Changing how you charge for labour

Image credit: Depositphotos.com

Automotive repair and service shops need to charge different labour rates based on the work being performed, according to a shop coach.

Today, there’s more labour work and shops need to charge accordingly for the different types of work being performed, said Vin Waterhouse, president and founder of The Waterhouse Group, which provides accounting, coaching and training expertise to the automotive aftermarket

“The labour intensity is growing every single day. The vehicles are more and more compact and trying to get better miles, you have to disassemble the vehicle to get the source,” he said. “And that’s costly.”

Gone are the days when your labour rate should be set based on what the guy down the street is doing.

What shops should be doing, Waterhouse urged, is charging different rates based on the work being performed. There should be a rate for standard work — the traditional type of work a technician performs — and then a different rate for more labour-intensive work and another rate for diagnostic work.

As an example, you’d use the labour-intensive rate — which is higher than your normal rate — when you buy parts from the dealership because you know you can’t make much profit in selling it to the customer.

“Sell them to the customer at your cost and charge them $140 an hour [for labour] and you make the same amount of money,” Waterhouse said during his session Show Me the Money at NAPA Expo 2022.

Waterhouse did the math: If you bought $50,000 worth of parts from a jobber and mark up 40 per cent, you made $20,000 on parts. But if you bought the same amount from the dealer at a higher cost and marked up 20 per cent, that’s only $10,000.

“It costs you $10,000 to source the parts from the dealership because you don’t make the same money but your expenses didn’t go away did they?” Waterhouse pointed out. “So what you can do is you sell the parts at cost and charge $140 an hour, and then you price it and you made the same amount of money.”

This is especially true for big-ticket items. Say a part was $1,500 — few, if any, shops would charge enough of a markup to get the proper amount of profit needed on the part because they know they’d never get the sale when labour is included.

“The labour intensity is growing every single day. The vehicles are more and more compact and trying to get better miles, you have to disassemble the vehicle to get the source. And that’s costly.”

So charge for the part at cost, go with the higher labour rate — which is posted and the customer knows what it will be — and you come out the same on the other end, with a satisfied customer to boot.

As for diagnostic work, Waterhouse argued that shops have a lot of costs in this area so it’s only appropriate to charge accordingly. Unlike a set of wrenches that you buy once and they last you for years, access to data costs money on a regular basis. So does ensuring diagnostic tools are up to date.

Using a formula based on a regular labour rate of $100 plus the 40 per cent not made on parts sales plus a portion of the technician’s salary plus the cost for access to information, Waterhouse came to $160 an hour for diagnostic work.

The key, he said, is in how it’s explained to the customer. He would never use the word “diagnostic” with them. Tell them you ran a series of sophisticated tests, used state-of-the-art equipment, accessed support, hooked up a scanner, ran test after test after test, read codes and finally isolated the problem. Then you tell them the problem has been corrected, you stand behind your guarantee and hand them the bill.

“Detail what you did. Talk about it,” Waterhouse said.