Why all the fuss about tiered labour rates?

By Bob Greenwood, AMAM

A lot of repair shops still use a single catch-all labour rate. Jobbers who are watching the industry closely know these shops. If you’re selling parts to shops that stick to a single labour rate, it’s time for you need to explain to them why it’s so critical to charge for their services in a way that matches the complexity of the work they do.

If they don’t, it will contribute to the demise of their business operations… and that will affect your jobber business.

Just as the formula jobber stores use to set prices has changed over time, so must the repair shop consider better, more intuitive ways to charge for their services.

A “tiered” labour rate – or “flex” rate – is a step in the right direction. It acknowledges the range of talent that operates under a single roof. It is invoked when diagnostic services are required for the vehicle. It doesn’t rely on a “flat rate” manual. It is based solely on the skill level of the technician involved.

Many shops fail to understand that their services are based primarily on knowledge and skill. Increasingly, vehicle problems are the result of many different parts failing to interact properly. Parts do not break so much as they fall out of step with other parts. Finding these issues is a matter of diagnosing the technology under the hood, and identifying the interaction that has failed to occur inside the engine. When technology fails, a systemized strategy – which consumes a lot of technician time – is required to diagnose and fix the problem. This involves special expertise by a qualified technician, coupled with the ability to use expensive high-tech equipment and software.

Diagnostic work brings with it another critical (and costly) requirement. The service writer must spend more time with the client, explaining the procedures and progress of the diagnosis element. This time is substantial when compared to the amount of time it takes to explain a simple mechanical repair or a maintenance service. This consideration must also be accounted for in the cost of the work.

The formula must also take into account the cost of the specialized diagnostic equipment used, the cost of ongoing software upgrades, and the cost of continuing education. These additional costs are all mathematically relevant.

The saying “time is money” was never more apt than when discussing diagnostic work.

The current financial equation to set the retail door rate for mechanical/maintenance work is 4.5 times the hourly wage of the top mechanical/maintenance technician. For example, if the top mechanical/maintenance technician is earning $25 per hour, then the retail door rate charged to the client should be a minimum of $112.50 per hour.

In the case of diagnostic work, the technician is probably earning anywhere from $32 to $37 per hour, and the multiple for this expertise is the hourly diagnostic wage times 5.35. So, for a $32-an-hour diagnostic technician, the tier rate should be $32 x 5.35 or $171.20 per hour for diagnostic work.

The shop would now have two labour rates. Clients are charged $112.50 for mechanical and maintenance work, and $171.20 for diagnostic work.

There is a third labour rate that also needs to be embraced. Reflashing vehicle software is an increasingly common task these days. The multiple for that work is the technician’s basic hourly wage times 6.0. So, in our example of a $32-an-hour technician, the charge-out rate would be $32 x 6.0 or $192 per hour. The main reason for the difference in the multiple is that subscriptions must be covered.

As a supplier of parts, jobber stores have a vested interest in repair shops embracing tiered labour rates. It would be a good idea to counsel your clients to charge a minimum of one-hour diagnostic or reflash time when this kind of work comes in. I’ve been assured by many competent technicians in the industry that competent diagnostic technicians can diagnose 60 to 70% of vehicle problems within 45 minutes. The other 30 to 40% of the problems are what we call “safari hunts” in which the technician may take 3 to 6 hours to figure out the problem. It doesn’t mean they are incompetent. It just means they haven’t been there before. They’re learning some new technology. The next time they see this same problem, they’ll immediately recall the familiar territory they are finding themselves in and the learning curve is substantially shortened.

The minimum one-hour charge, with the extra 15 minutes that are not used in 60 to 70% of the jobs, helps defray the cost of the safari hunts that even the best techs inevitably find themselves in.

To secure confidence in the client, the better shops also reassure the client that the maximum charge for any diagnostic work will be 2.5 hours (or $340 if you’re talking about a $32-an-hour technician) plus parts. This gives the client the reassurance that there will be a successful end to the diagnostic work. They’re not handing over a blank cheque. This maximum charge tells the client, “We are competent. We know what we are doing.”

Diagnostic and reflash charge time is a habit that the shop must learn. To develop this habit, the shop should commit to charging out one additional hour per day at the tier rate. If that rate is $171 per hour, that would produce an additional gross profit of $3,420 per month (based on 20 working days a month) and $41,040 per year.

Once this habit has been developed, the ultimate objective would be to have 25% to 30% of shop time billed going out at a tier rate. The mix of diagnostic work and reflash work is largely contingent on the shop’s mix of clients.

To get to this level of business will realistically take the shop a year or two.

Again, it is in the best interest of your parts store to make sure your shop clients get this right. It will secure their future in an industry that is rapidly changing.

Consider taking the time to discuss diagnostic and reflash billings with your clients. If they don’t recognize the advanced skill levels and technological expertise required to maintain today’s vehicles, they’re due for some serious business management training.

Diagnostic and reflash rates are necessary, and they’re here to stay. They’ll help shops cover rising equipment and training costs, and contribute to a healthy bottom line.