Auto Shop Labor Rates: Explained
There's a lot of confusion regarding how exactly the "labor rate" or "shop rate" works in a typical automotive repair shop.
Labor Rate(definition): A dollar amount that the customer pays the shop for labor costs incurred while repairing the vehicle. The rate is billed per hour of time. So let's say the labor rate for a shop is $100 per hour. That means that if the repair is quoted as 1 hour, you'll pay $100 for labor plus any parts costs, shop fees, etc.
In the automotive labor cost world, you don't always get exactly what you think you're paying for. Let's say that you need to have the transmission repaired in your car. The auto repair shop takes a look at it, gives you a call, and says that the labor cost will be $800 dollars (8hrs x 100/hr) plus parts. But where did the 8 hours number come from?
Almost every shop uses a large standardized database, such as 'AllData', that provides labor times. The reason that shops need a standardized list is because all cars are not created equal. Removing a radiator on one car might be a snap, on another car it might take hours. The database provides a labor time that they feel should be a fair compromise for the customer and the mechanic. A skilled mechanic should usually be able to get the repair done in the amount of alloted time without overcharging the customer for labor. Some repairs are not covered by the labor database. In that case, it's up to the shop to provide a fair estimate.
So back to the transmission problem for which you were quoted 8 hours labor. The mechanic works on the car, but ends up finishing the repair in 6 hours, instead of 8. And then you still get charged the full 8 hours of labor cost. What gives? This is what's called the flat rate system. The mechanic gets paid what was quoted, not how much time it actually took to repair.
Flat rate time is broken down into 1/10ths of an hour, which could also be looked at as 6 minute intervals (1/10 of 60 minutes = 6 minutes). Not all repairs are even chunks of time like 1 hour, some repairs fall in between. For example, an oil change would be something like 0.4 labor hours. So your mechanic is getting paid, and you are being charged, for 24 minutes of labor to change your oil.
And that all ties in with the way that mechanics actually get paid. It's an hourly job in the sense that they get paid for being there, but only at a base rate, similar to a waitress. If mechanics want to make any more money above the base rate, they have to beat the clock. If a mechanic can finish a job that pays 8 labor hours in 6 hours of time, the mechanic gets paid for 8 hours. So on a good day a mechanic can "book" 12-16 hours of flat rate pay, when he was only in the shop for 8 hours. Then again, if it's a slow day at the shop, and the mechanic only makes 4 hours, he goes home hungry. So it does go both ways.
This system is good in that it gives incentives for the mechanic to make themselves and the shop as much money as they can. However, it can also promote greed. Some mechanics will sell expensive repairs that don't need to be performed. Others will rush through and do half-ass repairs to increase their paychecks. Just like any other incentive based job that isn't directly supervised, there's always going to be a few bad apples.
That being said, the flat rate labor system still seems to be the fairest compromise for the shop, the mechanic, and the customer. The customer knows beforehand exactly how much the repairs will cost, the mechanic is given an incentive to work quickly and efficiently, and the shop makes some money as well. Now we just need to figure out why those labor rates keep going up every year, even though the mechanics aren't getting raises........