4 Tips to Setting Labor Rates in 2021

We've entered the New Year, and many body shops use this time to consider changes to their labor rates. 

Coming from a very challenging 2020, where repair volume was significantly down, if it was not already clear just how important labor rates are to a shop's business, it probably is now.

Because there were many fewer vehicles coming through the door, it was critical to make the most out of every repair.

That meant getting paid for all your work (billable hours) and at the right price (labor rate).  Now, perhaps more important than ever, labor rate pricing is crucial for body shops to sustain long-term profitability, growth, and prosperity.

Background
At NABR, we’ve been actively surveying, studying, and analyzing labor rates for quite some time now, utilizing our innovative Variable Rate System (VRS) software, which powers the new LaborRateHero.com site.  After communicating with thousands of body shops and hearing first hand how they make decisions about pricing their labor, we have some basic steps to share for anyone who wants to take action on their labor rates in the upcoming year.
 
First, let me provide some context. Over 6,000 individual body shops nationwide have submitted labor rate surveys to us.  From that survey data, posted rates for Body labor range from $59 (national average) to $92 (+2 standard deviations).  New surveys submitted within the last twelve months range from $63 to $99 (avg to +2 std dev).  (Note: You can report your posted labor rates for free to the independent LaborRateHero Survey at LaborRateSurvey.com and see free survey results at LaborRateHero.com)

4 TIPS
Doing a comprehensive labor rate analysis for your shop can be complex and quite involved, so instead, we offer here 4 simple steps to help get you started on the road to finding the right price for your individual shop.
 
1) Consider Your Market’s Overall Cost of Living. 
This step can serve as a simple sanity check to help ensure your labor pricing is within a reasonable range for the area you operate in.  While there is no official US government cost of living index that compares the cost to live in different cities, there are some online resources that do.  One site we like is AreaVibes, which will give you a good idea of your area's cost of living.  For this index, the national average is listed as 100.  The index number for your market represents the cost to live there, as a percentage of the national average. 
 
For example:  The cost of living index for Honolulu, Hawaii is 181, meaning that it costs 181% of the national average to live in Honolulu.  Based on the cost of living index alone, we might expect to see body labor rates in Honolulu in the $107 to $167 range (that is, $59 national average times 181%, and $92 times 181%).  Yet the survey data for posted body labor rates in Honolulu is in the $66 to $78 range, far below the cost-of-living-adjusted rates.  As you can see, labor rates there appear dramatically misaligned with that geography’s cost of living.
 
2) Consider General Consumer Price Inflation.
This is simply the overall increase in prices of typical household expenditures.  Over time, inflation erodes the purchasing power of money, and your dollars don’t go as far as they used to.  In the US, inflation is measured by the Consumer Price Index (CPI) and is often used for cost of living adjustments (COLA), such as social security benefits or wage adjustments.  Last year in 2020, the CPI rose about 1.8% (December 2020 inflation hasn't been reported yet).  To help maintain purchasing power and keep up with the overall increase in cost of goods, a shop could consider making an inflation adjustment to its labor rates and paint material rate.
 
For example:  If a shop's posted rate is currently $59 per hour, adjusting the labor rate for last year’s approximate inflation rate would yield a price of $60.06 (that is, $59 times 101.8%).  Note, this is not really a price "increase" in the sense of making more money for the shop.  This is just "staying even" with inflation so that you can keep up with costs and just "maintain" your standard of living.  The shop is not really growing in real terms.

Overall, our observation is that most body shops’ labor rates do not keep up with consumer price inflation over time, which puts those shops farther and farther behind every year, eroding their profits and purchasing power and risking their sustainability.  In reality, body shops’ costs are increasing at rates faster than inflation; paint costs alone could increase 3% to 8% per year, sometimes multiple times per year. 

We recommend shops think about keeping up with inflation more like a "minimum requirement", not as a real solution to setting their labor rate.
 
3) Consider What Makes Your Shop Different.
Differentiators may include training, equipment, facilities, and OEM certifications.  Shops are not alike, and those that have made more investment in these items likely have greater repair capabilities than shops that haven’t (for example, aluminum repair capabilities).  And those shops likely require a higher labor rate to pay back and earn a return on those investments.  We recommend our Variable Rate System (VRS) to find apples-to-apples comparisons between your shop and others, to understand what price ranges are for shops like yours around the country.   
 
