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.
Reviewing Motor and Mitchell procedure pages indicates that most welded-on components are to be considered structural. Replacement of inner structures like upper frame rails, aprons, core supports and lower rails are some of the items identified as structural repairs. Calculation of the structural labor rate is similar to other rate calculations. Since structural repairs require a higher skill set than removing and repairing a bolt-on part as well as specific equipment, the rate should be based on the expense involved in training a structural technician and maintaining the equipment required. Inter-Industry Conference on Auto Collision Repair (I-CAR) clearly defines a difference between a non-structural and structural technician in their training profiles, and OEMs are requiring specific equipment in their structural repair processes.
Mechanical repairs follow the same theory. If it takes a mechanical skill set to complete a repair, then a mechanical labor rate should be charged. There is often an argument that repairs accomplished by someone hired as a body technician cannot be billed as mechanical. That might have been a good argument once upon a time, but in today’s environment it really does not apply. There are collision centers that have trained their technicians through OEM programs that include specialized mechanical operations as well as enrolling technicians in dual roles within I-CAR and Automotive Service Excellence (ASE). As vehicles become more complex, there are many operations outside of panel replacement and structural repairs that fall into the mechanical category. Most estimating system platforms, while not inclusive, will identify common mechanical operations with a “m” in the labor margin.
I encourage you to review the estimates you are writing and compare them to the skill sets and equipment you are using during the repair process to see how they line up. I believe you will find you are not being properly reimbursed for the investments you are making in training and equipment to repair today’s complex automobiles. The only way you can maintain profitability in a repair environment that requires high technical skills and expensive equipment is through appropriate labor gross profit.
