Is Your Shop Rate What It Should Be?

By G.C. Skipper, Contributing Editor | September 28, 2010
Considerations in Calculating Shop Rates

Despite the complexities of the mathematical process used in developing shop rates and the fact that private fleets have profit-making objectives while public fleets seek to break even, there are commonalities in developing a shop rate. Both types of fleets share certain key elements and features, such as:

  • Labor rates—If there are overtime hours involved, combine straight time and overtime into a single rate.
  • Support costs—Charge out costs such as supervision, administrative and a portion of facility costs (utilities, for example).
  • Consumables—Many shops include the cost of consumables in establishing a shop rate, such as the cost of parts that are not charged to a customer.
  • Environmental fees—This covers costs such as fluid disposal. “The easiest way to set this fee is by using a flat percentage of the rate,” says David Greenlee, CEM, fleet manager for Alyeska Pipeline Service Co. in Fairbanks, Alaska. “For every hour, there is a certain percentage on the entire bill to cover this. For every productive hour you've got on a machine, you'll get a return on all your overhead expenses.”
  • Thorough staff analysis to determine what you really need—“The more people you have, the more administration you need and the more time it takes to provide that administration, not to mention the increased insurance costs,” says Roger Thompson, vice president with consulting firm Bucher, Willis & Ratliff based in Kansas City, Mo. “The key, and perhaps one of the most difficult calls, is to determine if your shop is staffed properly.”
  • Scheduling shop work—“If you wait for equipment to break down and then make the repairs, your rate is going to be very high,” says Thompson. “That is management by crisis.”
  • Preventive maintenance—PM is vital. It drives your staffing. If PM is poor, it is going to require more people.
  • Age of your fleet—An aging fleet requires more parts and more people to maintain it. “That's counter-productive to running a first-class fleet operation,” says Thompson.
  • Technician training—If technicians are poorly trained, you'll have a high number of callbacks and increased costs.
  • Parts availability—“If you have poor parts management or can't get the parts you need, you'll have more equipment sitting in the shop rather than working on the jobsite,” says Thompson.

All it takes to develop an accurate shop rate are a knowledge of the basic principles of accounting—and a commitment to “leave no stone unturned” in the search for costs. As easy as that is to say, it won't be that easy to do. However, these fleet managers have developed successful strategies for establishing shop rates that work.

“Fleet managers must know what their costs are—both internal and external—and keep full control of what is being paid out of their budgets,” says William E. DeRousse, fleet maintenance superintendent for the City of Everett, Wash. “Those costs should be separated into business costs and support costs. Business costs will determine your shop rate. Support costs (parts room, specification writing, and fueling operation) and other non-business expenses should be covered by an individual equipment charge or percentage mark up. The important thing to remember is to keep the costs separate. If you don't, your shop rate will not reflect the true cost of running your business.”

The chart on the facing page is an example of the detail DeRousse uses to develop his shop rate. The City of Everett has three business units: main automotive repair shop, radio repair shop and parts room operation. Each is a stand-alone business that must be competitive and make enough money to pay the unit's expenses.

The first part of the chart breaks down the cost for the equipment repair shop. The second is DeRousse's calculation of the number of hours that are available to bill customers. After deducting sick leave, vacations, meetings, cleanup time and training, the estimated billable hours each year for two technicians is 3,297 out of a possible 4,176. (One technician is a working supervisor.)

“Based on these numbers, we divide the hours that are available to bill into our total operating cost of $299,563 for the radio shop and come up with a fully loaded labor rate for 2008 of $90.86 per hour,” says DeRousse. “For the automotive repair shop, our fully burdened labor rate is $87.89 per hour. Our parts room mark up for 2008 is 28 percent.”

Some fleet managers are told by their accounting departments what was spent in previous years and given a dollar amount that is equal to or a slightly more than the previous budget to work with.

