bottom line of the business. Are you up to date in your management responsibilities to embrace the new profit potential available in our industry?