Effective Labor Rate Calculator
Measure the actual revenue generated per billed hour of labor.
Analysis Results
What is the Effective Labor Rate (ELR)?
The Effective Labor Rate (ELR) is a critical Key Performance Indicator (KPI) for service-based businesses, particularly in the automotive repair and HVAC industries. While your "posted" shop rate might be $120 per hour, your ELR tells you what you are actually collecting for every hour of work produced.
Discounts, menu pricing, comeback repairs (re-work), and unbilled time all pull your ELR lower than your posted door rate. Monitoring this metric helps shop owners identify leakage in their service department's profitability.
How to Calculate Effective Labor Rate
The formula for ELR is straightforward:
Example Calculation
Imagine an automotive repair shop with a posted door rate of $150/hour. During one week:
- Total Labor Revenue collected: $6,000
- Total Billable Hours worked: 50 hours
ELR = $6,000 / 50 = $120.00 per hour.
In this scenario, the shop is losing $30 per hour due to factors like excessive discounting or flat-rate jobs that took longer than expected.
Why ELR Matters for Profitability
| Metric | Impact on ELR | Action Item |
|---|---|---|
| Discounts | Decreases ELR | Limit "shop-wide" percentage discounts. |
| Menu Pricing | Varies | Ensure flat-rate times match actual effort. |
| Comebacks | Decreases ELR | Improve quality control to reduce unbilled rework. |
| Tech Efficiency | Increases ELR | Train techs to produce more hours in less time. |
Labor Gross Profit Margin
If you know your technician's average hourly pay, you can calculate your Labor Gross Profit Margin. A healthy margin in the service industry typically falls between 65% and 75%. If your ELR is too close to your technician's pay rate, you won't have enough remaining revenue to cover overhead expenses like rent, utilities, and service advisors.