Keys to Improving your Effective Labor Rate

Keys to Improving your Effective Labor Rate

Wednesday, May 1, 2019 | May 2019

Achieving optimal effective labor rate comes down to maximizing efficiency, shop transparency and the ability to communicate as a team.

Effective labor rate is a key indicator for understanding the profitability of your business. The simple calculation (total labor sales divided by total hours billed) tells you what your shop is actually making per billed hour. Improved efficiencies will enable more hours to be billed out in the same amount of time.

Anything you can do to increase the efficiency of your techs will increase your effective labor rate, which, in effect, will directly change your bottom line without changing what the customer is being charged.

“Effective labor rate (ELR) is the sales numbers divided by sold hours for a period of time, expressed in dollars per hour,” says Paul Rupp, owner of New Concept Auto Service in Overland Park, Kansas. “A healthy, sustainable shop will have an ELR that comes out higher than the base labor rate by paying attention to a few aspects I will describe.”

He says an effective labor rate of 100 percent is the ideal benchmark, which can mainly be achieved by decreasing technician’s downtime, and working to speed up customer authorization of repairs, rather than simply charging more.

Rupp breaks down his keys to maximizing this vital KPI.

Five Ways to Increase ELR

In Rupp’s eyes, the world has become a faster, more efficient place, mostly by necessity and driven by technology. There is no time to rest on our laurels.

He uses an industry benchmark of 72 percent gross profit on labor, which he learned years ago from Bob O’Connor and RLO Training.

“We have always been right on,” he says. “A shop’s base labor rate needs to be high enough to pay competitive wages, yet low enough to attract the consumer. Labor inventory is how I like to look at it by shop. If a tech is available for eight hours, then, ideally, he should at least flag eight hours. Scheduling should always be viewed from the standpoint of how many sold hours there are versus who the customer is, taking into account mitigating circumstances.

“There will be exceptions. I track unfinished sold hours (USH). The USH number is always positive; we have enough work in the parking lot or out back, but not enough qualified help. That’s still a good problem to have.”

Rupp says technician efficiency is one of the most important variables of ELR. Technician efficiency is measured by how fast a tech can complete a job on the flat rate system; if the job pays eight hours and the tech completes it in seven hours, then he or she beat the clock and efficiency is 114 percent.

“On the other hand, if he spent nine hours completing the eight sold-hour job, he was only 88 percent efficient. The hour lost can never be recouped,” he says. “You can see more sales dollars over a period of time due to high tech efficiency and a resulting higher ELR.”

According to Rupp, the following areas can be acted upon to help increase ELR:

Systems: Well-defined and open policies and procedures with an answer to almost any situation. If something new crops up, simply make a policy to address it for the future

Staff: Having a staff that cares about each other and wants to work together is key. Rupp holds a brief morning meeting to cover the schedule for the day to keep communication flowing.

Training: Rupp utilizes online relevant training through Automotive Video Institute (AVI) every Wednesday during lunch.

Facility & Equipment: Rupp’s staff cleans the floor and maintains equipment every Thursday morning. When a piece of equipment has reached its shelf life, he replaces it. Scan tools and software are the most commonly replaced/updated gear in our shop.

Products: Rupp says his shop only purchases name-brand products, and says he relies on that personal relationship with the vendors and really hold them to delivery times.

Rupp says his technicians use electronic timesheets to track their work. Expense time is paid time for building and equipment maintenance, training, philanthropy, and other non-job endeavors.

“It adds up each week, but is needed to keep the facility flowing smoothly,” he says.

The Service Advisor Component

In Rupp’s experience, the service advisor has the biggest role in increasing ELR.

“The service advisor needs to be constantly thinking, ‘What lift is available? What time is the appointment? When is the car promised? Are we waiting on parts or customer approval? Do we have the latest estimating tools?’” he says.

Rupp says the service advisor has control and vision to many more variables in the shop than the technicians. The tech’s role is to fix the car in an efficient manner, and he gets slowed down due to inefficiencies of the shop, not of purpose. Where’s the part? When is it due? Did the customer approve it?

“The service advisor knows the answers to these questions—or should know it—and should take these factors into account for the day-to-day schedule,” he says. “It’s a real balancing act.”

Rupp cites his service advisor as top in the business, and stresses—as a team—there’s always room for improvement in every area and on everyone’s plate, not just the service advisors.

“Inefficiencies occur; mistakes happen,” he says, “and we still don’t bust out eight hours per day sometimes because of all these little things. The best you can do is try to account for them.”

The team at New Concept Auto Care wants to work smarter, not harder. With an eye toward increasing efficiency and keeping the staff happy, motivated and knowledgeable, Rupp has enabled the shop to do just that.