Managing your effective labor rate is probably one of the best ways for a shop to increase its labor gross profit. The effective labor rate is calculated by dividing the dollar amount of labor sold by the number of hours charged for a repair. The most common labor rates in a collision repair facility are: body, structure, frame, mechanical and paint. The goal is to have a higher effective labor rate than your posted door rate.
Let’s use an example of an estimate that had 10 body hours, 4 frame hours and 12 paint hours. For this example, body labor is billed at $34, frame labor is billed at $45 and paint labor is billed at $34. Ten body hours calculates to $340, four frame hours equal $180 and 12 paint hours calculate to $408. The total of those hours is $928 with an effective labor rate of $35.69.
To maximize your effective labor rate opportunities, you need to ensure that you utilize all the labor categories correctly. As I review estimates I see body, frame and paint labor rates used most often, but seldom see structural repairs charged as a separate rate and, most often, mechanical repairs are identified as body operations. Using the 26-hour repair above, let’s identify the different labor operations required in the repair. The 10 body hours are now 4 body, 4 structural and 2 mechanical. Adding labor rates for structure at $40 and mechanical at $75, we will recalculate the repair. The 4 body hours calculates to $136, the 4 structural hours calculates to $160, the 2 mechanical calculates to $150, the frame remains at $180 and paint remains $408. The total on this repair is now $1034, and when it’s divided by the number of hours in the repair, the effective labor rate is $39.77 — a $4.08 increase in effective labor rate.
Adding a structural labor rate into the equation may be new to some of you. The question often is when to charge a structural labor rate and what to charge. The first part of this question is easy to answer by looking at the way vehicles are constructed. Any repair other than a replacement or repair of a bolt-on part should be considered a structural repair.