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SHOP LABOR RATE
Looking to increase labor rate. Looking for feedback on how people determine what to set it at. I know many people just raise it by a certain amount but I know there is a calculation that some people use. If so what is it and/ or any suggestions? I already called around to see roughly what everyone is at around my area. I know I want to raise it but just unsure by how much- although I have an idea.
Thanks!
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9 Replies
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Some of what you want to know will be covered here:
#autorepairlaborgrossprofit
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Successful shops typically pay their techs 25% to 35% of their effective labor rate. So, to figure out what their labor rate should be they work the numbers starting with their average tech pay per hour, then calculate what their labor rate needs to be to hit the right percentage. Example, if you wanted 30% for the tech and 70% for the shop and you paid techs $28 per hour, you would take $28 divided by 30% (.30) which would equal $93.33
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Well I did it with a VERY convoluted a whacky way, because I come from outside the industry. I took a rolling 18 month sample of my overhead costs and determined a basic “overhead required base rate” per month. That included everything from my fixed costs like internet, phone, trash, etc, as well as my floating costs like electric, snap-on expenses, etc. I then looked at payroll across the same period and came up with my so-called “known costs” estimate.
From there I then determined what the 24 month average hours billed per week was and extrapolated form there what my costs per billed hour needed to be in order to be profitable. I got blown away when I realized how high it was, but making the change was necessary for me to stay “in business”. I review that number on a biannual basis in order o ascertain if I am still where I should be. Things change, and for me, my costs continue to go up, never down.
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I would follow Tom Ham’s steps to arriving at you appropriate Labor Rate. That is how we do it as well.
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I also come up with shop labor rate as Tom described.
Though I am interested in “nctransmission” results of his complicated way in comparison to what seems like the more typical way if you are willing to comment.
Thanks,
-A
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My service advisors always give me crap about raising labor rate. But every year I do and no one even feels it.
Avg invoice has 2.4 hours. If you raise your labor rate every year $3 who would even see or feel it yet complain about $7.20 a ticket?
$7.20 an invoice x 275 invoices a month is $1980 per month or $14000+$ per year
Evey customer says everything costs too much.
We charge VW $107 Audi $127 137 Super Hi-tech cars and Porsche $150 hr.
Very close by our shops, the rates are lower and higher. I just want to be less than the dealer.
Our cost of labor Techs and service advisers never exceeds 41% of the effective labor rate.
I look for my gross profit to never go below 60%. parts and labor.
Tom has the deal figured out try his methods.
If you are the cheapest guy in town you will be out of business or never take a paycheck.
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I like Tom’s concept, but it was never the way I did it. I actually did his calculation in reverse. My concept is different enough to be ridiculed by most. I have always felt that I would not have a business if I couldn’t produce a product at or below market price. Thus market price is my whole world. My market competition is the dealer for the couple cars I choose to specialize in. My product has to be as good or better and equivalent in price. I market against the local MB and BMW dealers. My labor price is ten percent less than what they charge, even if my cost state I could do it for much less.
I then paid my techs (when I still had techs) a yearly figure between thirty and forty percent of what they billed.
A few times over the 36 years I did this my labor rate was forced close to my “Market rate” as dealers were having bad times and they reduced their rates. Most of the time my rates were 25 -30 percent above all independents in my market area and I was thus out of competition with them. This was fine because long term I also was interested in only the top third of the market, thus I was very happy for the bottom two thirds to find another place to use price as their first reason to be there.
If on the other hand this method had produced a price below what my costs would have demanded as a price I would have then known that I was in the wrong business. If one can’t produce a product sellable for market price then one should find a different product.
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With my clients I take it one step further than what Tom stated. I also include what’s called the technicians tax & benefit load. Add up all of the expenses that are directly related to having that technician in your shop. Payroll taxes, uniforms, health insurance, employee meals etc…This is what your techs true costs to the company are and make sure you let all of your employees at the end of the year know what their total benefits package was.
Once you have that number then you can figure out what your labor rate needs to be for YOUR shop.
At minimum your labor profit margin should be 60% or ABOVE
Stop worrying and fretting about what your competition is doing and focus on what your business is doing. Every shop is unique in that all of its expenses etc…are unique to that shop. Whatever you do don’t use the Oreo method of labor rates. That’s where you call all the shops in town and end up in the middle.
If you would like a copy of the work sheet that I use feel free to email me.
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I like Tom’s concept, but it was never the way I did it. I actually did his calculation in reverse. My concept is different enough to be ridiculed by most. I have always felt that I would not have a business if I couldn’t produce a product at or below market price. Thus market price is my whole world. My market competition is the dealer for the couple cars I choose to specialize in. Best tax consultant near me http://yourbooksontime.com/tax-consultant Virginia. My product has to be as good or better and equivalent in price. I market against the local MB and BMW dealers. My labor price is ten percent less than what they charge, even if my cost state I could do it for much less. I then paid my techs (when I still had techs) a yearly figure between thirty and forty percent of what they billed. A few times over the 36 years I did this my labor rate was forced close to my “Market rate” as dealers were having bad times and they reduced their rates. Most of the time my rates were 25 -30 percent above all independents in my market area and I was thus out of competition with them. This was fine because long term I also was interested in only the top third of the market, thus I was very happy for the bottom two thirds to find another place to use price as their first reason to be there. If on the other hand this method had produced a price below what my costs would have demanded as a price I would have then known that I was in the wrong business. If one can’t produce a product sellable for market price then one should find a different product.
I like Tom’s concept!
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