The Dangers of Your Cost of Labor

by Rick White, President 180BIZ                                                                  (Estimated Read Time 4 minutes)

In this episode, I’ll talk about the dangers of going after 25% off on labor. There are some potholes to be aware of.

1. The first one is understanding what your technicians are costing you.

You may think that you’re paying a technician so much per hour. While that’s true, it's not really accurate. You are basically talking about the time that the tech is there, right? That's what you're paying per hour. A much more valuable number to understand is cost per billed or sold hour. Figure out what your techs cost you per week. Then divide that cost by the number of hours that they produced. It can be a pretty scary number. I did this with a client the other day. He found that what he thought was his least expensive technician was actually his most expensive technician. So, the first thing to understand is your cost per sold hour.

2. Then the second thing to look at is how many hours a day are you getting. 

Figure out what your cost is and then divide it by 0.25. That's your Effective Labor Rate. Then divide that by the percentage of your Effective Labor Rate. A lot of times that number is overinflated because you're not getting paid for all the hours. Meaning you are paying your tech, but you’re not collecting for all the hours. For example, my tech spent three hours diagnosing a vehicle and I only billed for an hour. Well, if your labor rate is $150, your Effective Labor Rate is $50 an hour.

Understand that you could not be collecting for the right time and are working for free. We don't want to work for free. I don't know if you looked at your sign in the shop, but it doesn't say Goodwill or Salvation Army on the front of it.

You are there to create and keep a client. That's your purpose and generating a profit, that's your goal. Get into that mindset.

You need to detach a little bit and see the entire landscape instead of having this narrow focus on just getting cars done. Because unconsciously, you tie fixing a car to making money. And that isn't necessarily true. Make sure you are making money per car, then get 'em done. So that's a little bit different. Make sure that when you are paying your techs, you are collecting for it.

Next, make sure that your technicians are billing, at least, the number of hours that they're there working. Why else are they there? You have labor inventory that you buy every single day. You buy eight hours of labor.  Your techs are there for 8 hours.  You should, at minimum, be getting paid for 8 hours of work. But what happens if you only sell four of them? The other four just go away. It's not something you can put on a shelf. For example, let's say you're paying a tech $25 an hour and that tech only bills four hours for the day.  Then the tech cost per sold hour is $50 an hour. Now, look at your effective labor rate. You might say, “Oh my gosh, I'm not making my profit.” And you think it's because your effective labor rate is an issue. But it’s not the issue.

So what I want to make sure you're not doing is adjusting your Effective Labor Rate to make up for technician inefficiencies.

And when you have a tech that's way up like that cost per sold hour, it's because you're not getting enough sold hours out of the tech per day. Step back and realize that probably 80% of a technician's inefficiency is caused by communication, shop flow, documentation, bottlenecks, et cetera. Do the math. Figure out what your cost per sold hour is, then look at the hours they're producing. That's a big thing.

Now, you can also look at what you're getting paid. Make sure you're collecting what you should get paid for. The first thing you want to do is calculate what your cost per sold hour is. Recognize the number of hours they're producing per day. Then sit down with your techs one-on-one. Have a simple conversation that might sound something like this. “John, you are a great technician. You should be billing 10 to 12 hours a day right now. We're getting 5. But I don't think this is a “you” issue. I think this is an “us” issue. I need your help. Help me to understand what you believe is preventing you from being more productive. What is holding you back from billing those 10 to 12 hours a day? Then take notes.

Don't get defensive. Just listen. They may identify blind spots you never saw before.

God bless. Go have some fun. Go make some money.

Take care. Thank you so much.

Want to learn more about transforming your business? CLICK HERE to get advice you can use to improve your shop, the day it lands in your inbox.