Benchmarking: MEASURE UP to the STANDARD OF EXCELLENCE
Knowing labor, job costs is critical to operating a profitable collision repair business
When conducting management classes throughout North America and Australia, I am often asked how the "average shop" performs in critical areas. We rarely discuss averages but prefer to point our students in the direction of Masters Standards or benchmarks.
When I say Masters Standards, I am making a distinction between "common industry standards" and Masters' own data taken from real numbers and actual achievement of our higher performing shops.
After all the years of computerization and shop management systems, I see a disturbing trend to ignore appropriate data collection and analysis of critical numbers. Way back in the olden days, ARMS got the industry talking about job costing and business analysis. Over the last 10 years I have noticed many of the management system providers downplaying the importance of job costing and business analysis in favor of velocity tracking (cycle time) and techno toys.
One fact remains cogent: You must know what a job costs you if you plan to accurately price your product. Most shops have no idea what the true cost of labor per hour is. Consequently, they struggle to make a fair profit at the end of the day. We believe knowing the true cost of labor is essential to proper shop management.We routinely find shops rarely consider "load" on labor and simply calculate labor gross profit as total labor sale minus wage. Load on labor includes all direct costs on labor that are not overhead: costs such as company share of uniforms, medical insurance, sick and vacation pay, taxation, etc.
Many assume that these costs average 25 percent to 30 percent over the actual wage. However, several factors can affect the true cost load percentage. Factors like insurance costs in your geographical region can vary widely. Individual benefit plans vary from shop to shop, creating a variance in true cost. An employee's seniority often has an impact in that we often up the benefit ante as a reward for longevity with the company.
The sample (Figure 1) is deliberately low on benefits and is intended to get you thinking in terms of your own real costs associated with labor.The Masters Benchmark for labor gross profit is 60 percent when loaded, 70 percent when unloaded. The gross profit benchmark should be strictly held to at lower labor efficiencies. The scale can slide as efficiencies grow above 125 percent. In other words, the labor gross profit per actual hour increases as the employee's efficiency increases.
Since body shop labor rates are artificially low, we set a labor efficiency target at 125 percent to compensate for the artificially low door rates in most markets. So a $36 door rate would effectively become $45 per hour at a 125 percent efficiency rate. An effective labor rate of $45 per hour would result in labor gross profit per actual hour of $27 or 60 percent.
One problem in coming up with a true labor gross profit per actual hour is that few shops really know how many actual hours their technicians work. Even though labor laws are clear that a business must keep an accurate time record for their employees, few body shop managers know precisely how many hours individual technicians work on each car. Most shop owners tell us they "think" their labor efficiency is higher than it really is. As Jack Sutherland, the 1980s ARMS founder, taught me, "If you think you know, you don't know. If you know you know — you know."
The Masters Benchmark for parts profit is 25 percent in a general sense. The shops that repair primarily GM, Ford, Chrysler, Honda and Toyota vehicles should achieve 30 percent easily. The reason for a general standard and a more drilled down standard has to do with the common discount structure among various manufacturers. Many of our students perform at or above 30 percent parts gross profit. Too many shop estimators treat labor as the sacred cow of profit. What we have discovered is that the shops that take parts profit seriously are the big winners in gross profit dollars generated for each actual hour applied to the car.
When an estimator has the option, he/she should always default to replace rather than repair. Gross profit dollars per hour increases sharply with the "replace mentality." Our own research conducted using Classroom Performance System remote answering devices has revealed that more than 60 percent of body shop estimators default to repairing a part in borderline situations rather than replacing with new parts.
Our data sampling includes more than 3,000 respondents. The repair rather than replace mindset robs the shops from potential critical gross profit dollars the parts sale would have contributed. Additionally, the impact on refinish labor and material sales is worth considering. As parts sales increase, refinish labor hours increase dramatically (due to parts edging, painting undersides of new panels and adjacent panel blending).
As refinish labor hours increase, so does paint and materials compensation. Paint and materials compensation is directly tied to refinish hours. Parts replacement has a positive effect on paint and materials costs too. Materials costs drop dramatically as parts intensity increases (less primer, filler, masking and sandpaper is required on new parts). Parts should never represent less than 35 percent of your total sale and many shops exceed 40 percent parts to total sale percentage.
The Masters Benchmark for paint and material profit is 25 percent. I must tell you that most of our customers exceed the benchmark because they are aware of the previously mentioned impact that parts replacement has on profitability. A number of our larger shops use a combination of buying power and good estimating techniques to achieve as high as 50 percent materials gross profit.
The Masters Benchmark for sublet profit is 25 percent. That being said, sublet remains a fairly small piece of your sales pie. While many insurance companies are not eager to allow reasonable sublet markup, we still publish the standard. If you handle dollars, you should achieve some margin of profit. You may be able to get volume discounts from your sublet vendors in order to maximize your sublet profit potential.The Masters Benchmark for cycle time is seven days when measured keys to keys on an average $2,300 claim. Our own research has shown that shop managers do not generally know average cycle time. Most guess or rely on insurance company feedback. We have discovered that when we employ our keys-to-keys measurement technique that shops vary wildly in this area. We have shops in our consulting database as low as 2.8 days and some as high as 24 days. The drive to improve cycle time performance has been made entirely too complicated by industry consultants. From our perspective cycle time improves primarily by better initial damage inspection, accurate parts orders and deploying multiple and simultaneous technicians on the job. Cycle time is an article in itself, but major improvement can be seen right away.
The Masters Benchmark for administrative labor performance is 5.0 hours per $1,000 of business. If you are still reading you must be wondering what I am talking about. We like to know how many administrative hours you are spending for every $1,000 you produce. To get this number simply divide your monthly sales dollars by 1,000. You then add up all administrative hours you and your staff work in a typical month. The full formula is below.
The Masters Benchmark for net profit is 15 percent when total owner compensation (TOC) is included. True net profit is rarely looked at as net plus TOC. TOC is calculated by adding all company net profit after depreciation plus owner salary perks and benefits. Masters trained shops often exceed this benchmark (parts profit must be included for dealer shops to achieve this benchmark).
Most dealership statements do a lousy job of attributing actual parts profit to the body shop. Many dealer groups expect the body shop to be profitable on labor alone. This is a tragic error in judgment in that it motivates the body shop manager to sell more labor and not parts. Many times dealer shops underperform because of misguided scorekeeping and incentives for the wrong things. Independent shop managers usually get it right to some degree. The independent financial statement often shows a less than 5 percent net largely due to hidden benefits to the owner.
Understanding benchmarking is a necessary part of being successful. Many business people want to entrench in their current practices. As an educator, one of my biggest challenges is to point people toward a higher target.
If you do not measure up to the benchmark in one or more areas, do not be discouraged. Develop the necessary measurement tools and see where you are currently performing. Set a higher target with a big-thinking strategy. Develop some tactics that will lead you to bigger things. The view is great from the top.
