January 5, 2017

Repair Shop Tech Tip: How To Properly Calculate Your Labor Rate

Knowing what to charge for your labor rate is a critical step to solidifying the long term success of your auto repair shop. Granted, this rate may increase as your business grows over time, as it should, but to get started you need a foundation to build on. So, how do you know what to charge?

The formula below gives an example of how to calculate your base labor rate and what metrics you must take into account. This is by no means a perfect method, but it will give you a great starting point.

The idea is to take all of your monthly overhead, both fixed and non-fixed costs, and divide that number by the total available working hours in a month. Other factors to consider are the average shop labor rates in your local market as well as the total number of shops you’re competing with in the immediate area. You don’t want to undersell yourself, but don’t overcharge either.

For each and every month you will have fixed costs and dynamic costs. For dynamic costs, calculate an average (i.e. marketing or shop supplies).

Monthly costs of operation:

Formula: R + E +EL+ S + L + M + I + A+ TX + EQ / TMO =  Base Hourly Rate

(R) Rent: $2000

(E) Employees: $4000

(EL) Electricity: $750

(S) Shop Supplies: $1000

(L) Leased equipment: $2000

(M) Marketing: $1000

(I) Insurance: $800

(A) Accountant: $900

(TX) Taxes: $2500

(EQ) Equipment/Tools: $750

(TMO)= 160 workable hours per month

Total overhead: $15,700.00 divided by 160 available hours = $98.125!

Pro Tip: To calculate a base GROSS margin on labor let’s assume our total annual overhead is inline with the above figures. 15,700/ mo x 12 = 188,400 annually. If you want to gross 15%- you need to add 28,260 to that number (188,400 x 15%, divided by 12. Add that additional percentage to your base overhead figure to get = 18,055. Divided again by the total hours per month (160) = $112.84 per hour.

Stay tuned for more helpful tech tips from SHIFTMobility.

The SHIFTMobility Support Team