The marine service industry constantly fights the battle of understanding service cost overhead in relation to overall operation profits. I suggest staying out of this battle, for it's unlikely there will ever be a clear winner. The season-ality of the marine industry,  "overtime" due to lack of qualified recruit-able technicians in peak season, and warranty labor rates, paid by manufacturers, that rarely cover the real cost of a warranty but pay handsomely to the salesman/owner when the boat was sold initially, all contribute to a very complicated calculation, if attempted.   However, I'm sure you realize that it is important to draw a "line in the sand", somewhere, so that progress can be measured.

A management control tool used by service managers is the "Recovery Rate" calculation.  The formula is very simple:

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This calculation is best made for each mechanic, each week as the following example shows:

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There are also several computer systems which can collect information and print Recovery Rate Reports, each week, for each mechanic and for the shop as a whole. Your understanding of how your shop may calculate profitability is essential to your and their success and happiness.

What's a good Recovery Rate?

There is no one answer to that question. Each shop should compare it's recovery rate a year ago with this year, same week, and try to improve the recovery rate.

Recovery is the single best predictor of profitability in a shop operation. For example a shop with a:

55% recovery rate will have a great deal of difficulty making a profit.

65% recovery rate has a chance of making a profit.

75% recovery rate has a very good chance of making a profit.

85% recovery rate will make a bundle, because it is getting near the perfect score as this example shows:

Mechanic "A" works 52 weeks @ 40 hours per week and had 200 hours of overtime for a total paid hours 2280 hours. Subtract from this total, hours he was paid for but couldn't bill:

80 hours of vacation
40 hours of training
20 hours of shop meetings
56 hours of holidays
21 hours sick time

Leaving a total of 2060 hours maximum he can bill. If you divide 2060 (maximum available for billing) by 2280 total hours paid for on the payroll, you get a maximum recovery rate of 90%.

But what about sub-contracted labor?

If the company is supplying most of the job tickets, special tools, parts, and   equipment to complete a service ticket, essentially, that marine mechanic subcontractor or "percent/pay for billed hour" employee falls under normal overhead guidelines. The plus side to a company is that at a 50/50 split, for example,   the company comes out way ahead because it incurs no risk associated with lay-off and or unemployment, etc. By example, could a car dealer buy an automobile from a manufacturer and mark it up 100%? This is unlikely.

There are a lot of complicated issues concerning marine mechanic sub-contractors that are too much for this article. A marine mechanic subcontractor can have his own special tools, service truck, customer base, and in essence is a service shop all by himself. In this case you are basically, dealing with another company and not just an individual. But we'll save this topic for another article.

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