Recently, while teaching one of my professional evening courses, the topic of labour rates was raised as part of a general discussion about how businesses are coping during these challenging times.
It was initiated from one classmate to another, and as most of the candidates on the course manage or run their own business it soon overtook the technical topic being taught and developed into a quite a complex exchange of views.
As we had reached a natural pause in the lesson, I decided to stop for a break in the anticipation of being able to continue with the subject upon my return, but as it turned out, I was simply dragged into the debate.
I was happy to offer an opinion, but explained that as I did not work directly in the industry anymore, I would be the wrong person from which to seek business advice.
If they were after guidance relating to how they run their financial operations they’d definitely be better off talking to experts in this area such as Andy Savva, ‘The Garage Inspector’.
We are a service industry, and we make our money selling our skills and labour, and a recent IGA survey indicated that the average independent UK hourly rate is £47.47.
There are many factors that need to be considered when setting a labour rate, and it is debatable whether there is a right answer, however, there’s definitely a wrong answer.
The outcome should always come back solely to individual circumstances, and you must not use other people’s labour rates as a basis to calculate your own.
Although it is important to consider local market factors, this shouldn’t be the sole influence of your choice.
It’s also worth remembering that the chosen labour rate can affect other areas and services your business provides.
For example, a local prestige marque has stopped conducting its own MOT’s as it is no longer financially viable when compared to the rest of their hourly income.
Instead, it is cheaper to subcontract them to a local garage who’s main source of income is provided by MOT work.
This may sound as if the dealership is giving work away, but provides a symbiotic relationship which has become beneficial for both organisations.
Garage labour rate considerations
- Be honest with yourself as to how hard you work and don’t undersell your time.
- One labour rate may not be enough to cover the different levels of skill needed to undertake the diagnosis and repair of modern vehicles.
- You can’t just increase your labour rates overnight if you’re currently undercharging.
- Very few customers ask the labour rate, they often only ask for an estimate of the cost of a job and it’s how you sell that job that will determine if you get the work.
Another factor that should be considered when deciding on a labour rate, is the option to have a different rate for diagnostics.
Many vehicle issues present themselves as a diagnosis and repair for which there is no prescribed method.
As the first person to undertake such a task, how do you promote your skills, and demonstrate that this is not something that is within everybody’s capabilities.
Many businesses charge out their diagnosis at the same as their normal hourly rate; and some even discount.
Unfortunately, by doing this, it helps perpetuate the myth in the mind of the customer that diagnosis is easy; “you just plug the computer in and it tells you what’s wrong”.
We are one of the only trades where it is expected that we will be able to tell the customer what’s wrong before we’ve even seen the car, or at least before we start charging them for the privilege of working on their vehicle.
Many other trades will charge an upfront fee or call out, just to engage their services, but if our industry were to change to this method, we’d potentially be accused of profiteering.
Our work is no less demanding or difficult than any other, and in fact when you consider the investment in time, equipment, training and knowledge that many organisations or technicians have undertaken, it often far outstrips those of other trades.
Therefore, how do we recover that investment, and differentiate the complexity of diagnosis in the eyes of the public if we charge the same or even less for this service.
Although it is only my opinion, I feel that a different labour rate should be considered for diagnostic work, to help separate and contrast it with other types of mechanical work or repair.
I’m not saying that the difference has to be significant, but it should be enough to reflect the difficulties and issues modern diagnosis demands.
Historically there was a very basic estimation that could be used to provide a basis for an hourly rate.
In the simplest terms, it is the sum of three components – the hourly wage rate of the technician, overheads (or running costs) and profit margin.
The hourly wage rate of the technician is a direct cost incurred while undertaking the repair.
Overheads are indirect costs, and are all of the costs involved with running a business.
Finally, profit is the percentage margin which makes the business viable.
Unless you add profit, you’re only invoicing enough to break even.
Parts sales should not be included in this calculation as they are an external factor, not directly related to labour, and be careful if you include any fixed price work that is inclusive of parts, as this can artificially inflate workshop efficiency.
A percentage of the enterprise costs per hour can be calculated by dividing the overheads by the wage costs and multiplying the result by one hundred.
Annual overheads ÷ annual wage bill x 100 = an annual enterprise cost %
Once the annual enterprise cost percentage is calculated, an initial labour rate can be estimated.
This can be achieved by multiplying the technicians hourly wage rate by the enterprise cost and adding the desired percentage profit margin.
Technicians hourly wage rate x enterprise cost + profit margin percentage
In reality, this is far too basic to provide sound guidance as it does not take into account any of the individual business factors or workshop efficiency (which many people overestimate).
It is worthwhile undertaking professional courses that can examine your personal operation and offer advice tailored to your own situation.
In most cases, regardless of labour rate, there’s no doubt that many businesses provide exceptional value for money, considering the extremely high level of skill required when working on modern vehicles.
With a long history working in an independent garage, Graham now teaches motor vehicle technology at Chichester College.
He’s a renowned author too, with ten books and three CD ROMS to his name so far, covering a range of vehicle technology topics from levels one to four.
To find out more about Graham Stoakes and his automotive books, visit his website.