9/1/2001
Interruptions To Your Day Compromise Earnings
By Michael Green
By now everyone has heard about the electric and natural gas shortage we have been experiencing here on the West Coast. Our power company, Pacific Gas and Electric, sold off all its power plants, and the company has not built any new plants to keep up with the rapid growth of California, particularly in the Bay Area.
Last summer as the demands for power peaked, our power company started what it calls rolling blackouts. This is where the power is shut off in certain areas for two to six hours at a time. At times we would be alerted prior to the shutdown – other times we wouldn’t. Of course, I don’t have to tell you what kind of problems develop when you’re right in the middle of the machining process and the power goes out, or how sensitive machinery is to a power surge.
Rumors always fly about how the large corporations do these kinds of things to increase their rates. This may be true, but I think that in some cases it’s also just poor management and a lack of communication – and, naturally, the consumer is usually the one who ends up paying for these mistakes.
Our business has felt the phenomenal effects of big business profits and mistakes. Of course, being a small business we are not eligible for any federal or state aid to help bail us out if we should go broke. We have to raise our prices and cut the overhead in hopes to survive every time one of these situations arises. The bright side of these challenges, though, with higher gasoline and power costs, is that this snowballs into a higher cost of living.
Since almost every consumer product is dependent on power and transportation, it is generally only days before just about everything is hit with a price increase. As the overall cost of living increases, the average family or small business may not be in such a hurry to run out and buy a new car when the old one starts to give them trouble. This should equate to more work at our front doors – that is, of course, if we can still afford to be in business when this happens.
Just like the consumer products, our shop supplies, rebuilding parts and just about everything else related to our overhead is likely to increase. With rumors floating around that our power rates here in California could double, our power bill could potentially jump from about $1,200 per month to $2,400 per month. As this starts to take effect, I can easily see our overhead cost rising 30% over the next year.
As overhead expenses rise, shop owners who don’t pay attention may find themselves in big trouble. One of the biggest problems in our industry is quoting prices on the phone before ever seeing the job. This may have worked OK in the past, but today and in the future, billing out the correct man-hours involved in doing the work will be the only way to ensure a fair profit for the shop.
A good example of what I’m talking about is the man-hours involved in cleaning, preparing, grinding and polishing a crankshaft. Many of you machine shop owners know you can buy a reground crankshaft exchange for around $45. I’m sure that if you stop and think about it, you would realize that it is probably a two to 2-1/2 man-hour job from start to finish.
In reality, a reground crank should cost you $187 instead of $45, based on a shop rate of $75 per hour. Of course doing a large volume of production runs could make grinding profitable at $45 each, but again, man-hours and overhead still would not produce the proper profit ratio.
The one thing that needs to be incorporated into any machine shop labor survey is not only a labor charge to do a particular job, but also the man-hours required from start to finish. The alert shop owner could then see how much time it really takes to do the job, and he then can divide the amount he charged into the hours spent to do the work. This would allow the shop owner to really see how much an hour he is billing. From past experiences, I have rarely made my hourly rate based against a quote per job.
I have also found that when I quote man-hours to do a particular type of job, the customer automatically realizes what he is getting for his money. He understands the amount of time it takes and in a lot of cases realizes what kind of bang for his buck he is really getting. I think the customer is not as leery on a price based on hours as just quoting a price out of what appears to be thin air.
We do have two shop labor rates that we charge depending on the job. If we can do the job with one of our lesser-paid employees, such as flywheels, manifold surfacing, etc., we charge $60 per hour. This keeps us somewhat competitive on pricing with other shops for the simpler jobs. Our other rate is $90 per hour for the more complicated jobs such as boring, resizing rods, valve jobs, etc.
Half of our customers come to our front door because they are trying to save money by doing their own vehicle repair. I know a lot of them would rather buy a new car if they had the money or at least pay someone else to do the work required.
I think as money gets tighter, a lot more of these types of customers will be showing up and this will relate to a lot more handholding as you try to help them through their projects. Again, this sometimes relates to unbillable time that never gets put into the original job quote.
Over the years, I have found that because of handholding or particular problems that pop up during the day, our average billable hours per day is about six hours per employee. Although this is not great, it is better than that faced by some of the smaller shop owners I have talked to. In the smaller two-man shops, the shop owner ends up having to spend more hours and work late to complete his work.
Most of my day is spent problem solving, locating parts and dealing with the customers. This makes many of my hours per day non-productive and I end up sometimes working late just to get caught up. This problem is always compounded whenever I have to leave the shop to meet with our accounts. This means that the employees then have to deal with the phones and the walk-in customers. This naturally reduces our employees’ billing time.
Depending on what type of job they were on and however long they were with the customer, it can take them up to 30 minutes to get back to the job they were working on. This time loss is hard to bill to the job, but it has to be considered as part of the overhead and figured into your hourly rate or per-job price.
Tracking your man-hours and establishing an hourly rate also makes it a lot easier to raise prices as your overhead increases. Instead of having to refigure and calculate your per job price, you simply increase your hourly rate by $2 or $3 per hour. This is, of course, after you have established the man-hours involved with the types of jobs you are doing.
Since each shop has different procedures and uses different types of equipment, each shop will have a somewhat different hourly rate. The Engine Rebuilders Association (AERA) publishes an hourly rate guide, so if you are interested, please contact them (847-541-6550 or www.area.org). But remember the hourly rate guide does not take into account the many interruptions you may encounter every day. So if you do consider a flat rate billing system keep that in mind.