Optimize Your Available Labor Hours

Having run hundreds of performance groups over the past 40 years, I was challenged by FenderBender to recap the main topics the groups discuss. So, this will be a four-part series focusing on ideas to optimize: Labor, Parts, Paint and Material and Sublet, and Overhead expense reduction. 

Opportunity: Optimizing Labor Hours 

We start with labor because Labor gross profit makes up 60% and more of the typical shop’s overall gross profit dollars. 

After a few hours of discussion at the very first paint performance group, Ed Mohr, owner of Exclusive Auto Body near Los Angeles, shared wisdom with his fellow members. “Let’s be honest with ourselves. Those who are successful in our industry know how to best optimize the total labor hours produced from the productive staff during the hours we pay them to be there for.” We as a group then did the math: 10 technicians working 8 hours a day is 80 hours available. And with 5 days in a week, that is 400 hours. We need to track how many total labor hours we deliver in that period. Did you sell the jobs for them to work on? Did you write a complete sheet to get paid for their effort? Did you provide the training and tooling for them to safely repair vehicles? Do you have the right parts and material available? It is that simple. If the shop output is 400 hours, your productivity is 100%, but if your output is 800 hours, productivity is 200%. “The shop with 200% productivity probably has processes that should interest us!” It is from there the first paint performance group took off. 

Utilization, Efficiency and Productivity 

No conversation relative to labor would be complete without a review of these terms.  

First, Utilization = Hours invested working on vehicles - 32 / Hours Attended – 40 = 80%. Improving utilization requires the shop to have the administrative staff focused on keeping the technician in their stall. Leaving the stall looking for the vehicle, the critical parts needed to complete their process, the supplies (Kanban), the payer approval, tooling and maintenance (5S), and training affect this. The best way to learn how to improve this is to build a relationship with the staff and then ask them what slows or distracts them. Often, this results in a negative spiral as morale suffers and performance slips even further. It is at that time technicians start listening to the competitors’ recruiters who call them periodically. 

Next is Efficiency = Bid Hours Completed: 60/Hours invested working on a vehicle: 32 = 187.5%. Efficiency ignores the distractions of utilization and focuses on what the technicians can do with the time they invest working on vehicles. Efficiency can be improved with the availability of OEM procedures, OEM or I-CAR training, related experience, technician time management (such as disassembly and transfer versus bag and tag and put back together days later) and inspiration of the technician (which could be inspired by their leader or a positive pay plan). This could take the form of a painter being able to paint without debris. This avoids the extra time needed for buffing by either the painter or prepper (which is worse, as less paint work is being prepped!)  

Finally, Productivity is the sum of both Bid Hours - 60 / Hours attended – 40 = 150%. So to improve productivity, you target either time utilization or employee efficiency. 

Can you boost labor sales or better invest your labor cost? 

Obviously, improving the compensation for labor can assist the shop in optimizing labor hours. The advent of ADAS has changed the target sales mix from 30% body labor, 20% paint labor, and 10% material reimbursement. It’s now 27% body labor, 15% paint labor, 9.5% paint and material, and 9-15% sublet, with the remainder from parts. The average labor hours per RO are benchmarking 15-17 total body labor hours and 8-9.5 total paint labor hours, or 23 to 26.5 total labor hours per RO. Vale Tech, Collision Advice and others specialize in training estimators to get paid for the necessary work. This article does not hope to teach the ways to grow the total (body and paint) labor hours per repair order. Failing to focus on getting paid fair compensation for work performed is demoralizing for the staff and denies the repair center proper compensation for work performed. 

Repair vs. Replace 

A recent study proved that for non-welding tasks, a technician’s efficiency on remove-and-replace tasks leads to 100-115% efficiency, while the technician’s efficiency on repair judgment time can lead to 150-250% efficiency. Because replacement is easier, technicians tend to limit themselves by preferring to replace parts. You must wonder if the technician understands this math: they have 40 hours to work, and if they performed repairs with 100% efficiency of either type of work, then they would get paid for just 40-45 total labor hours when replacing versus 60-100 total labor hours in a week repairing. The only difference is using their skills to do metal shaping to make them more money and lower repair costs for the end-customer.  

How can you assist them with this? You can purchase tools to minimize damage such as PDR tools / training, glue or tab pulling tools/training, air suction pulling tools, and encouraging things like using a 3” DA to help keep the repair area of minor damage small so they can optimize efficiency on repair-related tasks. 

Optimizing Labor Costs 

No one wants to deny their staff the ability to earn a solid wage for the work completed. Let’s explore pay methods which can encourage quality repair output with repairs of varying complexity, while optimizing labor gross margin.  

Hourly Paid Staff Costs 

The hourly pay method is preferred by technicians in rural areas or areas with seasonal repair cycles. It is preferred by leaders who want to ensure that quality and teamwork are the backbone of their culture. Hourly-paid technicians who are highly efficient can drive up to 70% labor gross profit, but we have seen them as low as 50%. We have found that explaining the target or goal efficiency and then tracking performance can be a great motivator for the hourly staff. 

