What your techs really cost you

Jan. 1, 2020
The shop must have the ability to produce enough sales while maintaining costs to generate a profit.

A collision repair shop is in the business of selling labor, parts, paint and materials and in some cases services that are sublet to another business. The shop must have the ability to produce enough sales while maintaining costs to generate a profit.

With increasing influences on parts purchases and, in some cases, caps on paint and materials, a shop must make a large percentage of its profit on labor. Today, shops face several challenges. In addition to producing a proper repair and providing exceptional customer service, they must also be able to pay a qualified and skilled technician a fair wage while making a profit with the labor rate that the shop is able to charge.

Shop owners must constantly look at the number of technicians and its payroll compared to the labor rate. Shop owners have to ask themselves “Do we need him or her?” and “Can our labor rate support this tech and still give the shop the profit that it needs to make?” A complete understanding of what affects your labor margin — and how to hold a profitable labor margin — is essential to maintaining a profitable shop.

When looking at your labor costs, you have to keep in mind that your technicians cost you more, sometimes much more, than just their hourly rate. You need to look at your labor rate and see whether it has the ability to support the staff that you have and the benefits that are offered and still give the shop the return it needs.

A simple way to see where you are is to perform a Labor Rate Analysis on your more expensive employees and see whether your labor rate can support them.

Start by taking your most expensive technician’s flat rate (or the hourly rate, if that is your pay system), and then add to that the additional costs of taxes and benefits involved in having the technician there. Make sure your Labor Rate Analysis takes into consideration the FICA, FUTA, SUTA, workers’ compensation, any health, life or disability insurance, vacation time, sick time, uniforms, etc.

So let’s just say you pay $3,000 a year in health insurance for this technician. You take the annual cost and divide it out to determine the per hour cost.

$3,000 divided by 12 months = $250 per month

$250 per month divided by 4.3 weeks in a month = $58.14 per week

Divided by 40-hour work week (could be more) = $1.45 an hour for health insurance

Take all these costs (FICA, etc.) and add them to the hourly rate to determine the actual cost per hour for that technician.

Now, remembering that labor is something you buy and must sell at a profit, take the total actual cost per hour that you have come up with and multiply it by 2.5 to give you a 60 percent margin on the technician’s labor. The margin number that you come up with must be at or lower than your labor rate. If not, you may not be able to continue to offer the benefits package that you currently provide, you may need to look at an alternative compensation plan, or you may not be able to afford that technician.

You can visit www.ationlinetraining.com/abrn1307 to get a Labor Rate Analysis form that you can use to compare your loaded labor cost to your labor rate.

Tom McGee is Director of ATI Collision for the Automotive Training Institute, founded in 1974. ATI’s 108 associates train and coach more than 1,150 shop owners across North America to drive profits and dreams home to their families. You can contact Tom at [email protected] and visit ATI’s website at www.autotraining.net. Check out “Profit Matters” for mechanical repair management tips in Motor Age by ATI’s CEO Chris “Chubby” Frederick.

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