Utility Fleet

Indirect vs. Direct Labor: How to Hit the Magic 70%

Fleets can improve operational efficiency by maximizing direct labor time and reducing indirect time. Many aim to have staff performing direct labor at least 70% of the time.

March 2014, Government Fleet - Feature

by Daryl Lubinsky

 At a Glance
Managing indirect and direct labor costs can improve operational efficiency and a fleet’s bottom line. Fleet managers use various methods to track and manage indirect costs:
  • Make sure the fill rate in the parts room is high to reduce the problem of technicians waiting for a part to be delivered
  • The closer you monitor employees’ sick leave patterns, the easier they are to fix
  • If counseling does not help the problem of indirect time abuse, disciplinary action might be necessary.

Tracking indirect and direct fleet costs has long been an area of focus for Aaron Alvarado, utilities fleet manager for the Public Utilities Department at the City of Tacoma, Wash. Managing those costs was also an area of focus for him at his previous position at the City of Tempe, Ariz.

“I’ve been here for about a year, and tracking those costs has been a battle cry,” said Alvarado, who manages about 1,200 vehicles and pieces of equipment including aerial bucket trucks, digger derricks, hydro excavators, mowers, backhoes, cars, and pickup trucks. “It’s always been an industry practice.”

Fleet managers interviewed for this article defined direct and indirect fleet costs in slightly different ways. They agree on direct labor, which Alvarado sums up as time on task, or any time spent doing a specific task or repair. The work order is open, and as soon as the technician clocks in to perform preventive maintenance (PM), for example, that counts as direct labor. The technician gets the work order, picks up the vehicle, and services it.

Alvarado defines indirect labor as everything else that is not “time on task,” such as training, sick time, vacation time, and breaks.

John Hunt, CFPP, fleet manager for the City of Portland, Ore., divides billable time into three major categories: direct time, paid leave time, and indirect time. Indirect time includes time spent in meetings, training programs, safety programs, work order processing, and invoice processing. Paid leave time includes vacations and sick leave. He said while they’re still a direct cost to the fleet operation, technicians are not directly billing for these activities.

The issue of monitoring and managing indirect labor costs is important because time is so important to fleet management, Hunt said. He quoted Benjamin Franklin, who said, “Lost time is never found again.” Every second a technician’s focus moves away from a direct labor task to non-productive time is time a fleet department can’t bill out, Hunt said, and the fleet during that non-productive time might not bring in the revenue needed to keep the lights on and pay for all indirect costs.

“The quote from Ben Franklin is so true in our world,” Hunt said. “You can’t ever get that lost time back. Tracking time within an organization can help improve operational efficiency and your bottom line.”

Alvarado and other government fleet managers agree with Hunt on the importance of tracking and managing indirect labor costs. However they define indirect labor, they mostly agree on a goal to have staff on task and performing direct labor at least 70% of the time, with 80% being the ultimate goal. Out of the 2,080 hours a year that a full-time technician can work, 70% of that, or 1,456 hours, to  80% of that, or 1,664 hours, should be direct hours.

Vehicle equivalency, or assigning class codes to vehicles, is an important aspect of meeting that 70% goal for Alvarado. He assigns class codes to each type of vehicle based on how long it takes to maintain the vehicle each year. A sedan takes about eight hours a year to maintain. An aerial bucket truck takes 120. Maintaining the Tacoma Public Utilities fleet takes about 30,000 hours per year on average. The maintenance times include PMs and inspections but do not include unscheduled breakdowns.

“I look at the [1,456] hours and how many techs I have,” Alvarado said. “Then I run out the 70%, and that’s how I calculate my staffing.”

Government fleet managers and a fleet consultant described for Government Fleet additional methods to track and manage indirect fleet costs.

Why Are Technicians Waiting?

Technicians waiting for parts to be delivered is a top indirect time issue. If that issue is taking a lot of technicians’ time, someone at the fleet organization should find out why.

The possibilities are numerous: parts staff doesn’t have the right parts in stock, the parts vendor is delayed, they don’t have anyone to go get the parts, or the shop is too small and the technician can’t work on anything else until he finishes repairing the vehicle he’s working on.

“Whatever the issue is, they need to find out why [the technician is] not working on a vehicle and get him working on a vehicle,” said James Wright, president and CEO of Fleet Counselor Services and associate director of the Government Fleet Management Alliance (GFMA).

