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.”
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.
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.
“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.”
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.
