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Oil Changes and Effective Labor Rate

The Evil Combination

Let us be clear, there is no magic formula as to what your effective labor rate should be.

It is not supposed to be a percentage of your door rate, nor is it supposed to be particularly high or particularly low. Very simply, it is nothing more than the average labor rate you receive for all of the maintenance and repair work that goes through your shop.

The rate can be adjusted either up or down, but the key is to understand what is happening in the shop and on the drive that results in the ELR that you have.

It is widely accepted that the objective for a Service Department is to have the maintenance to repair mix 60% to 40% respectively. Naturally, oil changes are a part of the 60% maintenance mix. Before you can understand your maintenance ELR and your overall ELR, you must first know your oil change percentage.

Oil changes are so vitally important to the calculation because the effective rate on oil changes is ridiculously low. Oil changes are roughly $25.00 across North America. Your charge may be slightly higher or slightly lower; nevertheless the $25 dollar rate is the number we will use for this example.

If an oil change is $25, we know that roughly $15 of that $25 is for the oil and the filter and the remaining $10 represents labor. The flat Rate for an oil change is 0.3, therefore the ELR for the oil change is $10 divided by 0.3 = $33.33. It doesn't matter if you've got your $8.00/Hour Tech working on it or not, the ELR is what it is.

Now let us examine the Overall ELR for a shop and assume 100 Hours and a nice 60% to 40% maintenance to repair mix.

Repair work at 40% at Door Rate of $80.00 means:
40 Hours X $80.00 ELR = $3200

Maintenance work at 40% with an ELR objective of $60.00 with Oil Changes (as above) representing 15%:

15 Hours X $33.33 ELR = $499.95
45 Hours X $60.00 ELR = $2700

Therefore, 100 hours divided by the total labor sales of $6399.95 results in an Effective Rate of $63.99.

If you were to look at your overall maintenance ELR objective of $60.00 and did the math on just maintenance vs. repair, you would expect:

40 Hours X $80.00 = $3200
60 Hours X $60.00 = $3600
100 Hours ELR = $68.00 or a difference of over $6.00

As you can see, oil changes significantly impact the overall ELR. Your job is to know whether you are writing too many or not enough oil changes based on the total work coming into the shop. Understand ? your work mix determines your overall ELR.