When a technician is waiting for a part, Hunt calls that “non-productive time.” Figuring out a way to get the part in the technician’s hand is extremely important, and Hunt is proud his parts room staff consistently reports a fill rate of at least 80%. He explained that fill rate addresses how often the parts room has the part when the mechanic comes up to the counter.

COMMENTS

  1. 1. Bob Stanton [ March 31, 2014 @ 01:29PM ]

    If you truly want to get a handle on, and improve, your direct labor performance here's an easy and effective method that's worked timelessly for me.
    First, explain to your technicians what both indirect and direct labor are, how each is determined and most importantly, how both impact the fully burdened rate of your fleet and ultimately your bottom line performance.
    Second, ask for their help in improving their own individual direct vs indirect performance.
    Third, on a white board in a common area of the shop (s) such as a break room, post their indirect labor target and their actual individual indirect labor hours monthly in a ranking from lowest to highest.
    Technicians have a lot of pride and are naturally competitive; no one will want to see their name at the bottom of that board. Your techs will solve the problem by themselves. And when there are roadblocks affecting their numbers such as waiting for parts at the counter, they'll tell you.
    The only caveat is to assure each individual's target is attainable. Having a blanket across the board percentage isn't realistic. A technician with 20 years of service will have more indirect available than a tech with only 2 years. Make sure each target reflects accurately.
    Get your techs on board and they will help get you where you need to be.

  2. 2. Steve Kibler [ April 04, 2014 @ 09:43AM ]

    Daryl, Aaron, John, Jim and Bob are all 100% correct. Managing direct and indirect labor improves the Shop's bottom line more than any other action. Educate the technicians, the customers and administrative staff what the direct labor goal is, what the manager sees as the expectation and what happens when that expectation is not met (uncomfortable questions) and always follow through with counseling and if necessary - discipline. To reinforce this performance and make allies of the technicians, always involve them in work-flow improvement strategies and show them your support by providing the right resources needed on the shop floor.

  3. 3. Mike Webster [ April 16, 2014 @ 01:23PM ]

    Timely article for me since I was just updating a presentation I will be giving to our new Executive Director in which one of the slides addresses direct vs. indirect time. I do not believe in counting paid leave as part of the indirect time towards the 70% though. While it is indirect technically, it is a benefit given by the agency and encouraged to be used (vacation) so there isn't much that can be done. Sick time abuse is a different story of course. The best way to improve performance is educating the staff on why it is important and make sure it is a primary part of your monthly KPI. I agree wholeheartedly with Bob that posting the numbers for the shop to see is a great motivator. I have yet to see a mechanic shop that isn't competitive in nature.

  4. 4. Frank Castro [ April 21, 2014 @ 07:15AM ]

    A very good reminder of the importance of Direct vs Indirect performance. Over my career I've found it interesting that "exceptions" are granted for certain types of "indirect" time for various reasons by some fleet administrators. Seems to me the books can be cooked in any number of ways to make the numbers look better. I've seen public sector direct time performance at 95%. With the generous leave time, sick leave and mandatory training provided by most public agencies, my immediate reaction when I see this is that something has been adjusted which really takes away from the legitimacy of this metric. While vacation time, training time, etc is earned compensation it still contributes to the overall "total" indirect time figure and while there's not much that can be done about it, to not recognize it or "except" it provides a distorted view of productivity performance and depending on how the figure is applied can distort staffing requirements if using an adjusted indirect time figure in a VEU analysis.
    I agree that educating shop staff and supervisors is key. I have posted direct time performance in the shop in my career. The 80/20 rule applies. 80% of staff didn't have a problem with the posted information while the remainder didn't like it. 3 guesses if the 20% were the low or high performers.

  5. 5. john mc corkhill [ April 22, 2014 @ 11:50AM ]

    The topic of tracking labor is one of those in our industry that never loses relevance. As I approach the end of my public service fleet career I'm gleaning my office of old publications I've accumulated over the years. I was recently working on a stack of old California Fleet News newsletters with the first issue carrying a date of January/February 1983 and what is one of the topics from the issue: tracking our shop labor!

    I've tracked shop labor throughout my fleet career and have always preached on the necessity for doing it. The departments I have managed have always been unique because each has been the only internal agency in the city that bills another agency in the city. The process of billing has always increased our accountability meaning we better know where our technicians are spending their time and that the direct labor portion of it better be realistic and not padded. And as Mr. Stanton has stated, one size doesn't fit all. The amount of indirect time will always be impacted by an employee's years of service since longer term employees generally receive more vacation time; do you reside in a union state or right-to-work state; are you in the Rustbelt or the Sunbelt; etc.

 

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