How to Determine Effective Hourly Labor Rates In Your Dealership
If you want to build efficiency into your dealership then you need to have effective labor rates. But, many dealers don’t spend enough, or any, time figuring out a good rate.
The good news is there is an effective way to come up with an accurate labor rate that’s specific to your business. And, it will help ensure that your shop is consistently making money year after year.
Let’s start with this question: when was the last time you increased the labor rate in your shop?
Many dealers lag behind the market here. They’ll increase costs for everything else before they’ll raise the labor rate in their shop. Although it’s important not to overcharge your customers, it’s also important to bill a fair rate for your technicians’ expertise and skills.
The Wrong Way to Fix Your Labor Rates
When it comes to figuring out labor rates, many dealers will call up the shop across town, see what they’re charging, and then charge the same. But, this is a mistake.
The reason is that your dealership has different needs, and different expenses, you’re your competition. For instance:
- Your land, and your building, might have cost more.
- You might have better technicians (and thus can charge more).
- The benefits to your staff might cost more.
- Your property taxes might cost more.
You have to find a rate that fits your shop: not someone else’s.
The Right Formula for Determining Effective Labor Rates
Figuring out your shop’s perfect labor rate is fairly easy. First, look at the income statement/balance sheet for your dealership. Look at the gross profit revenues generated, and then look at your operating expenses.
Imagine that your dealership earned $600,000. Now, take away all the wages and benefits you paid out on the labor that earned that $600,000.
Let’s say wages and benefits cost $300,000.
You’re left with $300,000 in “hard costs”.
These hard costs are rent, taxes, electricity, gas, etc.
Now, look at how big your shop is compared to the rest of your dealership. Measure the square footage, and come up with a percentage. For instance, if your shop was 300 square feet, and your building as a whole is 1,000 square feet total, then your shop would occupy 30% of your dealership’s space.
This means that if your shop is using 30% of the space, it’s responsible for 30% of the expenses.
So, 30% of our fictional $300,000 in hard costs is $90,000.
At a $70 per hour labor rate, then your shop must have 1,285 hours billed to customers over the year just to break even. With those fictional costs, if you’re not billing that many hours per year you’re losing money.
And remember, this does not include the costs for tools, air compressors, or bench presses that every shop needs and uses on a regular basis.
Your OPE business management software can give you easy access to the data you need for this formula.
Tiny Tasks Ambush Shop Profitability
We also need to take a look at what can ambush your labor rate.
Let’s assume your dealership bills its technicians out at $70 per hour. And, they have more than enough work to keep them busy most days.
But imagine your delivery truck shows up full of freight to be unloaded. You want it done quickly, so you pull some of your technicians out of the shop to help.
What’s happened now? Well, instead of your technicians working on highly billable work, they’re now doing manual labor. This means it’s costing you $70 per hour to unload that truck. This is a very inefficient, expensive mistake that many dealers make.
Your technicians need to do what they do best: work on billable jobs!
Doing these two things: finding your best labor rate, and making sure your technicians stay on billable work, will help ensure your shop makes money year after year.