Monday, 19 February 2018 22:58

4 Tips for Setting Labor Rates in the New Year

Written by Sam Valenzuela – President, National AutoBody Research



4) Consider what investments you need to make this year. How much money do you need to invest to improve your repair capabilities (especially for high technology vehicles), such as training, equipment, or earning OEM certifications? In general, your current labor rate only covers your current business. You likely need a new labor rate to cover new investments because your current rate was never priced to pay for them. Most body shop investments such as tools, equipment, and training are intended to make repair labor more skilled and effective. Equipment can’t repair a car by itself; it needs labor to put the equipment to use. The same goes for tools, facilities improvements, and certifications. Therefore, labor activity has the burden to pay off those investments plus earn a return.


Let’s look at an example shop and investment: A shop needs to make a $5,000 training investment for a technician. The shop currently charges $57/hour for labor, has a 50% gross profit margin on labor, and wants to earn a 15% return on investment in one year for this training investment. The technician bills 2,000 hours per year and operates at 100% efficiency.


The 15% return on investment is $750 (that is, $5,000 times 15%). So the shop needs to earn back $5,750 (the $5,000 investment plus the $750 return) in one year. The shop decides to spread that cost evenly over the tech’s 2,000 billable hours, which calculates to $2.88 per hour. This is the additional amount per hour the shop needs to earn to pay back the investment in one year. Because the shop earns a 50% gross profit margin on labor, we divide the $2.88 by 50% to get $5.75. This is the additional amount that needs to be billed for each hour (via the labor rate) so that the shop earns the $2.88/hour profit it needs to pay off the investment and earn the return. Therefore, the shop’s current $57/hour labor rate plus the additional $5.75 equals $62.75, which is the new labor rate the shop needs to collect to pay for this $5,000 training investment and earn a 15% return.


A similar analysis is needed for all the other investments in equipment, facilities, certifications, and ongoing training. It can add up quickly. But shops that don’t adjust their rates to fund these investments quickly eat into their profits. Given the rapid increase in technology in this industry, we can expect a large and continual investment required to keep up with the training and equipment necessary to repair these high-tech vehicles properly and safely. Mathematically, the industry’s current labor rates will only take a shop so far down that road before they are simply unable to afford the necessary investments. This leads to three major risks to shops: 1) lacking the knowledge to repair new high-tech vehicles, 2) putting consumer safety in jeopardy, and 3) putting themselves at legal risk by performing improper or unsafe repairs.


None of these four tips are intended to be the only thing you do to compute labor rates. Think through all of these, look at the results, and then decide what price to choose.


You can also go deeper with a more thorough cost of doing business analysis, examining competitive wage levels in your market, and determining your profit goals then backing into the labor rate needed to hit that goal. These require having a good handle on your financial statements and a good spreadsheet or calculator to help with the calculations.


Also keep in mind that as unemployment in the US continues to drop, wage levels will increase, and it could become more expensive to acquire new employees and retain good ones. Shops need a labor rate that can support paying competitive wages. If you find yourself choosing between two rates, we suggest erring on the high side to help stay ahead of the increasing wage curve.


Remember, there is no rule that says you can only set your labor rates once per year. Prices can change at any time for any reason, and because markets and businesses are dynamic, labor rates can and do change continually throughout the year.


We advise shops to consider their labor prices several times per year as their business evolves, cost structure changes, and investments are made. They can change rates as often as they need to. And very importantly, shops can freely report their new rates to the independent VRS Labor Rate Survey at LaborRateSurvey.com. Pricing transparency is essential for free markets to function efficiently, so your survey participation is critical.


In conclusion, pricing your labor can often be more complex and more involved than this, especially considering all the investment needed to repair high-tech vehicles, but these simple four steps can help get you in the right range and closer to the right price for your individual shop. For a deeper analysis of your labor rates, greater access to more independent labor rate data, or help with any of these topics, contact National AutoBody Research for more information: www.nationalautobodyresearch.com.


To access the cost of living calculator, please visit areavibes.com/cost-of-living-calculator.

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