By Karrie Jackson, CEO and Cofounder, Evermore Accounting & Coaching

I asked a diesel repair shop owner last year how he landed on his labor rate. He said other mechanics charge $115, so he charges $110.

I asked what his costs were. He said he did not know exactly, but he was busy, so it must be working.

He was busy. He was also making about four percent net, working sixty hours a week, and had not taken a real vacation in three years. Busy was not the same as working.

Pricing off the shop down the road is the most common way trades businesses set rates, and it is a bad method for one simple reason. You have no idea what their costs are, whether they are profitable, or whether they are quietly going out of business.

Start with the hours you can sell

Before you can price an hour, you have to know how many hours you have to sell.

A technician on the clock 40 hours a week is not producing 40 billable hours. Between waiting on parts, diagnostics that go long, comebacks, cleanup, and the ordinary friction of a shop day, most techs bill somewhere between 60 and 80 percent of the hours they are paid for.

Say you have three techs; each paid 2,080 hours a year. That is 6,240 paid hours. At 70 percent productivity, you have roughly 4,368 billable hours to sell in a year.

That number, not the payroll number, is what your overhead has to spread across.

If you have never measured your actual productivity, measure it before you do anything else in this article. Compare hours billed on repair orders to hours paid, over a full month. Most owners are three to eight points below where they assumed.

Now find your overhead per billable hour

Add up everything that keeps the doors open for a year and is not a technician's wage or a part.

Rent, utilities, insurance, equipment payments, shop supplies, software, marketing, your service writer, your own salary, licenses, waste disposal, uniforms, training. All of it.

Say that comes to $210,000.

Divide by your 4,368 billable hours. That is $48.08 of overhead on every hour you sell, before you have paid the technician who performed it.

Add the labor cost, then the profit

Your techs cost more than their wage. Add payroll taxes, worker's comp, and any benefits. A tech at $28 an hour usually costs somewhere around $34 to $36 fully loaded.

But here is the piece owners miss. You pay him for all 40 hours and only bill 28 of them. So, the labor cost that must be recovered on each billable hour is his loaded cost divided by your productivity rate. At $35 loaded and 70 percent productivity, that is $50 per billable hour.

So, your breakeven on a labor hour is $48.08 of overhead plus $50 of labor, which is $98.08. That is the number where you make exactly nothing.

If you want a 20 percent net on labor, you are not adding 20 percent to that. You are dividing by 0.80, which puts you at $122.60.

The shop down the road charges $115. Your number is $123, and it is your number, built from your rent and your crew and your productivity.

Why parts margin does not rescue a bad labor rate

Plenty of shops carry a thin labor rate because the parts margin covers it.

That worked better ten years ago than it does now. Customers price shop parts online in the bay. Insurers and fleet accounts push on parts pricing. And the more your profitability leans on parts, the more exposed you are to a shift you do not control.

Labor is the thing you actually sell. It should stand on its own.

The productivity lever is bigger than the rate lever

Here is what I find most owners do not appreciate.

Go back to that example. If you move productivity from 70 percent to 78 percent, your billable hours go from 4,368 to 4,867. Your overhead per hour drops to $43.15. Your labor recovery drops to about $44.87. Your breakeven falls from $98 to $88.

You just found ten dollars an hour without touching your posted rate, and without a single customer noticing.

Better parts availability, a service writer who keeps the schedule tight, less time chasing approvals, fewer comebacks. Those are not glamorous projects. They are worth more than a rate increase, and they cost you less goodwill.

Chase both. But if you can only chase one this quarter, chase productivity.

Raising the rate

When shops raise rates, the fear is always the same. We will lose customers.

Some will leave. In my experience, it is a smaller number than owners expect, and it is disproportionate for the customers who were already the least profitable and the most work to serve.

A few things that make it go smoothly. Move in a real increment rather than two dollars at a time, because you will just have to do it again. Give your service writer language for the conversation so they are not improvising at the counter. And do it when your schedule is reasonably full, not during your slowest stretch, because you will hold the line better when you are not anxious.

Where to start

Two numbers this month. Your actual productivity percentage, and your total annual overhead.

With those, you can calculate what you need to charge instead of guessing. And the difference between a rate you chose and a rate you copied usually shows up as several points of net profit at the end of the year.

That is the difference between a shop that pays you well and a shop that just keeps you busy.