How to Calculate Effective Labor Rate (ELR)

How to Calculate Effective Labor Rate (ELR)

Effective Labor Rate, or ELR, is probably one of the most important numbers in your Service Drive. It never ceases to amaze me when I’m on strategy sessions with Service Managers and Shop Owners, and we’ll be reviewing their financials and I come to realize that they don’t understand Effective Labor Rate. That blows me away.

This happens all the time, and it’s shocking and disappointing how many Service Managers don’t understand their Effective Labor Rate. So let’s set the record straight, because ELR is one of the most important Key Performance Indicators (KPIs) for every Service Drive, whether you’re a dealership or an independent shop owner. It’s also used to calculate other KPIs, such as Hours per RO, so you need to understand how to calculate ELR. 

What is Effective Labor Rate?

This may come as a bit of a shock to you, but your posted labor rate doesn’t matter. It’s an imaginary number that you hope to collect for every hour of labor. I hear it all the time in strategy sessions, a Service Manager will say, “Oh, well, my posted labor rate is $120,” but when we actually look at it, we’ll find that although your posted labor rate might say $120, your Effective Labor Rate is actually closer to $80.

Why is that?

Well it’s pretty simple, really…. Are your customer pay rates the same as your posted labor rate? How about internal rates, service contract rates, and warranty rates, are those all the same? Do you not offer any discounts? Does your posted labor rate take any of these variables into account?

So if your posted labor rate is $120, but you’re not actually charging $120 for a particular service you provide (like an oil change), then is your posted labor rate an accurate representation of how much money you’re actually making from the half-hour your Technician spends on that oil change?

No.

That’s why your posted labor rate doesn’t matter, and why you need to know how to calculate your Effective Labor Rate, because if you don’t know your ELR, then you ultimately don’t know what you’re actually collecting for every hour of labor you’re selling.

To put it bluntly: If you don’t know your ELR, you don’t know what you’re going to pay your bills with.

How do you calculate Effective Labor Rate? 

The formula for Effective Labor Rate is: 

Total Labor Dollars

÷

Total Flagged Tech Hours 

That’s your total labor dollars divided by hours flagged by Technicians in the shop. That’s how you calculate Effective Labor Rate. So, for example, let’s say you sold a total of $7000 in labor, and your Technicians flagged 7 hours. Your ELR would be $100.

One Major Consideration

Now, there is one big variable that you want to take into consideration when it comes to calculating your Effective Labor Rate:

If you have hourly Technicians, and they aren’t flagging their hours, then you aren’t going to get an accurate number for your cost of labor. Without an accurate number for your cost of labor, you won’t have a real number to figure out what your Effective Labor Rate is, so you need to have everybody flagging their hours

Calculating Effective Labor Rate becomes easier when you really have a shop that is invested in flagging their hours consistently. If they’re not flagging for oil changes, but you’re collecting the labor, it throws your off your ability to calculate your ELR.

The main lesson here is that it doesn’t matter what you have as a posted labor rate. What really matters is what you actually collect for every hour of labor you sell, and that’s your ELR.

Where can I learn more information like this?

This calculation was originally featured on our Service Drive Revolution podcast as a part of our Terms You Should Know segment, and you can watch the full episode here. We pack every episode of Service Drive Revolution with tons of valuable information just like this, so don’t miss out! Make sure to subscribe today on Apple Podcasts, Spotify, YouTube, or wherever you get your podcasts!

If you’re in need of Service Department training, or professional coaching for your Service Drive, you can learn more about Chris Collins Inc. by browsing our products and services. Our motto is: “Training isn’t something that we did, training is something that we do!”

How to Calculate Hours Per Repair Order (HPRO)

How to Calculate Hours Per Repair Order (HPRO)

What is Hours per Repair Order, and why is it important?

This is one that Service Advisors and Managers get beat up on all the time– and rightly so. It’s kind of confusing. Hours per Repair Order, also abbreviated as Hours per RO, HPRO, or H/RO, is the average amount of time your Service Advisors and Technicians spend on a single Repair Order (RO). It is one of the Key Performance Indicators (KPIs) of your Service department, and it impacts every other metric in your shop… most importantly, profitability. So, how do you calculate Hours per Repair Order?

