Make That Hourly Rate Count

Jan. 1, 2020
Many of us agonize over setting our hourly labor rates, often delaying this important decision for months at a time. But through our inefficiency, we often make this exercise meaningless as our effective labor rate declines. Your ability to maintain
Make That Hourly Rate Count

Many of us agonize over setting our hourly labor rates, often delaying this important decision for months at a time. But through our inefficiency, we often make this exercise meaningless as our effective labor rate declines. Your ability to maintain an effective labor rate at or very near your actual hourly rate will go a long way toward ensuring the profitability of your labor operation.

Effective labor rate has nothing to do with tech productivity; more correctly, it is a way of measuring how well we convert the labor hours we are selling into actual labor sales. If we have a labor rate of $100 and we sell two hours of labor, we should generate $200 in labor sales.  

But if we rush an estimate through showing $150 in labor to the customer, pay the tech for the appropriate two hours, and give our customer a labor discount on top of that, we have just shot our effective labor rate to hell. Multiply this by as often as your habits would allow it to happen, and I am sure you can see the negative impact from week to week and month to month. 

Plan for profitability Effective labor rate is entirely a measurement of our ability to protect the integrity of that hourly rate. The use of a labor grid or matrix is an effective way of offsetting the inefficiencies unique to our industry - and coincidentally will go a long way toward assuring your hourly rate. Warranties, diagnostic time, our feeding our techs, slow parts deliveries and the inadequacy of labor guides on major jobs such as an engine replacement are all areas that commonly challenge us in predicting labor, and the consistent use of a labor grid will assist in minimizing the impact here.  It is fairly typical that the business owner absorbs the negative impact of these situations as they occur. The matrix would, at the very least, attempt to share these very real expenses with the customer as with a parts price, a rent increase or a delivery charge. The labor matrix is used as an offset to expenses and inefficiencies we all suffer, and when used consistently, it will allow us to generate moderately higher labor margin on all jobs, which is our way of anticipating and reacting to those things that negatively impact our labor rate and profitability every day.Don't sell yourself short Though it seems like a fairly straightforward process, creating estimates that are fair and reasonable for our customers and that assure our effective labor rate are a huge area of concern for many shops. With any number of electronic options available to the shop owner these days, it would seem an easy fix - but reality would suggest that quality estimates remain a significant challenge.  In our efforts to be quick, we often take shortcuts in estimate preparation and shoot ourselves in the foot. Most techs are very aware of what a job should pay and typically when we discover an issue with an estimate, we avoid calling the customer back, pay our tech what would be appropriate and suffer an effective labor rate well below expectation.  In too many cases, this occurs because we are feeling under the gun and throw together estimates that are incomplete or inaccurate. We sell our labor below our hourly rate and well below expectation. Sometimes, we just get lazy.  Building Profitable ServicesFor canned jobs and menu items, such as transmission flushes, it is crucial to find a balance between profitability and competition. However, shops will often credit technicians for an hour of labor but only charge customers for 0.6 hours ?- and there goes the profit. Crediting a tech .6 on a service that takes 20 minutes is fair and reasonable, and this is a win for him and a win for the shop. Consider the following example of a transmission flush, wherein using an $85/hour shop rate and a $30/hour flat rate, profitability can be built in to a retail price for this job or any typical serviceTransmission flush as a typical service (retail price):$129Parts:Trans fluid $1.20/quart x 16 quarts x 2.5 (multiplier to yield 55% gross profit)$48Flush kit $12 x 2.5 (multiplier to yield 55% gross profit)$30Total retail parts sales$78Labor:Retail labor sales = job retail cost - retail parts price = $129 - $78$51Billable labor = total retail labor sales / shop rate = $51 / $85 0.6 Hrs. Actual labor cost = flat rate x billable labor = $30 x 0.6 hours$18Gross
Profit:Labor gross profit = retail labor sales - actual labor cost = $51 - $18Percentage gross profit on labor = labor gross profit / retail labor sales$33
64.7 %
Fair and reasonable is a two-way street In putting together an hourly rate, we strive to have a number that is competitive in our market area - but more importantly, at a level that will support the compensation plan we have in place and produce reasonable profits. If we are consistently missing this mark, we are consistently missing out on sales and profit dollars that allow us to prosper and grow. Better to slow down a little and take the time to get those estimates right.  Another area that we need to verify in trying to address problems with our effective labor rate would be in how we have built our menu items and canned jobs. I frequently find that these jobs and services are major factors in whether we are hitting appropriate effective labor rate numbers. It would seem that we often put them together as loss leaders, with the obvious impact of our losing money on them. We are typically paying the tech generously, but charging the customer a fraction of what would be fair and reasonable.  The solution will likely require adjustments at both ends. My strong recommendation would be to review what goes into each of these services and adjust them so that we can be competitive (not the cheapest and not the most expensive in our market area) and profitable - on both the parts and labor sides of the coin! Changing nothing else, I have seen this service audit yield a significant impact on effective labor rate and immediately improve average repair order and labor margin. My suggestion might be to start here. An effective labor rate is critically important in assuring that your labor operation is yielding the sales and profits you had anticipated in setting that hourly rate. The viability of your business demands that you are paid adequately for the labor hours you are selling, and that you are getting an appropriate return. That hour needs to pay an hour or more.

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