Tips for Territory Managers – Establishing Service Labor Rates

In my experience with working with Territory Managers over the course of my career, one of the most common questions I get is, “How do I help my dealer properly price labor rates for service calls?” It is a great question and one that is very pertinent in our current economic climate with inflation being a major concern affecting contractor profitability.

The first concept that we need to understand is the fact that it can be very difficult for service departments to make money. Service departments are labor intensive and labor drives overhead. There are multiple calls throughout the day, which means more gas, more support from dispatchers, CSRs, and in many cases several trucks on the road. With these expenses in mind, we must make absolutely certain that the pricing structure in service is accurate.

The second concept to explore is whether your contractor is using time and material or flat-rate pricing. The beauty of a flat rate, is that it provides the contractor the ability to price a service call as a total cost of repair. If your dealer is not on a flat rate, then their hourly labor rate is exposed to additional scrutiny.

The last question that needs to be answered is, “How do I actually price the service call?” Back in the day, a common practice was to secretly shop competitors to see what they were pricing. With many more contractors moving to flat-rate, that is no longer an option. Thank goodness it is not an option because I would always counter that tactic with a response of, “If you don’t know your competitor’s costs, then why would you base your pricing on their pricing?”

Fortunately, through years of data collection, we can use key performance indicators (KPIs) as a means to help guide the answer of how to price an hourly labor rate. A service call consists of two components:

1. The parts cost that is then marked up for a retail price.

2. The labor cost that is then marked up to retail.

In time and material scenarios, each one of these component prices is exposed to the consumer. Conversely, in a flat rate, it is a packaged price where neither is exposed.

A generally accepted KPI is that your labor cost should be 22% of your retail price in your flat rate system.

For example, let’s say the overall average pay for a service tech is $30 per hour. We would then take $30 divided by .22, which gives us a retail labor rate of $136 per hour. But there is a catch. This would be true if the service department was 100% efficient, meaning I pay a tech for 8 hours and I am also billing for 8 hours. 100% efficiency is not possible, due to time between calls, traffic, parts pick up, etc. Therefore, we have to establish an efficiency rate. To do that we determine: how many hours did we pay techs for vs how many hours did we bill for? The industry average is 50% efficiency. In other words, the average company will pay a tech 8 hours per day but only bill for 4 hours per day. So, if your dealer is at the industry average, here is how the math works. $30 per hour avg tech wage divided by the KPI of .22 equals $136 per hour, then divided by .50 efficiency equals $272 per hour. Now, many people will freak out when they see that number. The good news is it is a fairly easy process for your dealers to figure out by simply getting the average tech wage divided by the .22 KPI and then by determining the hours paid vs hours billed. The numbers don’t lie. Clearly, if your dealer is anywhere near the industry average, they must utilize flat rate pricing so as to not expose their labor rate. Each company will be different, but the companies I have worked with that have done this exercise will tell you that it has dramatically changed their service department’s profitability.

To learn more about flat rate pricing and labor rate calculations, visit section 5 of the Resource Library of Contractor University.