Maintenance

Inside the Labor Rate Debate

March 2015, Government Fleet - Feature

by Thi Dao - Also by this author

One theory for calculating labor rateis to separate rates by vehicle type to get a more accurate comparison. Photo via iStock
One theory for calculating labor rateis to separate rates by vehicle type to get a more accurate comparison. Photo via iStock

Have you had the great labor rate debate?

Fleet managers use labor rates to see how competitive their fleet operation is in comparison with other agencies, dealerships, and private shops. Labor rates can range between $45 an hour to $125 an hour — and those are just ballpark numbers.

At a Glance

Labor rates can be influenced by numerous factors, including:

  • Whether a fleet charges administrative fees
  • What the wage rate is at the public agency
  • Whether shops are unionized
  • City-wide policies
  • Vehicle mix
  • Number of repair facilities
  • Local environmental regulations.

So if a labor rate in one fleet is half that of another fleet, does that mean the first shop is twice as efficient as the second shop?

Unfortunately, it’s not quite so simple.

It’s all determined by what’s included in the labor rate and what a shop considers a “fully burdened” rate. This term usually means the rate includes absolutely everything, but not everyone uses it this way, and not everyone calculates their rates this way. Additionally, accounting varies across public agencies, which can affect what a fleet charges its customers. For example, fleets may be charged for things that can’t be helped and that vary among agencies — such as fees from other departments, including IT, Human Resources, the city manager’s office, and accounting. To recoup costs, they must pass these along to their customers. Of course, comparing labor rates with a neighboring fleet that doesn’t have to pay these fees, or pays more or less, doesn’t make for a fair comparison.

Fleets are constantly asked to prove they are competitive, but considering the variables, comparing labor rates is very difficult. So what’s the solution?

There are a few options out there.

It is possible to compare a labor rate, but fleet managers doing so should proceed with caution.

Rates Vary

The way labor rates are calculated can vary significantly. This can depend on the accounting structure of the public agency, or numerous other factors that are out of the fleet manager’s control. Steve Riley, automotive director for the City of Coral Gables, Fla., said this can include wage rates; whether employees are unionized; city-wide holiday, vacation, and sick day policies; vehicle mix; number of repair facilities; shift work; and local environmental regulations.

Riley has researched the topic extensively and has included it in his “Public Fleet Self-Assessment Checklist.”

Wage differences often depend on cost of living, but not always, Riley said. A unionized shop can have higher wage and benefit rates. Those performing second- or third-shift duties may be paid a higher wage rate, bumping up the labor rate.

“In the surveys I’ve conducted and people I’ve talked to, wage rates can be plus or minus 20% within the same county,” Riley said.

It’s not just employee wages that can increase labor rates. A public agency may provide more vacations, holidays, sick days, floating holidays, or administrative days off than other agencies, reducing billable hours and increasing the rate. More maintenance facilities mean more administrative staff and supervisors, and if they don’t directly bill their time, fleets have to recoup that cost with a higher rate. Fleets may also face local or state environmental regulations that can increase their operating costs.

Richard Schonder, fleet analysis supervisor for the City of Tampa, Fla., said the city fleet charges $80 per hour for technicians and $60 for service attendants who mostly perform preventive maintenance. What does this rate include? Almost everything, Schonder said. That means: overtime, training, fleet management overhead, phones, uniforms, laundry services, tool allowances, and more.

What it doesn’t include are three cost centers: fuel, parts, and sublets, which are outsourced jobs such as body and glass repairs. These cost centers have their own markups to cover the cost of managing these services. And more importantly, the labor rate doesn’t include a $1.5 million cost allocation that the city bills the fleet department, covering the cost of payroll, senior staff, purchasing, facilities maintenance, air conditioning and heating, and various transactions. Schonder takes this sum and divides it among the 12 customer departments based on their use of fleet services — so Solid Waste, which fleet technicians spend plenty of time on because vehicles are older, pays about a third of that cost.

Why do it this way? Schonder said that $1.5 million cost is an estimated cost passed down to fleet from the city, and it’s paying for senior staff that other agencies may not be paying directly. So he believes adding the $1.5 million to the labor rate doesn’t make it more accurate. If this $1.5 million were added to the labor rate, Schonder said it would probably bump it up to more than $100 per hour.

In comparison, San Diego County, ­Calif., proposed a fully burdened labor rate of $115.10 for the 2015-2016 fiscal year, a 1.9% increase from its current rate. The fleet also has three maintenance cost centers: parts, fuel, and commercial repairs (similar to Tampa’s sublets), all with separate markups. However, the labor rate includes everything else, including department and division overhead as well as county overhead such as executive management, Human Resources, payroll, IT, etc., said Sharyl Blackington, fleet manager for the county.

Labor Rates Fluctuate

The labor rate is usually calculated annually, with adjustments made to account for raises, additional staff, additional services, etc. Mostly, the number goes up, but it can go down as well.

For example, Schonder lowered Tampa’s labor rates for FY-2015 (which started in October), from $88 and $68 the prior year due to an unexpected increase in billed hours.

Because of the age of the Solid Waste fleet, fleet was given permission to hire three technicians.

“By mid-year they were on board, and they were turning hours like any employee,” Schonder explained. “So we turned more hours than I’d projected because of the three new hires.”

