The second step is to determine what your effective labor rate really is. Many times dealers lose sight of what the actual labor rate they charge really is. What I mean by that is often, due to the need to discount some labor rates in order to be competitive in the market place so as to attract customer pay business, our average labor rate is lower (sometimes much lower) than what our stated rate is.
How do we calculate it? First, total all labor sales from the repair orders that were written for the previous month. Then total the number of hours that were booked (or flagged) by the technicians to produce those sales. Yes, we count no charge tickets. Then we divide the total of the labor sales by the total number of hours booked. The result is your effective labor rate. An example would be if a service department had a Stated Labor Rate of $60 per hour, $10,000 in total labor sales and 200 hours booked, the resulting math would produce an Effective Labor Rate of $50 per hour. ($10,000 / 200 = $50.00)
In the above example, if the department had a weighted average labor cost of $20 to begin with, the best they can now hope for is 60 percent gross profit as a percentage of labor. This is a typical example of how dealers and department managers get a surprise when they see their end of month statement and see a much smaller gross profit percentage than what they were expecting. Your choices again are to raise your labor rate, discount less, or lower your cost of labor.
Finally, here are two notes to the dealers that are still paying their technicians and mechanics by the clock hour and are not using book time.
First, to determine your actual labor gross profit, you must include all wages paid to technicians and mechanics paid during the month as your cost of labor. In other words, they should not show up as “technician wages” on your income statement, but rather as a reduction to the gross profit booked.
Second, if you don’t wish to switch the way you pay your technicians to book time, at least make your department manager book the time to the tickets just as if the technicians were being paid that way. It is the only way to truly see how productive your technicians are, and it will show you why your labor gross profit is averaging in the 50 percent range or lower.
In my 23 years as a franchise dealer and independent service shop owner, I always found that the service department was the foundation for profits and the key to lifetime customers.