Most small shops set their labor rate by looking at what the shop down the road charges. That tells you what customers will accept. It doesn’t tell you whether that rate keeps your doors open. Start from your own costs, then check against the market.
1. Add up what the shop costs each month
Count everything you have to pay whether or not a car comes in.
- Technician pay, including your own if you work on cars. Add payroll costs on top of wages: payroll taxes, workers’ comp and any benefits. As a rule of thumb, 10–15% on top of wages; your accountant can give you the real figure.
- Rent and utilities.
- Insurance: garage liability, property, the vehicle if you’re mobile.
- Tools and equipment: payments, replacements, scan tool subscriptions.
- Software, phone, card processing, advertising, and everything else that shows up on the bank statement every month.
2. Work out your billable hours, honestly
A technician is paid for about 173 hours a month (40 hours × 52 weeks ÷ 12). They don’t bill all of them. Diagnosis you can’t charge for, comebacks, waiting on parts, cleanup and paperwork all eat into it. As a rule of thumb, many small shops bill 60–80% of paid hours. If you haven’t measured yours, assume 70% and measure it (see step 5).
3. A worked example: a two-bay shop
The owner works one bay and pays one technician for the other.
| Monthly cost | Amount |
|---|---|
| Technician: $25/h × 173 h | $4,325 |
| Payroll costs on the technician, about 12% | $519 |
| Owner’s own pay | $5,000 |
| Rent | $3,000 |
| Insurance | $600 |
| Utilities | $400 |
| Tools and equipment | $500 |
| Everything else (software, phone, advertising, fees) | $500 |
| Total | $14,844 |
Billable hours: 2 people × 173 hours × 70% = 242 hours a month.
Cost per billable hour: $14,844 ÷ 242 = $61.34. Charge less than that, and every hour of labor loses money before you count a single part.
4. Add your margin
Margin is the share of the rate that’s profit. To earn a given margin, divide your cost per hour by (1 − margin):
| Margin you want | Labor rate |
|---|---|
| 25% | $61.34 ÷ 0.75 = $81.79 |
| 30% | $61.34 ÷ 0.70 = $87.63 |
| 35% | $61.34 ÷ 0.65 = $94.37 |
Don’t confuse margin with markup. A 30% markup on $61.34 is $79.74, which is only a 23% margin. The calculation above is margin.
This example shop would set its rate somewhere around $88 an hour, then check it against the market. Your parts markup brings in money too, but plenty of jobs are mostly labor, so make the labor rate stand on its own.
5. Check it against the market, then against reality
Look up what independent shops near you charge (not dealers, who usually charge more). If your number is well above theirs, look hard at your costs and your billable hours before you price yourself out. If it’s well below, you’ve probably been undercharging.
Then track your effective labor rate: the labor you actually charged in a month, divided by the labor hours on your invoices. If the example shop invoiced 240 labor hours and charged $19,800 for them, its effective rate was $82.50, below its $88 posted rate. That gap is discounts, free diagnosis and jobs where you charged less time than the book called for. It’s often where the money goes.
Track your billable share too: the labor hours you invoiced, divided by the hours your technicians were paid. The example assumed 70%. If yours is lower, your real cost per billable hour is higher than the calculation above.
Put the rate to work
Once you’ve picked a rate, save it as your default labor rate in CROW. Every new invoice starts with it, so you don’t type it again or quote the wrong number. See invoicing in CROW.