How Do You Calculate an Effective Labor Rate?

To calculate the effective labor rate of a dealership, the manager must divide the total sales figure by the total hours billed over a specific period. The manager at a dealership with different classes of technicians must calculate the effective labor rate for each technician separately and find the average.

Costs, such as employee health insurance, paid time off and contributions to employee retirement plans contribute, significantly to the gross cost of sales; these costs are included when calculating the effective labor rate. A dealership should have an effective labor rate that is higher than the posted labor rate. Dealerships that have low effective labor rates should consider reducing labor rate discounts and pricing jobs appropriately.

A manager can use the total billed hours to measure the performance of each technician. The efficiency and productivity of each technician must be above 100 percent for a dealership to realize its full sales potential. A technician’s efficiency is determined by dividing the total billed hours by the hours a technician was working. A technician’s productivity is measured by dividing the hours spent repairing vehicles by the hours the technician was available.

Factors that may cause technicians to spend time away from their bays include the dealership culture, the level of training of each technician and the ratio of technicians to customers.