Before you read this article make sure you have had a good sleep, a great cup of coffee and put on your reading glasses. I am going to shift gears and write an article about a key shop performance indicator that is not discussed much in the...
Before you read this article make sure you have had a good sleep, a great cup of coffee and put on your reading glasses. I am going to shift gears and write an article about a key shop performance indicator that is not discussed much in the independent automotive sector. We are going to discuss “Effective Labour Rate.”
The most common measurement of technician performance I hear shop owners use is what I call proficiency. Don’t know how many times I have heard a shop owner state, “I pay my techs for eight hours a day, and the best they produce is five hours.” In many cases, that is how much time they worked on vehicles; never mind how much of that was actually billed out in dollars. The technicians then reply, “But boss, I am working as hard as I can. I don’t understand!” What is missing in this discussion is the true measure of how well a technician has performed. On our way to understanding effective labour rate, we need to first discuss productivity and efficiency.
What is Productivity? What is Efficiency?
Productivity is the measurement of how much time technicians spend working on vehicles compared to the time they are at work, regardless of whether the time was billed or not. Most technicians work eight-hour days. See example below with a technician working four hours on vehicles that day.
Productivity = Actual Time ÷ Available time 4 ÷ 8 = 50% Productivity
So what happened during the other four hours? In many shops, technicians act as service advisors, order parts, look up labour times, create estimates, answer the phones, give customers rides etc. Productivity is generally the responsibility of management and service advisors.
Efficiency is the measurement of how much time a technician takes to perform a particular service operation compared to the time it was sold for. See example below where the job was sold for five hours and the technician took four hours to perform the job.
Efficiency = Sold Time ÷ Actual Time 5 ÷ 4 = 125% Efficiency
As you can see, when the technician actually had work to do they were able to complete it very efficiently. Efficiency is generally the responsibility of the technician, unless management has undersold the work. If both of these examples happened on the same day, the owner and the technician could have an intelligent conversation about how the day went and how profitable this technician was. Even though the technician was only 50 per cent productive, they were 125 per cent efficient, which is the industry benchmark.
In order to calculate productivity and efficiency one must be able to measure available time, actual time and sold time. The only way to do this well is to use a time clock system.
Let’s Look at the Dollars
Now that we have reviewed the benchmark methods of tracking and measuring time, we need to study this from the point of view of dollars. Like a wise person once said, you can’t deposit percentages in the bank, just dollars. How we bill out our time is the point I am finally going to discuss. The end result of what we actually deposit in the bank is a combination of menu priced items, jobs priced out by the labour guides, diagnostic labour rates, oil changes, and all the time we discount or do not charge for. On average the independent automotive sector collects only 4.3 hours in dollars out of eight hours worked. This does not mean that technicians are not working all day or are not working hard; it means that their time is not being billed out.
Many shops charge around $15 labour plus oil and filter for an oil change. If it takes a technician a half hour to perform an oil change that means the effective hourly rate for oil changes is $30 per hour. If a shop has a labour rate of $100 per hour, and the service advisor sells a job like four ball joints for five hours, the total labour charge is $500. If the technician performs this task in five hours, the effective labour rate is $100 an hour. If a bolt breaks that the technician needs to drill out and the whole job takes 5.5 hours, the effective labour rate is $91 per hour. (That is if the customer is not billed for this extra time, which happens all the time).
If a technician performs the ball joint operation in four hours, the effective labour rate is $125. We recommend using a diagnostic rate for electrical and drivability of 1.74 times your regular labour rate. That will have a significant effect on your effective labour rate. This is probably a good time to reevaluate your menu pricing for maintenance services like transmission services and winter tire swap overs. You will find that if you have not done a competitive survey in a while that many of these packages have gone up in price in the market place. A good technician should be able to be very efficient with fluid exchanges and other maintenance services, especially if they can run more than one flush machine at a time. See the chart above for a better visual of what I am describing.
In order to achieve the gross and net profits required to succeed in this business, and be able to afford and attract the best technicians, we recommend a benchmark of 125 per cent for your effective labour rate. This means that as we come to understand and manage our technician’s time, we should be collecting nine hours of labour at our full rate for every eight hours they work on cars. Having said that, going from 4.3 to nine hours is not something that happens quickly. But with hard work, good systems, and well-trained advisors, this can be achieved in time. Even seven billed hours out of an eight-hour day will make a huge difference to your bottom line.
Please follow along as I address the low effective labour rates in the services listed in the chart below. Any time we can combine an oil change (or a Maintenance Service as I prefer to call them) with another service we raise our effective labour rate. We can perform a maintenance service with a winter tire change over, with a fluid flush, with a brake service or any other mechanical repair. When we do this we are only driving the car in and out of the shop once, we are only lifting it on the hoist once, and many of the different steps in each operation actually overlap.
When we create an estimate for a customer we need to make sure that we add an estimate factor of anywhere from five per cent to 10 per cent for unexpected things like broken bolts. When a technician inspects a vehicle or diagnoses a concern, and knows that broken bolts on that operation are common, they need to inform the service advisor of that so extra time can be added to the estimate. Even average technicians should be achieving 125 per cent efficiency, not just because they are fast, but also because the job has been sold for enough time.
Multiplying your regular labour rate by 1.74 gets you close to the 60 per cent gross profit required on each invoice. Diagnosis is straight time, hard to beat the time when you are following an unknown problem like a bad ground or an electrical short. When you are diagnosing you are not installing and selling parts, which add to your gross profit.
Identifying maintenance opportunities on your client’s vehicles will also increase your effective labour rate. Using databases like Identifix to inform your customer of the services required by the vehicle manufacturer and performing regular inspections will lead to the results that you need. Machines can perform many of these services, so the technician efficiency really goes up, especially if they run multiple services at the same time.
To calculate your shop’s effective labour rate, divide your total labour sales for a period, such as a month, by the actual time your technicians work on vehicles. See this example with a shop at a $100 per hour posted rate:
$30,000 labour sales divided by 315 actual hours = $95.24 per hour effective labour rate. This sample shop is on its way to the benchmark. I challenge all of you to do the math for your shop, find out where you are at, and then begin to make the changes that will get you the results you need.
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