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Trucking Toolbox: Calculating an Internal Labor Rate for Maintenance Shops

March 21, 2024

In our ongoing exploration of transportation maintenance operations, we delve into the critical role of benchmarking maintenance costs and the indispensable task of establishing an accurate internal labor rate. Shop leaders face daily decisions on whether to conduct work in company shops, route it back to their own facilities, or outsource repairs. The ability to make informed choices hinges on accurately calculated labor rates.

Some companies rely solely on labor costs, encompassing mechanic pay and benefits. However, this approach may lead them to move tractors over long distances for in-house repairs. The disparity between this simplified labor rate and a fully burdened one can amount to $25 – $50 per hour, significantly impacting decisions on addressing equipment repair needs. It’s essential to consider additional costs related to facility maintenance, shop supplies, utilities, and management overhead when calculating your labor rate.

Calculating an internal labor rate for a truck and trailer maintenance shop involves determining the cost of labor per hour incurred by the shop to perform maintenance and repair services – essentially a fully burdened labor rate.

Given that carriers often have different ways of tracking expenses, here’s a practical approach for capturing those costs:

  1. Determine Direct Labor and Direct Compensation Costs

Begin by gathering all labor-related expenses incurred by the maintenance shop over a specific period, preferably a year. This includes wages, bonuses, and salaries. Combining these values with the annual PTO, payroll taxes, work comp, and any other labor-related expenses can add 20-30% to the direct labor expense depending on the state or province. From a reporting basis, it’s also important to capture all labor expenses related to maintaining shop equipment and facilities, not just turning wrenches. For example, hours spent cleaning a bay after fixing a piece of equipment should be assigned to that piece of equipment and become direct hours.

  1. Calculate Total Labor Hours

Determine the total number of labor hours worked by all maintenance technicians during the same period. This includes regular work hours, overtime hours, and any other paid hours spent on maintenance and repair tasks.

  1. Divide Total Labor Costs by Total Labor Hours

The internal labor rate divides ALL maintenance-related activities by all labor hours spent working on equipment (i.e., direct percent). Divide the total labor costs by the total labor hours to calculate the cost of labor per hour, providing the internal labor rate for the maintenance shop.

For example, if the total labor costs for the month are $65,000 and the total labor hours worked by technicians are 1,666 hours, the internal labor rate would be $39 per hour.

  1. Adjust for Shop Overhead

Calculating an accurate internal labor rate requires an adjustment to account for all the overhead costs related to running a shop – such as facility maintenance, utilities, equipment depreciation, and administrative salaries – if these costs are not already included in the labor costs (e.g., service writers, maintenance management). Consider including some indirect hours such as training if deemed critical to the operation. Exclude activities like shop meetings.

This additional expense should then be applied to the internal labor rate using “total labor hours” as described above. It is very common, depending on jurisdiction, to have a fully burdened internal labor rate above $85 per hour.

KSMTA does not recommend offsetting the internal labor rate with outside work, such as profit generated from working on owner-operator equipment and third-party carrier equipment. These two operations should be kept separate in ledger recordings.

  1. Review and Update Regularly

Regularly review and update the internal labor rate to ensure accuracy and alignment with changes in labor costs, productivity levels, and business conditions (e.g., mechanic increases, additional technicians).

The strategies outlined above offer valuable suggestions for establishing an accurate and effective shop labor rate. This ensures informed decisions regarding maintenance repairs. By implementing these approaches, maintenance facilities can maintain transparency and reliability in their operations. A precise labor rate aids in budgeting, resource allocation, benchmarking and maintaining competitiveness. As maintenance needs evolve, refining these strategies remains essential for sustaining excellence in service delivery.

To learn more or discuss any of the ideas shared above, please contact a KSMTA advisor or complete this form.

Bryan Burningham Maintenance Consultant, KSM Transport Advisors & KSMTA Canada

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