How to calculate

Effective Labor Rate in an automotive service operation

A Career Advantage presentation The art and science of career advantage for automotive managers

©2016 by Steven Brazill. All rights reserved.

He wants you to sharpen your pencil and earn

More

Profit

“No problem,” you say.

(Gulp!)

Profit Labor Sales

In your service operation . . .

. . . labor sales drive your profit.

And the formula for labor sales is simple

Your labor sales $ = Your hourly labor rate

X Your labor hours sold

Or, euros, yen, yuan, whatever.

That means the math in your sales forecast should be easy, right?

Remember your your third-grade math teacher? She’s still looking over your shoulder, saying “Don’t mess up.”

But wait! Which labor rate should you use?

Customer pay posted rate

Warranty rate

Service contract rate

Internal rate

Menu price

Special discount price

Policy split price

Fleet rate

Different customer types have different rates

Is there a way to average all these rates?

Try this

Divide your labor sales (in dollars) from last month by the number of

labor hours you sold last month. That number is called your

Effective Labor Rate.

It’s better than averaging all of the rates you use because it factors in the percentage each rate-type contributes to your business. It will change over time, so re-calculate often.

Spreadsheet example

(Don’t tell your third-grade teacher that you didn’t do this by hand.)

A B C D E F

1 action item number source comment

2 enter Labor Sales (in period) $30,242 accounting

3 divide by Hours Sold (same period) 350.6 accounting

4 equals Effective Labor Rate per hour $86.26 =C2/C3 rounded

Effective labor rate

Ste

p 1

Remember this guy? He thinks you’re a genius.

The new you. You are a genius.

Last thoughts

• Manage to maximize total profit, not averages. You can’t pay your people or yourself with an average.

• Manage your mix of business. More warranty sales might reduce your Effective Labor Rate, but might simultaneously increase your bottom line.

• Manage your trend. Your Effective Labor Rate will change over time as your mix and other factors evolve. Watch it.

Learn more:

stevenbrazill.com/2016/09/08/effective-labor-rate/

Steven Brazill Twitter: @TheCarProfessor

©2016 by Steven Brazill. All rights reserved.

Photo credits: iStock 3183727, 9269324, 8405242, 18005614, 23702414, 21630428 except spreadsheet