What Is Your Shop's Effective Labor Rate?

Motor,  Nov 2004  by O'Connor, Bob

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There are a significant number of financial benchmarks to focus on when running a repair shop. One of the most critical is the 'effective labor rate.' Most shops operate on too low a rate, which contributes to a significant loss of revenue and profits.

The auto repair industry has experienced many technical and business management challenges over the last several years. Overall, it appears as though the industry has stayed abreast of the technical changes reasonably well. However, there has been a sharp decline in both the number of independent repair shops and the profits earned by those remaining. There are several reasons for this.

Running a repair shop profitably today has become much more of an exacting science than in years past. Many of today's shop owners have either been resistant to educating themselves and/or their staff, or have not realized the importance of understanding what the benchmarks are and how they are achieved, and of immediately implementing changes to achieve them.

Almost every aspect of shop management-including training budgets and requirements, pricing and marketing techniques, among other things, as well as industry benchmarks for these areas-has changed.

One area that we regularly stress to our clients is management of the shop's labor inventory-specifically productivity and efficiency. It appears that the majority of independent shops have not significantly bought into and improved their ability to purchase 8 hours a day and bill out 8 or more hours, along with the goal of achieving our benchmark of years past of 9 hours per day for each technician. Our new benchmark is 11 hours per day per technician for every 8 hours worked.

With labor rates rapidly approaching, and in some instances exceeding, $100 per hour, repair shops are going to be required by the motoring public to become much more efficient. No longer will they be able to simply increase labor rates to meet ever-increasing costof-sales and operating expenses. Rather, they'll be required to significantly improve operating efficiencies. Improved efficiencies will enable these shops to bill out more hours by each technician without increasing the time they spend on the job.

For instance, instead of billing out 9 hours in an 8-hour day, increased efficiencies will enable 10 to 12 hours to be billed out in the same work day. Achieving this increase in efficiency will be a significant challenge for the industry, since it currently bills approximately 5.2 hours in an 8-hour day, on average.

Efficiencies will have to improve from 125% to 150% for a repair shop to remain viable in the i:oreseeable future. That will, in effect, require an increase in the number of hours billed in an 8-hour day to at least 11. Most shops not billing close to 11 hours per day per technician will probably fall by the wayside.

The goal of this increased efficiency includes achieving an overall effective labor rate of approximately 135%. A good mix of diagnosis, maintenance and repair work will make it easier to achieve this effective labor rate benchmark.

Elements Leading to Increased Productivity & Efficiency

There are six primary elements that must be acted upon to effect improved efficiencies leading to an effective labor rate percentage of 135%. They are systems, staff, training, facilities, equipment and products. Let's look at them individually.

Systems. Systems that have a direct effect on effective labor rate include the actual tracking of all four types of time-available, actual, "E" (idle) and sold. If this tracking system is not in place, it will be very difficult to get to the number of billed hours required to reach the 135% effective labor rate. For more details on these time categories, please see the December 2000 Business Sense article, "Selling Diagnostic Time Profitably."

Another system that will have to be dialed in is scheduling. Scheduling is a science not easily learned; it takes a great deal of self-discipline and practice to master it. Shop owners need to understand the concepts of capacity and cycle time as it pertains to their staff and billable hours. The toughest mind-set to overcome by most shop owners and their service advisors is to focus less on loading their shop by vehicle count and more on loading by billable hours. This process is covered thoroughly in our "Technician Time Management" workshop.

Estimating is another skill that has to be practiced because if it's not done properly, the labor sales and profit leaks will continue. Most shops do not allocate time for the estimating process; estimates get done when "time permits," which really means many may not get done at all.

Improvements in communications could include intercoms, cell phones, two-way radios, etc., to reduce the amount of foot travel currently experienced in most of todays shops.

Staff. The service advisor should be a person who likes people and is able to handle all of the tasks related to the sales position only; management tasks do not fall under his purview. Technicians should embrace training and technical challenges, and be truly team-oriented. All in all, shop owners should make sure they select the right staff with the correct attitude. Hiring anyone who doesn't meet the high-end criteria should be avoided. If not, turnover could become twice as costly as it is now.