Maximizing Effective Labor Rates
Bob Schwartz
Performance, Inc.
An ADP Company
202-271-8975
bob.schwartz@adp.com
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Profit problems in a marina usually show up in
one or a combination of the following areas:
– Gross.
– Sales.
– Expenses.
Effective Labor
Rates
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Great work in any one or two of these areas
can off-set weaknesses in the other(s).
We can only maximize when we are firing on all
cylinders.
Today’s focus is on effective labor rates.
– Which can/might/will affect gross, sales,
and expenses.
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We all understand posted labor rates.
– Posted door rates are what we announce
that we are charging per hour we sell.
– It is the $125 we are putting on the wall for
everyone to see.
Effective Labor
Rates
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The posted door rate is probably the rate that is
being quoted whenever a potential customer
asks what we charge per hour.
It has been my experience that we are
overwhelmingly stating a rate that is too high.
Quoting the posted door rate to someone either
over the telephone or standing in front of us
immediately puts us at a disadvantage
compared to many of the marinas around us.
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Effective Labor
Rates
The effective labor rate is what we actually
collect per hour we sell when all is said and
done.
We pay our bills out of the effective labor rate
we collect, not the posted door rate.
Effective labor rates must:
– Be high enough to provide a profit in the
service department.
– Provide enough profit to pick up those
departments that are not doing as well as
we would like.
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Effective Labor
Rates
In a perfect world if our posted rate is $125 per
hour and we sell 10 hours, we collect $1,250.
Variances of $20 to $30 or more posted to
effective are not uncommon with the marina
people I work with.
Conservatively speaking, probably less than
50% of our work is collected at our posted door
rate.
– I wouldn’t be surprised if none was,
especially our customer retail sales.
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The inventory of a service department is hours.
Maximizing effective labor rates is important if
we want to maximize profit.
The higher the effective labor rate, the fewer
hours we have to sell.
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Mounts up quickly.
– 5 hours quoted at $125 per hour.
– 5 hours collected at $95.
– Difference = $30 X 5 = $150.
Effective Labor
Rates
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Multiply this by the number or repair orders we
write.
Repair Shop Sales Avg Month
Effective Labor
Rates
37,566
Gross % Sales Avg Month
80.56
Labour Sales This Month
40,904
Gross % Sales This Month
81.34
Potential Gross %
81.71
Posted Labor Rate
Effective Labour Rate
86.95
85.22
# Hours Sold Avg Month
432
# Hours Sold Avg Month Previous Year
531
# Hours Produced This Month
480
Effective Labor
Rates
Repair Shop Sales Avg Month
Gross % Sales Avg Month
Labor Sales This Month
Gross % Sales This Month
Potential Gross %
121,497
73.62
133,573
75.18
81.09
Posted Labor Rate
Effective Labor Rate
125.00
95.27
# Hours Sold Avg Month
# Hours Sold Avg Month Previous Year
# Hours Produced This Month
972
978
1,402
Sales For The Month
Hours Paid Tech To Achieve
These Sales
Desired ELR
$25,000
250
$100
Reduced Sales Collected
Same Hours Paid As Above
Actual ELR
$17,500
250
$70
Reduced Sales Collected
Desired ELR
Hours We Must Pay To Move Back
To The Desired ELR
$17,500
$100
175
Original Hours
Desired ELR
$950.00
9.5
$100
Discount %
New Charges
To Keep Our Desired ELF
Pay The Techs These Hours
25
$713
$100
7.13
Discount %
New Charges
Same Hours
Actual ELR
25
$713
9.5
$75
Difference Per Hour
$25.00
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Effective Labor
Rates
Some dealer management systems can give us
ELR by:
– Individual technician.
– Total technicians.
– Labor category.
• Retail.
• Internal.
• Rigging.
• Warranty.
– Service advisor.
– Across the board.
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If by hand:
Dollar Sales Collected For Job(s) Done Over A Set
Period Of Time
divided by the
Effective Labor
Rates
Hours Paid To The Tech To Do The Job(s) Over
The Same Set Period Of Time
– The total labor dollars I collected during the
past month was ____________.
–
–
The total hours I paid out to technicians to
collect these dollars was ___________.
My effective labor rate was $_______per
hour.
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Under most pay plans, a technician will collect
his hourly, no matter the effective labor rate.
$100 – $25 / $100 = 75% gross retained as a
percent of labor sold.
– 70% - 75% is generally considered to be
Effective Labor
Rates
enough to pay all the bills, including rent
and owner salary, and make a fair profit.
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$60 – $25 / $60 = 58%.
– At this percentage the technician
approaches partnership level in the
department.
– We pick up all the expenses.
– Tough to make a decent profit in service.
Causes and Cures
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Effective Labor
Rates
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Essentially anything that reduces revenue
without reducing the hours paid to a technician
reduces the effective labor rate.
Here are some of the popular ones and things
we might do to eliminate the problem.
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#1: Pricing based on:
– Time it takes to do the job.
– What the customer will pay.
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Effective Labor
Rates
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Competition may or may not be considered.
What my people think we should charge may or
may not be considered.
Price includes:
– One sum for parts, labor, and shop
supplies.
– Does not include tax.
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Hold the technician to the time quoted.
