Why is my effective labor rate lower than my posted rate?

Because something between the rate on your wall and the total on your invoices is taking money out. Effective labor rate is labor dollars billed divided by labor hours billed, so discounts shrink the top of that fraction and unpaid hours grow the bottom. The usual culprits are discounted labor and flat-priced jobs sold below book. Hours shaved to close a sale do the same damage, and so does diagnosis nobody billed or a comeback done for free.

Key takeaways

• The formula is labor dollars billed over labor hours billed, with unpaid hours counted in the hours.
• Discounts come out of the dollars. Comebacks and unbilled time go into the hours.
• Multiply the gap by your billed hours to see what it cost you this month.
• Most of the gap starts at the counter, where the estimate gets written.

What is the difference between posted and effective labor rate?

Your posted rate is the price of an hour. Your effective rate is what an hour turned out to be worth once the month was over.

The Federal Trade Commission describes the two ways shops bill labor to car owners. "Some shops charge a flat rate for labor on auto repairs," it says, and "This published rate is based on an independent or manufacturer's estimate of the time required to complete repairs. Others charge on the basis of the actual time the technician worked on the repair." Either way, the posted rate is the multiplier. What the invoice ends up saying depends on the hours and the discounts that go with it.

In states with invoice rules, the numbers are easy to pull. California's invoice section requires that "Service work and parts shall be listed separately on the invoice," along with separate subtotals for each. Add up the labor subtotals for a month and you have the top of the fraction.

How do you calculate it?

Take a hypothetical month. The posted rate is 150 dollars. The shop billed 380 hours to customers, which would be 57,000 dollars at the posted rate, but 3,000 dollars of labor discounts came off, leaving 54,000. The techs also spent 20 hours on comebacks that nobody paid for.

Effective labor rate is 54,000 dollars divided by 400 hours, the 380 billed plus the 20 unpaid. That comes to 135 dollars an hour, 15 below the posted rate. Across 400 hours, the gap is 6,000 dollars for the month.

Our effective labor rate calculator runs this with your numbers and shows the gap against your posted rate.

Where does the gap come from?

From five places, and most shops have a few at once.

Discounts on labor. Coupons, fleet pricing, friends and family, and the discount an advisor offers to get a nervous customer to yes. Each one comes straight out of the labor dollars.

Flat-priced jobs sold below book. A maintenance special or a canned job priced years ago can bill fewer hours than the labor guide says the work takes. Our comparison of canned job pricing and labor guide time covers how that drift happens.

Hours shaved at the counter. An advisor under pressure to close a big ticket knocks half an hour off the labor instead of discounting the parts. It rarely shows up anywhere except in the effective rate.

Diagnosis nobody billed. Time spent finding the fault gets absorbed into the repair or given away when the customer balks. Mitchell 1's own estimate guide states that its times leave out diagnosis unless indicated, so a shop that bills straight book time without a diag line gives that time away on every ticket.

Comebacks and unpaid time. A comeback is labor the shop does twice and bills once. Those hours count in the denominator and bring in nothing.

Which cause is costing you the most?

Split the month before you guess. Run the effective rate separately for a few slices of your work and the biggest leak usually stands out.

• By job type. Maintenance and repair often carry very different effective rates. A shop with a strong repair rate and a weak maintenance rate should look at its canned jobs first.
• By advisor. If one advisor's tickets run well below another's on similar work, the difference is discounting or shaved hours.
• By discount code. Totaling each discount reason for a month shows which ones are costing real money.
• Comeback hours. Count them separately. If they are a large share of the gap, the fix is in the bay, and it belongs in a different conversation.

How is this different from technician efficiency?

They measure different things and they get confused constantly. Effective labor rate is about what an hour sold brought in. Technician efficiency is flat-rate hours produced divided by hours clocked, a measure of speed against published time.

A shop can have fast techs and a weak effective rate at the same time, if the counter discounts the hours those techs produce. It can also have a strong effective rate and slow techs, if every hour gets billed at full rate but each job takes longer than book. The technician efficiency calculator covers the second measure, and book time vs actual time covers how the two interact.

What should you fix first?

Start where the estimate gets written, because that is where most of the gap begins. Discounts, shaved hours and unbilled diagnosis are all decisions made while someone is pricing a ticket.

Audit the canned jobs. Every template that bills below current book time is a small leak on every ticket that uses it. Our guide to auditing your canned jobs walks through what to check.

Write down the rate rules. A labor rate sheet settles which rate applies to which work, so two advisors do not price the same job two ways.

Put diagnosis on the ticket. If the tech spent time finding the fault, that time belongs on the estimate as its own line.

Price from book time every time. California's repair statute requires the dealer to "give to the customer a written estimated price for labor and parts necessary for a specific job." When the labor on that estimate comes from the published time at your posted rate, the effective rate has less room to slip. Mechanica prices labor from published book time for the exact vehicle and applies your labor rate on every draft, which takes the guesswork out of that step while your advisor still decides what goes to the customer.

Should you raise your posted rate to close the gap?

Not as the first move. A higher posted rate with the same leaks lifts the effective rate a little, and the shop still loses about the same share of every hour it sells, since percentage discounts and unpaid hours grow right along with the rate. The customer sees a bigger number on the wall, and the shop keeps giving away the same slice of it.

Raising the rate makes sense once the leaks are under control and the effective rate sits close to the posted one. At that point a rate increase shows up almost entirely in the labor dollars, which is the whole point of raising it.

Check two things before you change it. First, what shops near you charge for similar work, because customers compare. Second, any rule in your state about how the rate has to be posted or disclosed, since some states require the labor rate to appear on a sign in the shop or on the estimate itself. Update your rate sheet and your canned jobs the same day, or the old rate will keep turning up on tickets for months.

How often should you check it?

Monthly, and every time you change a rate. The trend matters more than any single month, because one big warranty job or a slow week can move the number without anything being wrong.

Watch the dollar value of the gap more closely than the rate itself. A 15 dollar gap means something very different at 200 billed hours than at 800. Our post on labor overlap when two jobs share a teardown covers one of the quieter ways billed hours drift away from the work performed.

More on pricing labor and parts is on the blog.