“That is rapidly becoming an obsolete method as more responsibility is given to fleet managers to not only manage the repair of the equipment, but to know how and where each dollar has been spent,” says DeRousse. “It may take more time and more control of your fleet operation to develop a shop rate from scratch, but it's still the best choice.”

To develop a shop rate, include salaries, benefits, uniforms, fuel, parts, building rentals, depreciation costs, capital equipment replacement costs, office and shop supplies, membership dues and even subscriptions. Be particularly aware of the fees internal departments charge for services they provide your department or division.

“Internal charges can be unnecessarily high and should be negotiated to be competitive,” says DeRousse. “I spoke recently with a fleet manager who is being charged $2 million a year by his IT department. The charge made his shop rate $100 higher than local repair shops. You can't be competitive with inflated costs like that.”

Even after you have all the numbers pertaining to your projected costs and you establish your shop rate, the job isn't over.

“You don't want to overcharge or undercharge your customers,” says DeRousse “Your income and expenses must balance out and that should be checked monthly. Here, each department is billed monthly for the services provided by the Motor Vehicle Division. By doing a monthly audit, we insure each department customer is charged correctly and that monthly expenses equal charges to each department.”

Once your rates are set, they shouldn't need to be changed until the following year.

“In some cases, your shop rate might need to be reviewed several times a year, depending on what outside factors are influencing your costs,” says DeRousse. “However, in most cases your shop rate can be evaluated and set at the beginning of each budget year.”

Getting specific

Curtis Rhodes, fleet manager, for the City of Surrey, B.C., Canada, developed his shop rate this way.

“I calculate wages; employee benefit packages, including vacation pay, sick time, medical and dental fees, and long-term medical costs; and overhead, such as electricity, heating, building costs, support staff, parts and clerical,” he says. “I start with a base number, say, $29.62. I add $6.52 (22 percent) for benefits, $4.44 (15 percent) for overhead, and $4.44 (15 percent) for support staff and arrive at a shop rate of $45.02 per hour.”

Frederick Chun, fleet service manager for Tacoma, Wash., established his hourly shop rate and full-service maintenance rate using the labor rates; shop operating expenses, including utilities; and supervisory costs.

“Other key factors we consider are our billable rate to recover our labor costs and the inflationary factor, because we lock our rates in for two years in line with our budget cycle,” he says. “It's very difficult and I've made some mistakes that resulted in under- or over-charging.”

To avoid errors, Chun works closely with the administrative and finance staffs to develop accurate information and analyzes various scenario to establish accurate rates.

Cover your costs

David Greenlee, CEM, fleet manager for Alyeska Pipeline Service Co. in Fairbanks, Alaska, calculates his company's shop rate by incorporating all the costs into an hourly rate he can charge out.


Shop rates
To develop a shop rate, include salaries, benefits, uniforms, fuel, parts, building rentals, depreciation costs, capital equipment replacement costs, office and shop supplies, membership dues and even subscriptions.

“If you are a commercial shop, you want to have all your costs, plus your fee rolled into the rate,” he says. “You're looking for cost recovery, so you have to know what your overhead costs are to determine the rate. If you don't, you can't really recover them properly or defend them if someone in your organization challenges them.”


As a fleet becomes larger, Greenlee says, fleet managers eventually come to the point where they have to decide whether to increase or decrease their shop rates.

“For the most part, we review our shop rate annually, but we do take a look at them every time there is a change in the status quo,” he says. “If there's a labor cost change or change in electricity, heating or air conditioning, for example, we want to determine whether or not we should absorb the change or wait to change the rate at the next appropriate time.”

If you add technicians seasonally, you should consider the impact of that change.

“If you add technicians, it's possible your rate would go down a little,” says Greenlee. “Since facility costs stay roughly the same, more technicians allow you to spread the cost over more people. As a result, your actual cost may come down. However, you still might be able to charge your existing rate and give yourself a little cushion.”

In all these calculations, Greenlee works on the premise that you can never know too much about what you do.

