This month’s article was written with the help of Coach Brian Hunnicutt.
Although I am not very focused on football or baseball, the one thing I have noticed is what the winning teams are paying for their players. I overheard veteran coach Brian Hunnicutt explaining to his 20 Group his feeling on the future of hiring and retaining great employees in the years to come. Brian began his talk by saying, “The topic that gets the most reaction from my clients when I bring it up is labor rate. It is always followed by silence.”
What is your labor rate and why is it the rate that it is? What would happen if you increased it by $25 an hour? $50 an hour? Here you were just thinking that I was talking about $2 or $5 an hour, right?
The reason that labor rate is even a topic right now and the reason why we are talking about way higher labor rates is because of your employees or the lack of great employees. In calling all over North America every week, the one constant I hear is a lack of qualified technicians and service writers.
Better benefits and pay
So let’s look into the future and see how this is going to play out as the lack of technicians becomes even greater. Who will have the best techs? Is it the shop that pays them OK, or will it be the shops that pay them better than average? Is the average going to go up? I believe it is. So if you are supposed to make at least 60 percent on the labor margin, and you have to factor in whatever your extra load is that you are paying them, it stands to reason that the labor rate will need to go up.
When you take into consideration FICA, FUTA, Social Security, Medicare, unemployment insurance, workman’s comp, vacations, meeting costs, uniforms and any insurance that the company pays, then the extra load could be around 30 percent of their wage that you are paying them on top of what they took home. It can be higher or lower depending on your shop. If you use 30 percent, then most shops will be in the ballpark.
If you pay a tech $25 an hour and the load is 30 percent then the math to get your 60 percent margin is like this: 25 x 30% = 7.50 + 25 = 32.50 divided by 40 percent is $81.25 an hour to get a 60 percent margin. The problem is that to get the best techs, it is no longer $25 an hour to start with. I already have shops paying $40 an hour for the right tech. That math makes it so that we need a $130 labor rate right now.
Effective labor rate versus door rate
Does your door labor rate match what you are really collecting per hour? What is your real or effective labor rate? Take your labor dollars and divide them by the hours you give your techs credit for performing and that is your effective labor rate. Most shops are around $15 to $20 under their door labor rate. Say you do $10K in labor sales and you have a $100 labor rate. You would need 100 hours to get your labor rate. But your techs got credit for 120 hours. Your labor rate is now $83.34 an hour.
How does this happen? What do you charge for an oil change in labor? If you charge $10 labor for the oil change, what credit do you give the tech who did it — .1, .3 or .5 hours? Unless you only gave them .1, your labor rate is not really your labor rate. You just lost .2 or .4 hours with the other responses.
So what is your real or effective labor rate? That is the number we need to use to see if you are in fact hitting the right 60 percent margin in your labor.
So how does the higher labor rate affect the customer? The type of shop you own or manage tells us how many hours per vehicle you should be shooting for. Quick lubes would love to have .75 hours with the huge car count. For tire shops and state inspection shops, the goal is 1.5 hours per vehicle. Regular auto repair shops are going for 2.5 hours and Asian and Euro shops go for 4 to 7 hours per shop, with Asian on the low end and Euro on the high end.
So a normal shop is 2.5 hours, and if you raised the labor rate $25 per hour, then the normal increase to the customer would be $62.50 on a 2.5-hour job. Is this a deal breaker? It is if you don’t have your brain attached and you are selling price rather than warranties and benefits.
On a 10-hour job it would be an additional $250, but the bill would already be around $2,000. Is an additional $250 a deal breaker? We may not be able to raise our rate to $25 or $50 an hour all at once right now, but we need to start moving it up — and in the near future — if we are going to attract and pay the best techs and service writers.
In jurisdictions where you have to post your labor rate, you should consider posting it by the half hour, not the hour. Customers love it!
Calculate and track your effective labor rate
When you are quoting your labor rate to a customer, what are you quoting? Your supposed labor rate that you are not collecting? Your effective or real rate? Your blended rate for all the menu jobs and the door rate and the effective or real rate? Don’t we always quote the highest one if we quote the rate at all? Why not say it depends on the job, and we would love to give them a quote once we look at it. Then are you going to sell the labor rate or are you going to sell the value that you bring to make the sale? What if there is rust or any other thing that can get in the way and make the job last or take longer?
The bottom line is that techs and writers are hard to find and keep. I know that most of our good employees don’t make money the only consideration. Don’t you want the loyal great employees who are working for you to know that they are some of the best paid in the industry? Don’t you want them to feel like they are really being taken care of so when they get the call from your competitor to go to work for them, your employee is not interested in even listening to them?
Don’t we owe it to ourselves and our team to be the best? Does the best cost money? Is your competition going to hold you back?
If you are interested in a worksheet that will help you determine what your Effective Labor Rate is, simply go to www.ationlinetraining.com/2016-10 for a limited time to download your own copy.
