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Control the Effective Labor Rate (ELR)... Control the Profits

The ELR factor is one of those hidden items which isn’t viewed often, nor is it considered a high impact area until it hits one between the eyes. We are going to look at ELR a number of ways here:

So what is ELR and what manipulates it in three main labor categories - customer pay, warranty, and internal?

Why is it important financially to monitor and manage the ELR?

Who is affected by ELR results?

What about warranty versus customer ELR?

So what is ELR and what manipulates it in Customer Pay, Warranty, and Internal?

The Effective Labor Rate is a result of the combination, and related use, of multiple labor rates in any of the three labor categories.

Multiple labor rates are created sometimes purposely, and sometimes accidently, by various means.

Effective Labor Rates can vary day to day, week to week, monthly, or really any measured time period.

There is also a fourth ELR commonly known as the “Overall Effective Labor Rate”, which is a result of the combination, and related use, of each of the three labor categories, Customer, Warranty, and Internal. And yes, it can become confusing.

Understanding your Effective Labor Rates is vital for accurate forecasting.

What Manipulates ELR in Customer Pay?

Customer pay labor contains many factors which affect the ultimate ELR. Some are planned, some are mistakes, some are unplanned discounting, some are from changing volumes of labor categories, and some are basically cheating the system.

1. Planned Labor Rates - the result of specific labor rates related to:

A. Maintenance Packaging (Labor $$ / Flat Rate Time)

B. Specifically Applied Labor Rates (i.e. Diagnostics - Diesels)

C. Short-Term Marketing (i.e. Spring A/C Special-10% discount)

D. Long-term Marketing (i.e. 10% Military Discount)

“Planned” Labor Rates essentially are rates applied by management with specific marketing and financial goals in mind.

2. Mistakes - usually the result of one of several areas:

A. Lack of understanding about how the labor pricing system is setup

B. Training on how to apply labor pricing in various categories

C. Lack of updating Pricing Software

D. Caring about doing it right

When labor rates aren’t audited, mistakes can continue unabated, ultimately having a negative effect on the final Customer ELR.

3. Unplanned Discounting – happens way too often

When subordinates (writers in particular) have control over flag time and labor pricing, discounting often occurs when final estimates are incorrect.

4. Changing Volumes of Labor Categories

Because Effective Labor Rates vary, sometimes drastically in each category, the volume produced in each affects the Overall Effective Labor Rate.

Such items as recalls, specific parts failures, and even the volume of certain models sold will affect the final Effective Customer Labor Rate.

Another issue can be the volume of service contract work performed, when contract companies do not honor the established service labor rates, demanding additional discounts and concessions.

5. Cheating the System

If writers and technicians have control over labor times and labor applications, the Customer Pay Effective Labor Rate will drop, sometimes substantially.

If their paycheck is affected, (maybe most) employees don’t follow the “rules” when they aren’t monitored.

What Manipulates ELR in Warranty?

Many managers are surprised when they finally take a look at the actual ELR in their warranty account.

There are several factors which cause the ELR to be less than the rate which the factory pays.

1. Paying Technicians More than the Warranty Flat Rate

While this occurs both fairly and unfairly, (hopefully only after management authorization), additional time is provided to the technician. That time and money should be placed in an expense account such as Policy to accurately reflect the true ELR and provide an audit trail of the adjustment.

2. Technicians or Writers Paying Flat Rate with No Reconciliation after Submission

Typically techs and writers do not underpay themselves!! When jobs are flagged before completion, the result is that they are overpaid.

If this is not caught and adjusted to match actual billed hours, the warranty effective labor rate is affected.

For this reason, monitoring the Warranty Effective Labor Rate to catch changes is critical.

What Manipulates the ELR in Internal?

1. Discounting

While Internal Rates vary greatly among dealers, the top players usually don’t discount the Internal Rates for service or parts much, if at all.

Any discounting lowers the Internal ELR and eats up gross profit and the added costs are typically recaptured when the other department makes the related sale.

Frequently the used car manager with a poorly appraised vehicle is the cause of such discounts, but like an addiction, one “deal” always leads to more, then more and more!

The better solution is accurate initial appraisals so the manager doesn’t need a service bailout.

This DealersEdge Blog post is just a snippet of a longer report included in the DealersEdge Guide- Fixed Operations Management Skills - and was based on the content of a Webinar featuring Ed Kovalchick.

See Below on how to obtain a copy of this print Guide.


390 Pages of Fixed Ops Management Wisdom... and Tabbed for Easy Reference

Financial Analysis Tools for Fixed Ops Mgt

Pricing Formulas for Service and Parts

Service Advisor Coaching

Parts Dept Profit Mgt

Plus What Fixed Ops Managers Need to Know About the Entire Enterprise

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