Basic Principles And Ways For Calculating The Labor Rate And Auto Parts Profit In Auto Repair Shops

Today’s article is about the labor rate that you have to charge at auto repair shop. This is a very interesting topic which I like to discuss and I believe that I’m pretty knowledgable.

I will share the basic principles of calculating the labor rate according to your costs so that you can determine it adequately and get the opportunity for better profits. There are two things I want to mention at the beginning:

1. You need to understand that labor is the most important thing because it is the product that you actually sell and that is completely under your control. Yes, auto parts are also involved in profits, but they are a by-product. You don’t have complete control over the parts, and if you don’t sell labor, you don’t sell parts. That is why work is such a critical factor and that is why I will focus on it. I will return to the parts at the end of this article to explain the difference in profit formation and the difference between markup and margin but for now, I start with the profit from the labor based on the cost of running a repair shop… It is a well-established practice that shop owners ask each other on social media about what labor prices to announce, and from there, everyone gets involved with some advice. But this is not the right way to determine the price of your labor, because each auto repair shop is different – different quality and range of services, a different customer base is covered with different demographic factors, different cars are serviced, different costs by regions, etc.
2. Most garages choose a price range that is common in their area – the garage opposite on the road keeps price of EUR 50, the other below is EUR 55, so I will set my price on the middle – EUR 52.50. This is also a wrong way to determine the price of labor. Yes, it is important to be aware of the prices around you, but you need to emphasize other much more important factors such as the services you offer, the level of skills, the level of quality, the condition of the facilities and buildings you manage, the investments you have made, the training costs… From this you can conclude that the prices of others help in your decision to determine your rate, but are by no means a leading factor. I am sure that many owners who read this article undercharge their labor and from there, their final profit is insignificant.

The first step is to determine the associated costs that allow you to keep your repair shop open and working. Whether it’s just you or you have staff, you have one or more lifts, these are fixed costs that may vary slightly over time. You will easily check these costs from a report that you can get from your accountant. And they do not include the cost of buying parts, but only those that allow you to turn on the lights and open the doors in the morning. Because if you do not have customers you do not buy parts, but you still have the other costs – salaries, rent, insurance, maintenance, electricity, etc.

How to determine the costs: from the Profit & Loss statement you establish the amount of expense during the year (the last whole year) and from it you remove the amount related to the purchase of auto parts. Below this line, you will get a whole list of other costs, which are the costs of maintaining the business. We will break this amount into working days of the year to get what your business costs you each day and what you need to sell as services (not parts) per day to cover costs.

Here is the formula with a simple example: EUR 300k (costs for 1 year), 8 (working hours), 5 (working days), 52 (weeks per year)…

300.000 / (8 x 5 x 52) = EUR 1152.85 per day = EUR 144.23 per hour.

Everyone can calculate for themselves what is the actual amount for them based on the above formula. Here I want to make a caveat that this is the calculation under perfect circumstances without taking into account non-working days such as public holidays, sick leave, vacations, etc. A more realistic assessment can be made over 46-48 working weeks per year. In this situation we will make the following calculation:

300.000 / (8 x 5 x 46) = EUR 1304.35 per day = EUR 163.04 per hour,

which shows that the cost per day and hour is rising. We now know that we have to sell labor within a day for that amount, just to cover the costs. The next step is to calculate labor individually because that’s how we sell it.

If we assume that a technician works 8 hours a day, 5 days a week for 46 weeks, a number of 1840 working hours is obtained annually. Theoretically, 1840 working hours can be sold. If the number of technicians is 4 the corresponding total number is 7360 hours per year. I emphasize that we work with sample values, and the actual values for each repair shop are different. You already know what your annual costs are and if you divide to the amount of time that could be sold the cost for you obtained for 1 hour of work = EUR 40.76. This is accurate if you manage to sell 100% labor time, but the reality is different and in some repair shops efficiency varies between 45% and 65% compared to the theoretical 100%. In well-organized shops with skilled technicians, good management, advertising, and a large customer base, levels of 80-95% efficiency can be achieved. For the purposes of our accounts, we are going to work with 70% efficiency.

Now we can make a more realistic calculation that if you theoretically invoice 7360 hours x 70% efficiency = 5152 effective hours of labor per year. And if you divide the annual costs by the new number obtained, you will find that the cost per hour increases to EUR 58.23. If you assume that you have set a labor rate of EUR 70, you can probably clearly get EUR 60- 61. Because here comes in play another factor that changes our arithmetic – you can’t always sell 1 hour of work at this price of EUR 70 because sometimes you run promotions or you have a car returned to the workshop… But to keep it simple we’ll adhere to round numbers, so 5152 hours x EUR 70 = EUR 360640 annual turnover in labor. Imagine a case in which the car repair shop has sold only 45% of the hours – it is quite daunting to find yourself in a situation like this because your cost per hour will increase dramatically. You can recalculate how much 1 hour of labor will cost you in this case – EUR 90.58.

There are certain cases when garages sell mixed services like operations that involve labor and materials (ex. a complex air conditioning service or brake fluid change where there are labor and materials involved). They affect the cost figures as well, but in general, the statistics show about 50% / 50% proportion. I would recommend that you strive to obtain 60% labor and 40% materials proportion, ie. to sell more labor.

Because of the low efficiency, in fact, there are garages that merely cover their own labor costs and rely on parts upsell to bring in overall profit in their budget.