Labor Rate

Labor Rate Isn’t as Tough to Crack as you Think |Becky Witt

This business isn’t all that hard. You have a basic hourly rate for your labor—let’s use $100. You look up how much to charge for replacing a water pump on a Chevy and find it’s 2.4 labor hours, resulting in selling the job for $240. 

Easy. When anyone asks, “What is your hourly rate?” one-hundred bucks slips easily off your tongue. That’s not the whole story, however.

Take your total labor sales for a month and divide that by the number of hours you billed. Eighty bucks? Must be an error with the calculator. Slap it and try again. Nuts!

You have a variable rate because of “competitive” items on your menu board. You have to charge less per hour for an oil change, tire repair or complimentary inspection. Repair times have to be assigned to these items and your techs should be paid.

So, where do you get that labor rate? Do you base it on a survey of other shops? If you do, are they making any money? The most common answer is, “I don’t know.” Stop trying to be super competitive—the cheapest shops often run themselves out of business.

Use the “nut” to set your prices. Total all your expenses, including owner’s wages and return on investment. Add in the expected profit desired and the number you get is called the “nut.” Achieving enough total gross profit (GP) to pay for the nut is called “cracking the nut.” Cracking the nut means you made your target revenue—congratulations! Failure to consistently achieve your target, however, is called “going nuts.”

GP is what’s left over after you pay the cost of sales. Tech wages are the cost of labor sales and what you pay for a part is the cost of parts sales.

Total labor sales divided by total billed hours is called your “net effective labor rate.” That’s the amount for which your average labor hour really sold. When you consider expanding your shop, adding a tech, or adding a bay, this is the number that should be used when calculating expected revenue.

It’s probably more common for that to be only 70–75 percent of your “wall rate.” It might be even less if you pay your techs for those “free inspections” (and you should pay them for that). Some shop owners will sell the techs on the idea that they should do them free “because of all the upsells.” If there are really that many upsells, pay the techs. Sell yourself on the idea that there are a ton of upsells. Marketing isn’t their job—it’s yours. Techs fix cars and should be paid for doing that.

Shops are often asked, “What is your labor rate?” I always respond with the number that’s our net effective labor rate. I tell them our average hour last month sold for X dollars, and “X” always makes our pricing look very reasonable if people are comparison shopping.

So, how can we change our net effective labor rate? It’s important to understand where competitive pricing starts and stops. A low price on a brake inspection might be an enticement to get a car on the lift and take off the wheels. Many experts claim that once the wheels are off, the price shopping is pretty much over. If that’s your experience, you may start to tweak labor pricing on additional repairs, such as brake rotor replacement.

Then, start looking at your actual costs on other labor items. Hybrid vehicles, for example, require more training (increased cost) and more tooling for a higher cost. You may choose to assign substantially higher rates to hybrid repairs. And why not? Cheap shops aren’t trained or tooled for them, either.

Actual costs also include needed supplies or hazardous material disposal. Change pricing to reflect those costs, as you do need to recover costs.

If a machine is required for a job, the total cost of that machine should be computed and factored into the cost. You had to buy it, and you’ll wear it out and eventually have to buy another.

Older cars with rust issues should also have pricing adjusted accordingly. Remember that a labor guide is just that. Some prices need to be adjusted based on your own experience and the cost of doing business.

In a nutshell, evaluate pricing job by job. It’s like turning over rocks to see what’s under them—a little here and a little there can end up paying bigger dividends at the end of the month. It’s important to continually track net effective labor rate as a key performance indicator (KPI). If you get really good at this, you might find that the gap between the net rate and that poster is getting smaller and smaller.

Don’t worry about the cheap shop down the street. It probably won’t be there next year. 

 Becky Witt is the owner of George Witt Service, a family-owned repair shop of 24 years in Lincoln, Neb. Witt is a MWACA founding member.