What Should Be Considered in a Realistic Labor Rate Calculation? This month, we “ASK MIKE” to share his thoughts on some of the critical things shops should consider when calculating their Labor Rates. We at Hammer & Dolly hope you find the following exchange useful, and we encourage you to reach out to us if you have a question for Mike on this or any industry-related matter that he can answer in a future issue. Hammer & Dolly: We could easily come up with a list of things that are negatively impacting shops’ profitability these days, but not all shops know how to adjust their Labor Rates to reflect these issues and charge a reasonable amount of money to stay in business. What are some of the most critical things a shop needs to keep in mind when determining a realistic Labor Rate? Mike Anderson: First of all, employee recruitment is one of the major things our industry has been talking about recently. Obviously, part of recruiting new employees is being able to pay them a competitive wage. There are three ways to accomplish that. Number one: Shops could charge more for not-included operations, which is really the easiest path. Number two: They could increase their rates. Number three would be a combination of the first two. When I ran my own shops, I was never a proponent of just randomly raising my Labor Rate by a dollar or two. That never made sense to me. Every business is going to be different. For example, where my shops were in Alexandria, the property tax rate was very high. Ten miles down the road, that property tax was much less. Additionally, my shops were located close to areas where there were a lot of government employees and contractors. The Federal Government paid people certain salaries and offered retirements and great benefits, so I had to compete with that.
Another consideration would be the wages you need to pay in your town. The cost of living in your shop’s area could be much different from where you actually live. On top of an employee’s salary, you have their health insurance costs – which could have doubled over the last couple of years. Then, add in vacation time – one week could be two percent of an employee’s income – and workers’ compensation, 401(k)s and FUTA [Federal Unemployment Tax Act] and SUTA [State Unemployment Tax Act] contributions. It’s not just about what you pay an employee – it’s also about all the other things you have to pay. Those expenses, in addition to their wages, could average thousands of dollars a month. You need to figure out how many hours your employees need to produce to cover that, and then include that information in your considerations when determining your Labor Rate. Also, if you’re going to invest $200,000 in equipment, you need to figure out what you have to do to offset that. Is that equipment going to be paid through the increased efficiency it’s bringing to your shop, or do you need to take that into consideration in your Labor Rate? You also need to think about profit. How much money do you want to make? What is it going to take to get to that? Don’t forget that when fuel prices go up, it costs us more to paint a vehicle. When it comes to raising Labor Rates, you have to understand your cost of doing business and understand what your rates need to be based on what you’ve invested in training and equipment, the benefits you offer and the property taxes in your area. All of that needs to be considered. Your Labor Rate should never be just a fictitious number pulled out of the air. Shops need to determine their rates through business analyses. What are their training budgets for the year? That is going to be different for a shop that’s Porsche-certified versus someone who is Honda-certified versus someone who has no certifications. Also, what do competitive industries in your area pay? If you’re located near Amazon or the Federal Government,