For example:  Our national survey data shows I-CAR Gold Class shops have an average posted Body labor rates of $59, the same as the overall national average.  Nissan certified shops are at an average $62/hr., while both Audi Ultra certified collision centers and Mercedes Elite shops average $65/hr.  Bigger price ranges and higher labor prices tend to be seen in luxury OEM certified centers, especially for aluminum structure and restricted repair work.

4) Consider What Investments You Need To Make This Year. 
How much money do you need to invest this year to improve your repair capabilities or personnel?  Perhaps you want to invest in greater scanning, diagnostic, and calibration capabilities, or your shop needs more training, equipment, or OEM certifications.

In general, your current labor rate only covers your current business.  You likely need a new labor rate to cover new investments because your current rate was never priced to pay for anything new.  Most body shop investments such as tools, equipment, and training are intended to make repair labor more skilled and effective.  Equipment can’t repair a car by itself; it needs labor to put the equipment to use.  The same goes for tools, facilities improvements, and certifications.  Therefore, labor activity has the burden to pay off those investments plus earn a return.
 
For example:  Let’s look at an example shop and investment:  A shop needs to make a $5,000 training investment for a technician.  The shop currently charges $57/hour for labor, has a 50% gross profit margin on labor, and wants to earn a 15% return on investment in one year for this training investment.  The technician bills 2,000 hours per year and operates at 100% efficiency.
 
The 15% return on investment is $750 (that is, $5,000 times 15%).  So the shop needs to earn back $5,750 in one year (the original $5,000 investment plus the $750 return).  The shop decides to spread that cost evenly over the tech’s 2,000 billable hours, which calculates to $2.88 per hour.  This is the additional amount of profit per hour the shop needs to earn to pay back the investment in one year.  Because the shop earns a 50% gross profit margin on labor, we divide the $2.88 by 50% to get $5.75.  This is the additional amount of revenue that needs to be collected for each hour (via the labor rate) so that the shop earns the $2.88/hour gross profit it needs to pay off the investment and earn the return.  Therefore, the shop’s current $57/hour labor rate plus the additional $5.75 equals $62.75, which is the new labor rate the shop needs to collect to pay for this $5,000 training investment and earn a 15% return.
 
A similar analysis is needed for all the other investments in equipment, facilities, certifications, and ongoing training.  It can add up quickly.  But shops that don’t adjust their rates to fund these investments quickly eat into their profits.  Given the rapid increase in technology in this industry, we can expect a large and continual investment required to keep up with the training and equipment necessary to repair these high-tech vehicles properly and safely.  Mathematically, the industry’s current labor rates will only take a shop so far down that road before they are simply unable to afford the necessary investments.  This leads to three major risks to shops:  1) lacking the knowledge to repair new high-tech vehicles, 2) putting consumer safety in jeopardy, and 3) putting themselves at legal risk by performing improper or unsafe repairs.
 
In Closing
None of these four tips are intended to be the only thing you do to compute labor rates.  Think through all of these, look at the results, and then decide what price to choose.
 
You can also go deeper with a more thorough cost of doing business analysis, examining competitive wage levels in your market, and/or determining your P&L profit goals then backing into the labor rate needed to hit that goal.  These require having a good handle on your financial statements and a good spreadsheet or calculator to help with the calculations (such as the VRS Labor Rate Calculator).
 
Remember, there is no rule that says you can only set your labor rates once per year.  Prices can change at any time for any reason.  Because markets and businesses are dynamic, labor rates can and do change continually throughout the year. 
 
We advise shops to consider their labor prices several times per year as their business evolves, cost structure changes, and investments are made.  They can change rates as often as they need to.  And very importantly, shops can freely report their new rates to the independent LaborRateHero labor rate survey at LaborRateSurvey.com and see results at LaborRateHero.com.  Pricing transparency is essential for free markets to function properly, so your survey participation is critical!
 
In conclusion, pricing your labor accurately can sometimes be hard work, but these four simple steps can help get you in the right range and closer to the right price for your individual shop.  For a deeper analysis of your labor rates, greater access to more independent labor rate data, labor rate calculators, or help with any of these topics, please contact us.