Effective labor rate

[mmotley]

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?

[bstewart]

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.

[flacvabeach]

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.

[mmotley]

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 July 22, 2014 by mmotley

[bstewart]

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

[mmotley]

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...

[bstewart]

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 July 23, 2014 by bstewart

[mmotley]

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.