How do you calculate Hours per RO?

If you ask a Service Advisor or Manager for the formula they use to calculate Hours per RO, they’ll respond with something about hours… and I’m just going to stop there, because calculating Hours per RO has nothing to do with hours! Hours are a piece of the calculation, but a very small piece.

The real formula for Hours Per RO is as follows:

Labor Sales ÷ RO Count

÷

Effective Labor Rate

That’s Labor Sales divided by your RO Count, and then you divide the result by your Effective Labor Rate. So, if you had $20,000 in Labor Sales, 20 Repair Orders, and your Effective Labor Rate was $100, it would look like this:

20,000÷200=100

100÷100=1

Your Hours per RO would equal 1.

Why do we calculate HPRO this way?

Most shops calculate Hours per RO by pulling their billed hours from their management program, and dividing that number by their RO Count. By calculating this way, you’re leaving out the most important part of the measurement– profitability. You will achieve a much more accurate reflection of your department’s profitability by including the Effective Labor Rate in the calculation.

Where can I learn more information like this?

This calculation was originally featured on our Service Drive Revolution podcast, and you can watch the full episode here. We pack every episode of Service Drive Revolution with tons of valuable information just like this, so make sure to subscribe today on Apple Podcasts, Spotify, YouTube, or wherever you get your podcasts!

If you’re in need of Service Advisor training or Service Manager training, or professional coaching for your Service Drive, you can learn more about Chris Collins Inc. by browsing our products and services. Our motto is: “Training isn’t something that we did, training is something that we do!”

How to Calculate Technician Efficiency

How to Calculate Technician Efficiency

What is Technician Efficiency, and Proficiency?

We have to talk about how to calculate Technician Efficiency, and some would argue you should also know how to calculate Proficiency. I disagree. A lot of consultants like to emphasize the importance of Proficiency as the Key Performance Indicator (KPI) for the Technicians in your Service department. Don’t listen to them. They will tell you that Proficiency is the most accurate measurement of a Technician’s time, but the truth is that there are several ways to measure your technicians’ performance, and proficiency is probably one of the least valuable and least relevant.

Proficiency is definitely not a measurement that I’ve ever seen improve the bottom line, and at the end of the day KPI’s exist to shed a light on how much the people on your team are actually contributing to the bottom line of your dealership or independent shop. If it doesn’t help you learn that, then it doesn’t help. To figure out how much a Technician is contributing to your bottom line, you’re going to want to focus on Technician Efficiency as your Key Performance Indicator, not their Proficiency. Let me tell you why.

How to Calculate Technician Efficiency:

Efficiency is how many hours the Technicians flag vs. how many labor hours are sold. So, if they’re working an 8 hour day and they flagged 8 hours, that’s 100% efficiency. If they work an eight hour day and they flagged 16 hours, that’s 200%. 24 hours, 300%. 30 hours, 375%. You get the idea. So here is what the calculation would look like:

Hours Flagged

÷

Labor Hours Sold

Proficiency, on the other hand, is a formula of how long a Technician is clocked on a repair order, which means… nothing. If you flag 200% Efficiency, I couldn’t care less about Proficiency! If you bonus on Proficiency, but your Efficiency is low, you’re losing money! So the thing I would like you to do is just focus on Efficiency, and forget about Proficiency.

Where can I learn more information like this?

This calculation was originally featured on our Service Drive Revolution podcast, as a part of our Terms You Should Know segment. You can watch the full episode here. We pack every episode of Service Drive Revolution with tons of valuable information just like this, so don’t miss out! Make sure to subscribe today on Apple Podcasts, Spotify, YouTube, or wherever you get your podcasts!

If you’re in need of Service Advisor training or Service Manager training, or professional coaching for your Service Drive, you can learn more about Chris Collins Inc. by browsing our products and services. Our motto is: “Training isn’t something that we did, training is something that we do!”