I have been talking a lot about charging the right price for tasks. Take some time to think about how you originally determined those numbers. Was it a guess? A gut feeling? Some number you pulled out of a hat? All of these reasons are bad.
If you don’t know how many of your worked hours are translating to dollars (i.e. billable hours), I would recommend beginning to measure that metric first. Tracking you and your employees’ hours will allow you to see where you sit.
Determining Your Efficiency
I define shop efficiency as the total number of billed hours over the total number of worked hours. Take a guess at how efficient your shop is as a whole. And remember, your front desk person bills zero hours even though they may work 40 hours/week.
Now, let’s use some data to actually determine the efficiency. Assume there are 3 people working 40 hours/week which is approximately 6000 hours/year. If the shop generated $300,000 in labor revenue last year and you charge $100/hour, this translates into 3000 billed hours. This equates to a 50% efficiency (6000/3000). This number can definitely be improved but it actually isn’t too bad for a small performance shop.
Here is the formula if you would like to determine it for your shop:
Total Labor Revenue last year a. ____________
Hourly Rate b. ____________
Total Billed Hours in a year = a/b c. ____________
Employee 1 hours per week d. ____________
Employee 2 hours per week e. ____________
Employee 3 hours per week… f. ____________
Total Hours worked in a year =
(d + e + f) * 52 weeks g. ____________
Service Efficiency = c/g SE= __________
You will notice that we do not include Parts Sales in this equation. We do this on purpose. Parts margins are shrinking every year and it is becoming increasingly difficult for install shops to complete with online-only parts retailers. So, we want people to focus on making their core strength, installs, be the most important metric at the shop.
Here is some food for thought: If you employ a person who only sells parts and pay them $35,000 per year, they need to sell $175,000 worth of parts just to make their salary if your margin is 20%. If that margin is reduced to 15%, that person needs to sell $233,000 worth of parts each year. And this doesn’t even account for additional employee benefits or taxes! If you have that type of employee, did they meet that goal?
Quit Guessing and Start Measuring
More than likely, you looked at your overall shop efficiency and it is well below 100%. If it is 50%, you are doing OK but you can still improve it a lot. If it’s less than 30%, you are probably struggling. To improve this we need to know where we are messing up. Tracking time on jobs is the single best way of doing this and why we created My Shop Assist. Thankfully, you made a task list to work from in Part 2!
The price for a task should be directly tied to how long it takes and the tools required to perform it. If you do custom work and bill hourly, you shouldn’t guess at how much time you spent. If you are doing flat rate work (i.e. the price is fixed) but if you don’t know the average time to perform the task, again, you are guessing.
Here is an example of how I learned the hard way to track time:
Prep Chassis 14 hours
Fabricate Cage 20 hours
Weld Cage 35 hours
Paint Cage 2 hours
Reinstall Interior 2.5 Hours
Total 79 hours
This example drives home the fact that you need to be tracking the time on every task. The more employees you have, the more critical it becomes. In My Shop Assist, each technician can track their own time on a task and you can compare their performance. This allows you to make decisions on who performs the task the quickest (and makes you the most money).
Using the Data to Adjust Pricing
You may have to guess on the task price the first time you do it. If you measure your time and determine you underestimated it, you can adjust the price to compensate. If you didn’t measure your time, you may never know if you are actually making money on the install. And again, if you have technicians performing these underestimated tasks over and over again because they aren’t tracking their time, you are missing thousands of dollars in labor revenue each year.
This is why chasing higher revenue is not the answer. Hiring more technicians to perform tasks that you undercharge for will increase your revenue but decrease your profit. Sound familiar?
Action item #2: Track everyone's time at your shop. Utilize the list from action item #1 to break down where the time is going.
I personally have used My Shop Assist to cut out work that isn't profitable (mounting tires), raise prices on bigger ticket items (engine installs, head gaskets), and adjust prices both up and down based off of average times it takes to do.
This My Shop Assist report shows the last 27 clutch installs I've done on Evo 8/9 5-speed cars only. The average time is 5.3 hours.
This wouldn't be possible without putting forth the effort to religiously track time on every task I do. The hard work pays off as I now work less hours and make more money doing it.
In this blog, we covered the basic concept of setting up a task list, tracking time on jobs, and applying it to pricing. This concept works for any type of service job (install, fabrication, powder coater, machinist, etc.). Take a look at your own books and determine the efficiency of your shop. Do this once a month and pay close attention to where the time goes.
Use that measurement to implement improvements and watch your profits improve as the efficiency improves! If you don’t have a tool to track time or any way to break down the tasks you perform, consider using My Shop Assist. Good growth can’t happen without a stable system in place.
Revenue may be the flashy number that everybody talks about, but increasing efficiency makes you more profitable. There is always room for improvement so contact us today to see how we can help out.