“He only costs me $10 an hour.” Really?

Mark Poffenberger NewsletterI hear these words several times a month when discussing personnel with a Service Manager or Fixed Operations Director in response to the questions about the structure and pay of his hourly people in both the Quick Lube as well as the Main Shop.

It is a rare the occasion that the above title is true.

It’s easy to confuse what we pay an employee per clock hour with what their true effective cost per flat rate hour produced is.

We would all agree that $25 per flat rate hour is a pretty decent wage for a technician, right? It usually represents a wage that is higher than the average of all Techs in any one particular shop. We would also agree that barring any bonuses, a $25 an hour flat rate tech would have an effective cost of sale on an oil change of $25 per hour produced; same as replacing a water pump, right?

Often Service Managers will use the $25 an hour effective cost of their flat rate Tech to explain why they hire “$10 an hour guys” to perform their oil changes and tire rotations, citing that $25 an hour is just “too much to pay on services such as this because I will lose money!”

If we can then agree that all personnel that produce billable labor should have an associated effective cost of sale, then we can calculate the true cost of an hourly employee by dividing their total pay for a given period by their total production for that same period.

The results may be a shock to you.

I recently took 7 actual case studies I have performed, added them together and then divided them out into an average.

There were 13 hourly employees in these stores that produced billable labor.
I used a 10 week history of both compensation and production for each employee.

All but one of them received overtime. I find this to be a common practice to avoid either hiring more hourly personnel or dispatching these jobs to “$25 an hour guys.”

The calculation below represents a one week average per hourly Tech.

$418.00     Base Pay     ($10.45/HR x 40HRS)
+ $106.55      Overtime    ($15.67/HR x 6.8HRS)
= $524.55      Total Pay
$524.55      Total Pay
÷ 19.2 HRS    Average Total Production
= $26.49        Effective cost per flat rate hour produced

Surprised that a “$10.00 an hour guy” can end up having an effective cost of more than the average flat rate tech you employ?

Don’t be yet, there is still more to consider.

Because more often than not, hourly personnel are the least trained employees in the service department is it any mystery that these very same hourly personnel’s ASR’s (additional sales request) averaged just under .6 of an hour per repair order, while their counterparts on the flat rate side in this study were just north of 2.1 hours?

The hourly personnel averaged working on just shy of 7 repair orders per day.
The average CP effective labor rate of these stores was $73.26 per hour.
How about some potential “missed opportunity math?”

Let’s take into consideration low mileage vehicles and reduce the ASR difference by 33% to just one hour.

That’s 7 repair orders times 1 hour each or 35 hours of potentially missed ASR’s in a 5 day week.

At a $73.26 CP effective rate, that is $2,564.10 potentially missed per week, or $133,333.20 of labor over the course of 52 weeks!

These stores averaged 69.3% gross on CP labor sales, for a staggering potential lost labor gross of $92,399.90!

But wait there’s more.

In these stores there was an average of $0.96 in parts for every labor dollar sold. The average gross on CP parts on repair orders was 37.4%.

That equates to $127,999.87 in parts sales or $48,871.95 in parts gross profit.
That is a total of $141,271.85 in potential parts and labor gross profit per year!
Let’s say that we only close at a minimal rate of 30% of our ASR’s.

That’s over $42,000 in potential parts and labor gross missed per year, per “$10 an hour guy!”

If we normally close at 50%, we are looking at over $70,000 of potential lost gross per year, per billable hourly employee in this study!

Remember, this is only an average. Some of the individual stores performed a little better and of course some were considerably worse.

Only you can decide the right course for your particular situation, but let’s at least be honest with ourselves and do the math, what does your hourly Tech really cost you?

 

About the Author