“There are always things you overlook, especially if you're developing a shop rate for the first time,” he says. “For example, there may be things you can't see that someone else is paying for—taxes on the facility, for example. You may not see them as part of your fleet expenses because there is no monthly bill. Or you might buy a product that you don't use very often and pay for it over several years.”

Greenlee also makes it a point to watch for hidden costs.

“There might be facility maintenance issues—things you have to do, such as repair one of your garage doors or modify your facility in some way,” says Greenlee. “These types of costs don't happen every day, but being ready for them gives you a reserve fund to cover them. Otherwise, you'll have to absorb that cost another time. It's going to happen, so it's better to be prepared for it in advance. If you're new on the job, there should be budgets from prior years that you can look at or somebody more experienced you can talk to.”

Don't forget the supervisor

Today's fleet managers are more in tune with the business aspects of running a multi-million fleet operation. They understand the importance of keeping an eye on their costs, billings reimbursements, technician productivity, support staff and equipment service intervals.

Roger Thompson, vice president with consulting firm Bucher, Willis & Ratliff based in Kansas City, Mo., advises fleet professionals to consider how much time is spent with upper administration to support the fleet operation.

“Fleet managers need to know what portion of their costs is clerical staff needed to support fleet services and what portion is for parts,” he says, “But they also should take into account the administration costs for the shop, such as the fleet manager's time and supervisory personnel costs. It's important to use all overhead that supports the shop when calculating your shop rates.”

Admittedly, Thompson says, there's a lot of math involved.

“By doing this you come up with what a truly burdened labor rate, which only about 40 percent of the shops in the United States use,” he says. “The other shops are just using the mechanics' time, insurance and parts costs to calculate the shop rate, which probably isn't a true picture of what their shop rate actually is.”

According to Thompson, the reason many construction companies avoid the in-depth mathematical process necessary to determine what their actual shop rates are is because they're primary concern is doing what it takes to return the equipment to the jobsite.

“In contrast, municipalities that use a fully burdened labor rate are not profit-makers, he says. “Municipalities are break-even operations. They develop rates based on historic data.”

Developing and maintaining a good shop rate is a balancing act, says Thompson.

That balancing act, however, doesn't have to be on a high wire without a net—not if you stick to the basic principles of accounting in developing a shop rate that covers the obvious and the not-so-obvious costs of doing business.

The City of Everett, Wash., calculates its fully loaded labor rate based on total operating cost and total billable hours.
Total Wages and Benefits (110, 120, 160, 170, 180, 210)
1 Working Supervisor and 1 Electronic Tech., Office Support Staff $242,140
City Support Costs (910, 920, 940, 950, 960, 980) $39,304
Office Overhead Costs (260, 310, 470, 494, 620, 630) $10,560
Asset Replacement & Operating Costs (640 & 000) $550
Shop Costs, (350, 480) $4,589
Training (441, 442, 443, 444, 445, 446) $1,100
Professional Services (410) $ -
Leases (450, 660) $550
Dues/Memberships (491) $330
Subscriptions (492) $440
Total Operating Cost $299,563
Total Hours Available ( 2 x 2088 ) 4,176
Sick Hours Available ( 12 days x 8 hrs x 2 ) (110)
Vacation Hours Available (200)
Holiday Hours Available ( 11 days x 8 hrs x 2 ) (176)
Training, Meetings, Cleanup, Misc. - 3% (25)
Supervision (368)
Billable Hours 3,297
Total Operating Cost $299,563
Total Hours ÷3,297
Fully Loaded Labor Rate $90.86