He had calculated the labor rate based on 1,550 hours per technician per year, based on the number of technicians the city employed at the time. The new labor rate ($8 less per hour) reflects the additional time from the three new hires, he said.

San Diego County also reduced its labor rates a few years ago. In FY-2009-2010, the fleet reduced its labor rate by 3.4% due to a reduction in budget because of the recession.

“We had to figure out where we could take cuts,” Blackington said. “We had to defer some of our facility maintenance costs in order to offset that decrease in labor rate.”

Is it a Valid Rate?

Not only can labor rates include different factors, but they can also be — well, made up. At Riley’s previous position as a fleet manager in Georgia, the fleet faced an internal audit that compared his city’s technician labor rate to those of other public entities in the area. Riley found that auditors didn’t quite care how other agencies calculated their rates. In fact, some of the fleets the auditors contacted later admitted to making up their labor rates since they didn’t charge their customers, Riley said.

For Comparison Purposes

While the factors affecting labor rates seem infinite, they’re not impossible to compare — comparison just requires caution.

“You can do it, but you need to know what the variables are in order to be able to compare, and be able to do a rational comparison to see if you’re actually operating in a boundary people find acceptable,” Riley said.

When comparing rates, make sure indirect costs, such as IT, Human Resources, safety staff, and facilities maintenance, are either included or excluded. Some fleets have administrative fees to cover overhead costs and work closing fees that can lower their labor rate. Insourcing maintenance work from other agencies can lower rates. Activity-based costing can skew the number, which you don’t know about unless you ask the percent allocations for each individual position, Riley said.

Riley also said when comparing with dealerships and repair facilities, to be aware that many operate on a flat rate when most public entities don’t do so.

Jim Wright, CEO of Fleet Counselor Services, agreed that labor rate comparisons are difficult since not everyone uses a fully burdened rate. Fleet managers need to document how they calculate their rates or better yet, use an accepted industry tool or calculator to develop rates and markups, he said.

Wright believes that to get a true comparison, fleets need to separate their labor rates based on the type of vehicle they’re working on — technicians performing simple work on light-duty vehicles shouldn’t be charging the same rate as technicians performing more skilled work on specialized equipment. While this may provide the most accurate numbers, it’s difficult to ­accomplish ­because it can get confusing fast.

Schonder at Tampa said he gets questions about his two labor rates. “Some of our users go, ‘Wait a minute. I’ve got this complicated bulldozer and you’re charging $80 to fix it, but the guy over there is putting decals on my new pickup truck and he’s charging me $80.’ I say, ‘Well, if you would like to sit down with me and calculate a rate for every little task we do, I’d appreciate the help,’ ” Schonder said. With a short staff, simplicity just works better.

He tries to compare labor rates with neighboring fleets that belong to the Florida Association of Governmental Fleet Administrators (FLAGFA). However, he said it’s hard because people use the “fully burdened” term loosely. Maybe they don’t include the tool allowance in their labor rates, or they add the electric bill to the administrative fee. He also has that separate cost allocation, which has to be considered when comparing numbers with others.

But Schonder believes comparing rates is a good way to see if you’re competitive. “Keep asking people,” he advised. “What all is in your labor rate?”

San Diego compares its labor rate annually with the advertised labor rates of local light-duty and heavy-duty repair service providers to ensure it stays competitive within the local market.

“The county provides a myriad of repair services to an exceptionally diverse field of equipment and vehicles spread out over a very large area, and by creating one labor rate based on both light and heavy vehicles, we can accommodate any type of repair at the right price without having to tailor each unit to a specific rate,” Blackington said.

San Diego does utilize a slightly higher labor rate when mobile maintenance services are needed, but the price is offset by the cost savings of large vehicle towing bills, unit downtime, and employee time for pickup and delivery to a service garage, she said.

“By comparing our labor rates with our local area service providers, we can ensure that we keep a competitive mindset in how we do business,” Blackington added. “I would highly recommend it be done once a year, so you can talk to elected officials and whoever might ask, ‘Are we competitive?’ We should be prepared for that.”

Rate comparisons can be flawed because of the myriad factors that can affect the labor rate, including factors out of the control of fleet management. So if you’re asked prove you’re competitive, and you’ve got to provide a comparison, remember to check the variables and proceed with caution.

COMMENTS

  1. 1. Jim Chiles [ March 23, 2015 @ 11:45AM ]

    It is very important to remember that when comparing a fully burdened labor rate for a public full service fleet operation against a labor rate for a private repair facility that the cradle to grave operational costs such as specification development, rental rate development, internal billing and costs associated with surplusing equipment (just to name a few) are more than likely not part of the private shops labor rate.

  2. 2. Allen Mitchell [ March 27, 2015 @ 02:16PM ]

    I am a proponent of having a fully-burdened labor rate. Recovering all costs of one's operation is a standard for building credibility and support for your fleet's necessary costs. The fully-burdened rate must be reviewed and updated annually to be correct.

    It is necessary to review the rates of comparable juris dictions and comparable dealer fleets to demonstrate competitiveness in one's operating environment. If the labor rate is competitive, it will be equal or less than the competitors. Once you have that data, you can prove you know what the local market will support.

    If your labor rate is not competitive, you must determine what your other rates (e.g. Rental rates, fuel rates, supply mark-ups) must recover so that you do recover all of your costs in some way. When that happens, you will have a self-sustaining operation and will not need to rely on the political powers to keep your operation whole.

 

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