This month’s article was written with the help of Coach Brian Hunnicutt.
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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.