To calculate the expected labor hours, use this calculation: 

Hourly Wage Cost Paid to Staff Member: $35/(100% - 62% (target gross profit)) 38% cost budgeted per hour/$92.11, then divide that by the average compensation rate of $80 (for example) = 1.16 (or a 116% efficiency goal), then multiply 1.16 * 40 hours worked in a week = 47 total labor hours delivered is their target. Good leaders set these goals, review their performance weekly as they hand out paychecks, and ask them what we can do to assist them to improve in the future. 

Hourly Incentive 

Using our example, then, for every hour over 47 the labor gross profit is 100%. So, some repairers who realize they need to reward their staff for exceeding that goal pay 10-20% of the incremental hours. If the labor rate is $80, a 20% incentive means for every hour over 47 they would be paid $16.00. So, if they produce 57 hours, or 10 more than their goal, they will earn an incentive of $160.00. If they can sustain a higher level of output over a 3-to-6-month period, it is incumbent on the shop owner to consider an hourly rate increase / raise. 

Flat-Rate or Commission Staff Costs 

The flat-rate (or commission) pay method is preferred by technicians in markets with a steady flow of work and confidence in their ability to safely and productively repair vehicles. Repairers don’t have to manage the staff’s motivation level as closely, as their pay is directly affected by their level of effort. The challenge is the labor market remains quite tight during a technician shortage. This inspires employers to offer to pay a higher flat rate to attract technicians from another shop. Labor gross profit with flat-rate technicians tends to be paid 35% -45%, resulting in 55% to 65% labor gross profit. 

Ways to Improve Flat-rate gross profit levels 

With the skill level being quite different from apprentices to journeymen to master technicians, you may want to consider offering a varied pay method based on the type of job. The small gravy jobs tend to get fought over and the train wrecks are harder to inspire them to repair. So, consider setting employees up based on the levels of repair they work on and then accumulate the flat rate pay earned. Here is an example assuming an $80 average reimbursement:

This model allows you to discount cosmetic repairs and is made up for when you get paid a higher labor rate for OEM-certified repairs, frame/structural, or mechanical labor. 

Another way to reward the top performers who work on ROs with more repair procedures is to offer a sliding flat rate based on sustained output in a pay period: 

This model rewards them for repairing more and using their time and equipment wisely. These methods “feed your eagles” so they feel acknowledged for doing the more difficult repairs, and you thus retain them. Remember, losing one “eagle technician” can cost you 30% in annual wage in lost production, recruiting, new hire, and training costs to replace them. 

Added Value-Upselling Benefits 

Another source of bid labor hours per RO is to review the vehicle and ask the customer to opt-in to get an estimate to repair unrelated prior damage or a detail package. The repairer can offer a discount on these repairs which can be completed “while you’re here.” Repairers can add these hours to technician hours produced/pay and add a small incentive (10% for the estimator) because all the non-value-added costs (create a file, check-in, pull into the booth, detail, etc.) are covered by the repair. 

Why doesn’t my labor cost from my management system match my income statement? 

The management system merely records the flag hours paid on a job and the time clocked into a job. The income statement reflects the total amount paid to the technicians, which includes time for new-hire orientation time, training time, time working with a mentor, time repairing tools, time on vacation/PTO. One way to capture these costs is to record them throughout the month on an internal repair order. It is my view that any time not invested working on the vehicle for training needs to be moved to overhead in training costs, and things like paid time off need to be recorded as an employee benefit cost and paid out on a per-pay-period basis (preferred) or accrued and paid when used. Also, be sure to flag up all jobs as of the last day of each month (even if not a payday), to ensure that month’s labor costs are factored into the costs or WIP labor costs. 

Points of Labor Cost Leakage 

There are a couple more important points of inaccuracy of labor costs. One is quite preventable, and that is miscalculation of payroll. To prevent human error, we encourage shops to verify payroll accuracy and use an automated system such as a management system, Excel spreadsheet, or calculator with a tape (always have someone else double check your work to ensure accuracy). Another source of leakage in margin is harder to see. It requires the production manager to be aware of work completed by hourly staff, like a detailer doing pre or post scanning or installing a molding or stripe on a vehicle. They need to go into their system and de-flag these lines.  

Finally, if a technician flags a line and the insurer later denies payment for those tasks, you need to go into the system and unflag these items if the RO is open or de-flag via an internal RO. The same applies to a labor credit on a salvage part; you need to deduct 20-30% from the labor credit (hours) to account for the body and paint materials used to complete the repair. If you get a 2-hour labor credit, allow the technician to flag 1.6 to 1.8 hours to ensure the shop has been compensated for the materials. 

TCL 

A final consideration is to understand what the TCL or True Cost of Labor is. Using this calculation, you take the annual wages earned and add up the various company paid benefits offered. If your shop pays great benefits, the employee benefits from it, but they need to consider these things as a part of overall compensation. Review these at least annually to ensure the employees appreciate your true compensation so they don’t get lured away by an offer of a bit higher hourly or flat rate / commission %.  

Conclusion 

With labor being 60% of our gross profit $ earned, it is important that you hire and train a staff who knows the efficiency you expect for the pay offered, you reward them for producing safe and quality repairs. Further, you adjust your accounting to accurately report your staff’s performance. As a servant-leader, you need to constantly be monitoring technician output, flow and morale to ensure they have the approvals, parts, supplies, tools, OEM resources and training to be as successful as they can. Now it’s on you to challenge yourself to refine your leadership to optimize the labor hours you have available!