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Poor processes or training may allow someone
to quote a price that is too low for the job.
– Must be sure before we open our mouth.
– Should have done the same thing dozens of
times before committing to a number.
– Take the time to look at each new job
Effective Labor
Rates
carefully before committing to a price.
– Get everyone involved who should be
involved (managers, technicians, etc.).
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Must be especially careful over the telephone.
– We can’t let ourselves be pushed.
– Specific word track.
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Effective Labor
Rates
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Provide ranges instead of exact pricing if
necessary.
Practice on each other instead of the customer.
Lots of communication between the customer
and the service department.
Go as far as we can then stop and
communicate.
Everything communicated and initialed ahead
of time.
– Can’t have too many initials.
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Sample word track for regular retail work:
“I am sorry Mr. Jones. I cannot give you a
price for that until we have our technician look
at the job and find out what is involved. This
should take one hour.
Effective Labor
Rates
The charge for this diagnosis is $125 [This is
equal to one hour of time it could be less
depending on the boat]. I will call you as soon
as the technician has had a chance to look at
the job. We will let you know the exact cost
parts and labor.
The $75 charge will be included in the final bill
if you chose to have the work done here. If you
chose to have the work done somewhere else,
we will charge you the $75 for our diagnostic
time.
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#2: Legal discounts.
Probably the simplest to deal with are discounts
that are being accounted for incorrectly.
– Charge these discounts to the proper
account.
Effective Labor
Rates
– They are not a cost of sales.
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Usually charge $300 to winterize something.
– Provide a discount of 10% if it is done
before November 1st.
– Bill is still $300.
– $300 - $30 = $270.
– $30 goes into advertising, etc.
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#3: Illegal discounting in a attempt to cover up
a mistake.
– Can we block the advisor from using the
computer to change a work order?
Effective Labor
Rates
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#4: Stealing.
#5: Intentionally quoting an incorrect price.
– Hourly person getting his.
– Better to quote low and get the job rather
than lose the job.
– This is what the competition is charging.
– Who has the right to give away our money?
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Effective Labor
Rates
#6: Not holding to the times once a quote is
given the customer.
Allowing extra hours to do a job but not
collecting from the customer kills profitability.
Routinely throwing the tech extra hours for
whatever reason.
– Usually an issue when we pay based on flat
rate hours.
– Hourly or salaried people just slow down
and ignore the time.
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#7: Not closing repair orders.
#8: Poor maintenance package pricing.
– Many people have not looked at their
package pricing in years.
– Too many hours to do, too little charge to
the customer.
Effective Labor
Rates
– Might be able to cut the time we give to do
the job.
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#9: Too many discounts at the low end without
making it up at the high end.
As A % Of
Total Work
Try On
Rate
ELR
Competitive
51
$60.00
$30.60
Maintenance
27
$90.00
$24.30
Repair
Hi-Tech
Target
17
$110.00
Included in this group are those
competitive operations charged out at a
competitive price. Competitive may allow
us to be $5 or $10 higher than the
competition.
Included in this group are the hourly
interval services. This rate should be at or
a little higher than the regular door or
warranty rate.
$18.70
Included in this group are those
operations for which people normally
come back to the marina. This rate
should probably be higher than the
maintenance rate.
Included in this group are those
operations that no one else can do or
wants to do. Charge what you can.
5
$150.00
$7.50
100
Actual Rate
$81.10
Target Rate
$90.00
Remember the formula for
determining an effective labor rate.
Grid pricing for maintenance,
repair, and hi-tech operations may
get you what you want.
Some Other Ways To Raise
The Effective Labor Rate
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Raising the door rate.
– For internal work, which we can control.
– For our repair work.
Effective Labor
Rates
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Raise door rate may still have the same
problems giving money away.
Why raise rates if we can cut down on what we
give away?
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Variable pricing structures:
– Basic outboards vs. state of the art.
– Diesel vs. gas.
– Simple chart plotters vs. integrated
systems.
Effective Labor
Rates
– Competitive vs. non-competitive.
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Increased:
– Training.
– Equipment.
– Liability.
– Time to get it right?
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Pay plans that offer kickers based on ELR.
Service Manager:
– 7% or 8% of gross.
– 8% or 9% if the effective labor rate is at
least 90% of the door rate. Or,
– $3,333 a month with a bonus of $500 if the
Effective Labor
Rates
effective labor rate is 90% of the door rate.
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Service writer:
– Salary of $28,000 + ¾% commission on
total work orders + an additional
commission of 5% if what is written is more
than the previous quarter. Plus,
– A bonus of $250 if her/his effective labor
rate is 90% of the door rate.
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Effective Labor
Rates
Use grid pricing.
0
0.1
0.2
0.00
1.00
2.04
3.09
0.10
1.11
2.14
3.20
0.14
1.21
2.25
3.30
Labor Rate =
100
0.1
0.00
100.00
204.00
309.00
0.2
10.00
14.00
111.00 121.00
214.00 225.00
320.00 330.00
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Tracking ELR by job, technician and service
advisor either through the DMS or by hand.
Review repair orders regularly.
– Who is taking too long to do the job?
– Who is discounting?
Effective Labor
Rates
Bob Schwartz
Performance, Inc.
An ADP Company
202-271-8975
bob.schwartz@adp.com