Labor margins, which are much more complex and impacted by many more factors than your parts margins, need a greater effort to get them to a point of profitability and to maintain them there.
An important first step in getting our labor margins where they need to be would be to conduct a labor rate analysis based on our highest paid technician. We would take his or her hourly wage, and then take other payroll costs per year (to include health insurance, uniforms, training expenses, shop tools and diagnostic equipment, and finally any benefits such as 401K), and then calculating these at what they cost the shop per hour. Add the hourly wage of your tech and the hourly cost of the tools and benefits (Tech $40.50 per hour + Expenses per hour $8.76), and just as you would do with a part, you would multiply that total (49.26) by 2.5, yielding a base labor rate of $123.15 per hour.
Of course, if that highest paid tech of yours is not 100-percent productive, you will have to account for that in your calculation. At 90-percent productive, your hourly rate would need to be $136.83 and if he is only 80-percent productive, your hourly rate will need to be $153.94. There's quite a range there, but productivity is real and has impact on our ability to be profitable. An adequate labor rate is our foundation.
Maintain an effective labor rate at or near your actual hourly rate
Many of us agonize over setting our hourly labor rates, often delaying this important decision for months at a time. But through our inefficiency, we often make this exercise meaningless as our effective labor rate declines. Your ability to maintain an effective labor rate at or very near your actual hourly rate will go a long way toward ensuring the profitability of your labor operation.
Effective labor rate has nothing to do with tech productivity; more correctly, it is a way of measuring how well we convert the labor hours we are selling into actual sales dollars. If we have a labor rate of $100 and we sell two hours of labor, we should generate $200 in labor sales. But if we rush an estimate through showing $150 in labor to the customer, pay the tech for the appropriate two hours, and give our customer a labor discount on top of that, we have just shot our effective labor rate to hell. Multiply this by as often as our habits would allow it to occur, and I am sure you can see the negative impact from week to week and month to month.
With all the inefficiencies and challenges to labor margin, your effective labor rate needs to be at or above 90 percent of your floor rate. Some very good news here is that your shop management system can likely be set up to manage your effective labor rate.
Use a labor matrix or grid
The use of a labor matrix or grid is another good way to assure the viability of our labor operation. The use of a labor matrix is an effective way of offsetting the inefficiencies unique to our industry - and coincidentally will go a long way toward assuring our hourly rate. Warranties, diagnostic time, slow parts deliveries, and the inadequacy of labor guides on major jobs such as an engine replacement are all areas that commonly challenge us in predicting labor, and the consistent use of a labor grid will assist in minimizing the impact here.
With the use of a labor matrix, the tech is paid per normal, but the shop will benefit by accounting for unforeseen charges and expenses. It is typical that the shop owner absorbs these but that seems inappropriate. The matrix would, at the very least, attempt to pass on these very real expenses to the customer as with a parts price, a rent increase, or a delivery charge.
The labor matrix is used as an offset to expenses and inefficiencies we all suffer, and when used consistently, it will allow us to generate moderately higher labor margins on all jobs, which is our way of anticipating and reacting to those things that negatively impact our labor rate and profitability every day. Some additional good news here is that your shop management system can likely be set up to manage a labor matrix.
In part, productivity is a measure of our ability to keep our shop fully and appropriately staffed, along with our ability to maintain an adequate car count. If we do not have an adequate car count, there is no way our technicians can be productive. Appropriate staffing would include enough techs (at a cross-section of skill levels and experience) to handle the numbers and types of services and repairs we would expect to see. This is all a delicate balance.
Keep technicians focused on generating billable time
If our shop process is cumbersome or in any way pulls our technicians away from generating labor, we need to reset our priorities. We must develop procedures that will keep our technicians doing the things that will make us viable and profitable. Technicians are there to service and repair our customer's cars and they need to be focused on generating billable time. We need to do everything in our power to get out of their way in accomplishing this and pay them in ways that encourage them strongly in that direction.
For canned jobs and menu items, such as transmission flushes, it is crucial to find a balance between profitability and competition. However, shops will often credit technicians for an hour of labor on these services but in trying to be price competitive, only charge customers for 0.6 hours — and there goes the profit. Crediting a tech .6 hours on a service that takes 20 minutes is fair and reasonable, though your technician might or might not agree. In the long run, the shop being viable and profitable is a win for everyone.
Your challenges with labor margin are real but solvable. My recommendation is we work in that direction. It sure won’t solve itself.
