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Focus groups and surveys for the past several decades on repairs and maintenance issues have been unanimous in one fundamental area. The customer wants to know how much it will cost before giving you approval to do the work.

Pretty simple, isn’t it? And we’re customers too sometimes and we’re exactly the same way.

But what is interesting to me is that if we know what our customers want, why don’t we give it to them? The answer is also quite simple. It’s just not that easy to do.

To fix that, let’s start with some fundamental and simple basics.

Labor Efficiency

We have touched on this subject in previous columns, but let’s now define labor efficiency and how we can measure it in your business. Labor efficiency is the percentage of your gross profit potential that you achieve in actual gross profit.

To arrive at your gross profit potential, you have to take your average published charge-out rate and your average wage paid to your technicians. Subtract the wage average from your average charge-out rate and get a gross profit. Divide that by the average charge-out rate and you have your gross profit potential.

Let’s look at an example. Assume you have only one charge-out rate and it is $72 an hour. Assume you have 12 technicians who average $18 an hour in wages (wages only, no benefits). The gross profit would be $72 minus $18 (or $54). That means the gross profit potential is $72 minus $18 divided by $72. So your gross profit potential is 75%. This means the most your gross profit could be at 100% efficiency would be 75%.

So next, take the actual gross profit from your financial statements for labor only. Let’s say it is 60%. This means that on labor you actually achieved a gross profit of 60% on labor.

It really is quite straightforward, isn’t it? You achieved 60% gross profit when you could have achieved 75% gross profit. So you achieved 80% of your potential, or a labor efficiency of 80%.

Standard Times

Standard time is the allowed time to perform a repair or maintenance on a component, a system, or a piece of capital equipment. This is normally the time we give the technician to perform the job, and it is on that foundation that we develop a quotation for the customer for the work they want done by us.

But where does the standard time come from in the first place? The time is a developed value based on the work that has already been done in the service department. In other words, we have to view a history of the work that we have performed.

If you don’t log this history, you can still arrive at a standard time that you can use to start the system. Normally, your suppliers will provide standard times that they will use to reimburse you for warranty work. This time is typically quite sharp and hard to achieve in the real world. Nonetheless, this can be a starting point for you.

Get your better technicians together and go over the times the suppliers are giving for various repair functions, and arrive at a multiplier that your best technicians say would be appropriate to use to arrive at a time that they could match.

Now we can start, right? Not so fast. If you are going to provide a guaranteed price, you are assuming all of the risk. Shouldn’t there be a premium for you if that is the case? You assume all the risk and you are entitled to a risk premium. Normally this risk premium is 15%. In other words, if you did 50 jobs and the average time was 10 hours, the standard time should be 11.5 hours. This would be the foundation time that would be used in conjunction with your charge-out rate to arrive at a guaranteed price for your customer.

So if you have a time of 11.5 hours and the charge-out rate is $100 per hour, the price to the customer would be $1150 for the job. If your labor efficiency is 80%, you would take not 11.5 hours, but an additional 2.3 hours for a total of 13.8 hours.

So if the job is done at 100% labor efficiency with a wage of $20 an hour, you would have a gross profit of $920 for the job, which is 80%. If it was done at 80% labor efficiency with the same wage, the gross profit would be $874, which is 76%. The labor efficiency loss cost you $46 more in labor cost, and as a result a reduction of $46 in gross profit.

So the customer didn’t pay for your lack of labor efficiency—you did. You paid more in wages to the technician who did the work. You assumed the risk of the guaranteed price and it cost you because your technician was not efficient enough in performing the work.

This gives you two of the critical foundations for customer service in the repair business: labor efficiency and standard times. I know it is a bit complicated, but that is the nature of the work we do. But as you work through it, you’ll find it is rather straightforward.

Next month we will discuss how you can maximize your labor efficiency.