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Effective Labor Rate – Identifying Causes of Erosion and Correcting Them

In this article, I wish to offer some thoughts on the erosion of our customer pay effective labor rate, identify common causes, and offer some activities we can perform to correct it. In this article, I will only address customer pay labor, as warranty and internal effective rates are driven from variable sources not typically controlled by the service manager.

The first step is to set a standard as to where the minimum effective rate should be for the department and individual service advisors. My best-performing clients are typically at 85 percent or greater than their posted door rate.

I recommend that the service manager conduct a survey of one hundred consecutive customer pay repair orders, sorted by the advisor, noting the labor charged and technician time flagged per job line per repair order. A sample of twenty to twenty-five repair orders per advisor should be sufficient. Document on a spreadsheet each repair order, labor operation and calculate the advisors’ effective labor rate for this survey by dividing the total labor dollars charged by the total flat rate hours flagged, per advisor. Highlight any repair orders that are below the minimum set standard of desired effective rate for further review.

Next, using the same sample of closed customer pay repair orders, separated by advisor, on a separate spreadsheet, determine the work mix of customer pay labor per advisor into two categories, repairs and maintenance. Determine the total hours sold by the advisor and calculate the flagged hours of each category by dividing the total hours sold per category by the total customer pay hours sold. From here you may determine the repair percentage contribution of total customer labor hours sold. A low percentage of repairs is typically an indication of either an opportunity to improve on the multi-point vehicle inspection process and technician training, advisor skills of presentation to the customer of recommended repairs, or both. Additional training is advised on this process to achieve improvement.

Let’s take a look at our service menu. We need to determine the overall customer pay labor rate for ownership of the vehicle, assuming our customer will complete all recommended maintenance services throughout their ownership cycle to 105,000 miles. This calculation is performed by listing each labor operation performed on the menu, frequency of times performed, charges per operation, and technician flagged hours per operation.


LOF – Performed 17 times @ .3 x $25.00
Air Filter – Performed 5 times @ .2 @ $10.00 labor
Spark Plugs – Performed 2 times @1.5 @ $125.00 labor Brake Fluid – Performed 2 times @ .8 @$95.00 Labor
Cabin Filter – Performed 5 times @ .4 @ $40.00 labor
Calculation – Total labor hours 12.7 hours labor, $1115.00 Labor dollars charged $1115.00 / 12.7 = $87.79 Menu labor sales effective rate.

Here is where we need to determine the market rate for each operation, by performing a competitive market rate survey of both dealerships and aftermarket providers in the area. Most often you will find that our service pricing is below market value and pricing changes are in order.

We need to revisit our service menus with our service and parts managers, review our margins, and current effective rates, and develop new menus to reach our desired outcome for both departments. Family pricing service menu parts can be of great value when creating said menus.

Price adjustments and discounting can be a cause of effective labor rate reduction. Many times, the service advisor will adjust the job line’s labor charge to meet the quoted price. As parts pricing has increased, many of our advertised prices and menu prices have not changed, leaving the advisor to change the original agreed-upon labor charge to meet the quota or adjust the labor price in a case when an estimate was miscalculated. Daily management of your pricing policy and discounting must be performed.

In the case of an established labor grid, is the grid being followed? The repair order survey will expose variances for purposes. A labor grid can build an effective rate by incrementally increasing the labor charged per cell, per tenth of an hour, for repairs. Each cell should be rounded up to the next $.99.

Another recommendation is to identify the top twenty-five labor operations performed other than menu services and calculate the effective rate. An example would be brakes, alignments, fluid services, tire mounting and balance, air conditioning service, shocks and struts, and bulbs. Working with the parts manager, determine if the desired gross profit percentage on the parts is being met, and determine the effective labor rate on each operation. These are typically operations that are found during the MPVI and are not typically advertised or discounted for marketing purposes, that can command a higher rate.

Following these activities and managing your processes daily will increase your customer pay effective rate, leading to a more successful fixed operation.

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