Anyone selling anything generally knows how much their cost is on a given item before they price it to sale. Body shops however seldom know their true cost of labor. The way labor is generally dealt with in the body shop world is strange to say the least. In the service department labor rates are set based on a variety of factors such as market conditions, direct costs etc. In the body shop we typically set our rate based on whatever the insurance industry dictates. I actually have no problem with labor rates and how they are set. I do have a problem with our industry’s complete lack of understanding of how much the labor really costs us to buy. Many managers shoot for an industry standard of 60 percent gross profit on labor as a minimum acceptable margin. What dealer managers fail to calculate is the true cost of labor. (The incidental direct expenses associated with labor that radically decreases the real gross margin on labor.) For some reason the dealer world considers these direct expenses as part of an overhead calculation. My problem with that is that we have varying costs levels from employee to employee. Some employees have “true cost” as low as 25 percent over the wage amount. Some employees may have a “true cost” as high as 75 percent over the wage amount. Factors contributing to this wide swing in true cost are:
1. Longevity: People who are with you longer typically get more hidden benefits as a reward for seniority. Vacation pay, sick time and other perks.
2. Age: Older workers typically have higher insurance cost, assuming you participate in their group health coverage. Additionally older workers may have more dependents thus increasing family medical costs that you may participate in.
What can you do about it?
I am not telling you to go out and cut anyone’s pay if you suddenly realize your margins are lower than you think. I am saying that educating yourself and your management team regarding the real cost of labor may help you evaluate “future” hiring practices.
• Next time you obtain an insurance labor rate increase you may want to retain a larger share than normal and not always pass it along to the technicians.
• You might look into changing from straight flat rate or commission to a graduated incentive. Graduated incentive is a way to pay flat rate or commission maintaining higher percentages of gross at the lower end of the productivity scale while sharing more of the labor percentage as the employee becomes more efficient or productive. Two good things happen here. The margin retained increases while the hours produced per employee tend to increase simultaneously.
• Change to straight hourly pay. I actually prefer this as I have notice better quality and morale in hourly paid environments. This has to be done delicately and you will create some turnover. The good news of paying hourly you find it easier to stop the tail wagging the dog.
• Change the pay to hourly plus incentive. This works pretty well in that the employees have more stability on a weekly basis but a chance to win big when they are productive.
Please note: I am not recommending a rubber stamp approach to your pay plan. Every scenario has to be thought out carefully. But I think it is high time we discover what our labor really costs us. Awareness creates some creating problem solving.
On the previous page is a chart you can follow. Notice the benefit and additional costs total $7.91 per hour. As a percentage of the wage that is over 45 percent of additional cost. You may have a higher true cost than you think. You can buy electronic calculators for pay plans at http://www.autobodyuniversity.com. We have no financial stake in that company but highly support their efforts. Check it out as a possible resource.
Dave Dunn owns and operates Masters School of Autobody Management in Galesburg, IL. Masters consults with dealerships worldwide. Dunn is also a body shop owner and the author of Liquid Amalgam, a guide to managing service companies.