Flat Rate Versus Hourly: Which Is Right for Your Truck Dealership?

Every heavy truck dealership must determine how it wants to approach labor costs in its Service Department. Flat rate and hourly pay are the two most popular options, but there's no clear-cut answer about which one is right for your dealership. Each comes with its own pros and cons. 

Flat Rate Rewards Efficiency but Risks Quality Issues

With a flat rate, Technicians get paid a set amount to complete a particular job. Here’s how it works: If a dealer estimates a repair at three hours but the Technician finishes in two, dealers still pay them — and still bill the customer — for three hours. Conversely, if the Technician takes four hours, they're only paid for three, and the customer is also only billed for three. 

Because of this, dealers need to be very careful in accurately estimating repair times. That means analyzing how long a particular repair typically takes in their shop, manufacturers' estimates (for warranty repairs) and industry standards.

A flat rate tends to reward senior Technicians who are both skilled and efficient. In this model, you're paying less for the Technician's time and more for their expertise. Those who can complete jobs more quickly than the allotted time can see an uptick in their income even while working a typical 40-hour week. For many Technicians, this can be highly motivating.

From the dealer’s perspective, this pay model ties compensation directly to productivity, relieving the dealer of extra costs for jobs that take longer than expected to complete.

That said, there are some risks. Some Technicians may rush through a job and not properly complete the repair. This increases the chance of mistakes and comebacks, which cause dissatisfied customers. Dealers should establish clear policies for handling comeback work when paying Technicians a flat rate. They also need guidelines for compensating nonrepair work, like cleaning the bay, since you typically don't include that in the standard repair time.

A flat rate might not be the best model for entry-level Technicians, who are still improving their speed and accuracy. 

Hourly Rate Removes Time Pressure but May Reduce Motivation

With an hourly rate system, Technicians get paid a set amount for every hour worked. If a repair takes three hours, dealers pay them for three hours and bill the customer for three hours.

This pay model removes the pressure of working against a standard repair time, making it less likely that Technicians will rush through the job. For the dealer, hourly pay offers flexibility. It's easier to adjust Technician hours based on the shop’s workload, allowing dealers to shorten hours when business is slow and extend them during busy periods. 

However, it makes it more difficult to give customers a realistic estimate of labor time. If a job looks like it'll exceed the estimated hours, the Service Manager will need to contact the customer for approval before proceeding, which can slow down the repair. Another drawback is motivation. Because there's no financial incentive, Technicians may lack motivation to complete jobs quickly.

Alternative Models Include Door Rates and Job Pricing

While a flat rate and hourly rate are the two most common ways of charging for labor and compensating Technicians, there are other methods dealers can use: 

• Customer Pay Door Rate: The rate a customer will pay for one hour of labor, which may differ from the Technician's actual hourly wage. 
• Job Pricing: This is more of a menu option, where dealers assign a set price to specific services that aren’t tied to Technician wages. This is often done with items like oil and filter changes and other simple maintenance and repair procedures.

Choose a Pay Model Based on Your Shop's Specific Situation

Choosing the right pay model depends on a dealership's unique situation, including Technician experience levels, operating costs and the competitive environment. Setting the right labor rate is also critical to shop profitability while staying competitive with other dealerships and independent repair garages.

Our Fixed Ops solutions give dealers the flexibility to customize labor rates that fit their operations. We also have à la carte options that allow for flexibility and functionality for dealers in programming their preferences.