Operating Expenses
This report, used in developing shop rates for the City of Everett, Wash., tracks the operating expenses for the motor vehicle department from 2004 to 2007. The most striking change is the spiraling cost of fuel.
Description 2004 Actual 2005 Actual 2006 Actual 2007 Actual 2008 Budget 2009 Budget
Salaries and Wages $1,499,909 $1,446,805 $1,467,772 $1,550,307 $1,621,755 $1,693,179
Overtime, Hazard Duty $9,555 $13,034 $8,093 $7,727 $23,764 $25,000
Day Laborer/Seasonal $22,260 $18,580   $34,591 $0 $0
Other Pay $2 $10 $30   $0 $0
Employee Benefits Taxes $473,396 $544,128 $506,398 $560,630 $555,759 $510,254
Uniforms & Clothing $6,969 $9,312 $9,049 $8,018 $9,000 $9,000
Office & Operating Supplies $27,362 $27,396 $25,677 $39,148 $20,000 $30,000
Fuel Purchased for Resale $1,014,043 $1,517,651 $1,833,592 $2,156,794 $2,600,000 $2,833,800
Items Purchased for Inventory $635,840 $683,984 $814,285 $1,138,768 $1,125,563 $1,252,076
Small Tools/Equipment $39,225 $27,246 $28,021 $24,123 $24,000 $35,000
Professional Services $53,589 $63,367 $71,483 $74,568 $100,000 $80,000
Misc. Travel/Training $10,413 $10,218 $13,183 $9,806 $10,000 $10,000
Operating Rental/Lease $9,520 $6,480 $3,945 $4,446 $5,000 $5,000
Utility Services $45,329 $47,846 $57,592 $58,802 $62,000 $65,000
Repairs & Maintenance $244,299 $239,877 $269,191 $363,543 $365,000 $395,000
Dues & Memberships $2,100 $2,072 $2,031 $2,260 $3,000 $3,200
Subscriptions $4,063 $4,254 $2,184 $4,016 $4,000 $4,000
General Services $2,939 $2,846 $8,439 $5,111 $5,000 $4,000
Improvements Not Bldg   $0        
Fixed Assets, Mach. & Equip.   $17,265        
Int Professional Services(1) $106,560 $150,312 $141,180 $139,872 $130,065 $157,797
Interfund Telecomm. $19,488 $9,312 $18,636 $16,560 $16,092 $16,949
Interfund Supplies   $9   $30    
Interfund I.T. $8,748 $10,752     $17,808 $26,220
Interfnd Operating Rent $111,024 $122,652 $133,800 $141,132 $147,191 $150,439
Interfund Insurance Services(2) $69,924 $65,436 $53,640 $43,032 $46,153 $48,786
Other Interfund Svc & Chgs       $270    
To Reserve Account (in 480) (in 480) $60,000 $30,000 $5,000 $5,000
Actual $4,416,557 $5,040,844 $5,528,221 $6,413,554 $6,896,150 $7,359,700

Motor Vehicle Department Costs
The City of Everett, Wash., provides the list of fees, shown here, to all its customers.
Fee detail Fee amount per…
Automotive shop rate $ 87.72 …vehicle/equipment
Radio shop rate $ 90.86 …communication repair work
Fuel surcharge $ 0.07 …gallon of fuel
Fuel surcharge (2) $ 0.15 …gallon of fuel
Hazardous waste fee, warranty, spec writing, L&I & Fuel tax refund 10.76% …work order billable hr.
Parts processing fee 28% …parts ordered
Pool car rental
(1)Staff Car $ 4.00 …hour, max of $32/day
Pick-up truck (S-10 type) $ 4.00 …hour, max of $32/day
Van, 11 passenger $ 12.00 …hour, max of $96/day
Accident and outside vendor repair fee 28% or …cost of requesting bids,
  flat $100, if cost is >$300.00 arranging repairs, etc.
Indirect fees paid by MVD for departments (actual cost is transferred to the appropriate department) …hazardous waste disposal for items received from department
    …license plate fees
    …identifix fees
Parking fee (2) $ 25.00 …month and vehicle
Overtime 1½ times the automotive or radio shop's rate  
Call Out/Back 3 hours minimum at the overtime rate  
Sick leave/L&I 5% ….work order billable hour
(1): for City Departments only (2): Non-City customers