Stop Subsidizing: Make Internal Work Profitable
A Blueprint for Maximizing Dealership Internal Effective Labor Rate
The most effective solution for maximizing a dealership’s Internal Effective Labor Rate (ELR) is to require the service department to implement a competitive yet profitable internal labor rate that accurately reflects the true cost of labor, materials, and overhead, thereby preventing the artificial suppression of service department’s financial performance. Subsidizing other departments, such as used car reconditioning, with deeply discounted or free labor directly drains the Blended ELR and hinders the true service department profitability.
Key Takeaways
1. Eliminate internal subsidies by implementing a competitive, cost-plus labor rate that ensures the service department functions as a distinct profit center rather than a cost center for used car reconditioning.
2. Improve financial accuracy by requiring every minute of internal labor to be captured through mandatory technician clocking and automated digital repair order systems to prevent “time shaving.”
3. Drive dealership accountability by standardizing internal effective labor rates across all locations and reviewing gross profit metrics regularly with both service and used car management.
The Cost of Free Labor: Why Internal ELR Matters
The Effective Labor Rate (ELR) is comprised of three key segments: Customer, Warranty, and Internal. While Customer and Warranty ELR frequently capture management’s attention, the Internal ELR—labor performed on the dealership’s own inventory (used car recon, loaners, body shop work, etc.)—is often treated as an inter-departmental favor. This mentality is financially devastating as charging a deeply discounted rate for internal work will cause your overall blended ELR to suffer. This hidden expense, often manifesting as low used car reconditioning labor rate charges, means the service department is performing billable hours for little to no revenue. This is like leaving a hose running directly into the used car department’s gas tank while the service department is charged for the gasoline.
Treating Service as a Business Partner
Our philosophy addresses this by enforcing a fundamental concept: the service department must be treated as a financially distinct entity. It’s a profit center, not a cost center for other departments. This perspective shift is crucial for franchise auto dealer effective labor rate optimization.
1. Implement a Competitive, Profitable Internal Rate
The core solution is to replace the deeply discounted or free internal labor rate with a figure that is both competitive (allowing the used car department to remain profitable) and profitable (allowing the service department to cover its true costs and contribute to absorption).
- Cost-Plus Pricing: The rate must be calculated based on the service department’s actual cost of labor, including technician wages, benefits, and a fair allocation of overhead.
- Strategic Discounting: While a discount from the posted retail rate is often necessary for internal work, it must be controlled. We recommend establishing a fixed, non-negotiable internal rate that still contributes a healthy margin, rather than the arbitrary, low rates often seen. This prevents the service department from artificially suppressing financial performance.
“Treating internal work as an inter-departmental favor is like leaving a hose running directly into the used car department’s gas tank while the service department pays for the fuel.”
2. Process Discipline in Internal Billing
Even with a proper rate, discipline in execution is vital. The temptation for under-billing and “time shaving” remains high when dealing with internal work, often to make other departments look better.
- Mandatory Clocking and Billing: Every minute of internal labor must be clocked and billed accurately to the respective department’s repair order. There should be zero tolerance for “free” or un-clocked work.
- Digital Documentation: Implementing digital repair order systems that automatically calculate and post the established internal rate ensures that the correct charge is always applied, eliminating manual errors and favoritism. This guarantees that all work—including complex used vehicle preparation labor costs—are accurately captured.
3. Inter-Departmental P&L Accountability
For multi-location auto dealers, it is essential to standardize the Internal ELR and rigorously benchmark this metric across all stores.
- Separate P&L: The service department’s financial statements (P&L) should clearly show the revenue generated from internal labor. If one store’s Internal ELR is consistently lower than the others, it signals that the department is subsidizing other areas, skewing the overall dealer group service department profitability metrics.
- Transparency and Review: Leadership must review internal labor gross profit with both the Service Manager and the Used Car Manager. Making the true cost of subsidies transparent creates accountability and drives a collaborative effort to maintain a competitive used car business without bankrupting the service department.
Optimizing the Internal ELR is about financial integrity. It ensures that the service department is credited for the value it delivers, leading to more accurate financial reporting and maximizing the dealership’s overall bottom line.
Driving Profitability Through Internal Accountability
To maximize a dealership’s overall financial health, the service department must transition from a subsidized cost center to a high-performing profit center. By establishing a competitive yet profitable internal labor rate, enforcing rigorous billing discipline, and fostering inter-departmental P&L accountability, dealers can eliminate the “hidden drain” on their Blended ELR. Ultimately, treating the service department as a distinct business partner ensures that every billable hour is accurately valued, providing a transparent and sustainable blueprint for long-term dealership profitability.
Disclaimer: This article provides general industry insights and is for informational purposes only. It should not be construed as specific financial advice, accounting guidance, or a substitute for consulting with a qualified CPA or business advisor regarding your dealership’s unique financial situation.
Questions?
With over 45 years of experience in automotive, RV, and marine fixed operations, Brett Coker, CMC, has held nearly every position in a dealership, including Service Advisor, Service Manager, F&I Manager, and General Manager for import and domestic franchises. Widely known as a fixed operations expert, Brett consults with Brady Ware Dealership Advisors and emphasizes a strong focus on maximizing revenue per billed hour and implementing proven processes that help dealers and their employees build profitable, sustainable service and parts departments.