Increase contribution margin per repair order

Full order books are good - but Not every order is equally profitable. In practice, it is clear that some order types generate a high contribution margin, while others barely cover the costs. As long as this is not measured, the order mix remains a black box. This article therefore shows how Contribution margins can be calculated, analysed and improved. Industry-specific economic analyses for the independent workshop sector provide classification. The contribution margin logic for workshop orders is also based on the profitability definitions of the DIN EN 13306 (maintenance) and the VDI 2895 (life cycle costs).

DB improvement is possible for many companies even without additional sales. This includes better costing, upselling, optimised use of materials and conscious control of the order mix, which in turn enables precise order management. Order planning is a prerequisite. The guide also describes how these measures are incorporated into overall profitability Running a profitable workshop. In terms of methodology, this approach is based on established calculation tools used by national chambers of commerce.

The contribution margin is the difference between the revenue and variable costs of a repair order. It shows how much an order contributes to covering fixed costs and making a profit. The higher the contribution margin, the more economical the order type is and the more targeted a workshop can manage it.

The Contribution margin accounting (DC accounting) is the most important tool for assessing the profitability of individual orders, order types or customer groups. Full cost accounting, on the other hand, allocates all costs to products. On the other hand, absorption costing shows how much an order contributes to covering fixed costs and to profit. If you would like to delve deeper, you can also find more information in the article on Calculate hourly rate Further information.

The DB I results from the simple formula: Revenue minus variable costs. The variable costs of a workshop order include the material purchase costs (spare parts, consumables), the productive labour costs (only the directly attributable working time) and order-dependent external services, such as wheel alignment by an external service provider. Anyone who clearly shows the DB I for each order type will immediately recognise where labour or material dominate the margin and where the greatest effect can be achieved.

The DB II also takes into account the fixed costs attributable to the order: pro rata platform costs, tool wear, pro rata energy costs and diagnostic licence costs. DB II thus shows the actual profitability of an order and is the key figure by which the order mix can be precisely controlled. However, it requires consistent time and cost accounting.

Not all orders are equally profitable. The following comparison shows qualitatively which order types are expected to be high-margin and which are expected to be low-margin. Specific values, on the other hand, depend on the company, location and purchasing and can only be reliably determined using your own order data:

The consequence of this analysis is not to only accept diagnostic orders. Rather, the aim is to Consciously control the order mix: Maintenance orders serve as the basis for basic capacity utilisation, while you selectively expand the proportion of high-margin orders such as diagnostics and major repairs. For low-margin orders, you also consistently look for upselling opportunities.

The Material usage ratio (cost of materials / material turnover) shows how much is spent on parts in relation to the customer price. Every percentage point gained on the total volume of parts results in a substantial margin driver. Starting points are better purchasing conditions (see Procuring spare parts at favourable prices) and differentiated mark-ups by parts group. The spare parts catalogue optimises parts procurement Alltrucks VINcat and research on the VIN. If you would like to delve deeper, you can also read the article on Optimise order planning Further information.

Additional revenue is generated during vehicle reception. When a lorry comes in for an oil change and the service technician Worn brake discs is not sales pressure, but customer service. The prerequisite for this is a standardised acceptance check process in which every vehicle is checked for the same points. It also requires employees who can communicate findings professionally. We would be happy to discuss with your team how this acceptance step can be structured in the network.

If your mechanics regularly work faster than the labour value, this is good for efficiency. The customer is charged the full labour value. Conversely, you lose money if certain jobs regularly take longer than calculated. Therefore, check your target times every six months against the actual times and adjust your calculation if there are systematic deviations.

Combining several jobs in one workshop visit reduces the proportionate fixed costs per job, such as acceptance, set-up time and vehicle movement. This increases the total contribution margin. Therefore, actively promote bundling: „Your vehicle is here for an oil change - the next periodic technical inspection is due in 6 weeks. Should we do the preparation at the same time?“ The saving in set-up time therefore has a direct effect on the DB per bundled order.

Do you have order types whose DB I is significantly below your target value per hour? Then you need to take action. Either increase the price, organise the work processes more efficiently or deliberately reduce this order type if neither is possible. That may sound radical. But one hour that you spend on a low-margin order is not enough for a high-margin order. The calculation of your hourly rate plays a central role in this - read more in the article Calculate hourly rate.

Pricing has the strongest influence on the contribution margin, as every percentage point of price increase flows 100 per cent into the DB (assuming costs remain the same). Three approaches have proven themselves in practice:

• Differentiated material surcharges: Instead of a flat-rate surcharge, differentiate by parts group - fast-moving parts (filters, oils) lower, wear parts medium, special parts (turbochargers, injectors) higher. Customers rarely compare the surcharge, but rather the total price.
• Fixed price offers for standard services: Package prices for frequent work (oil change package, brake change package) give the customer price certainty and the workshop costing certainty. Efficiency through standardisation also generally allows a better DB than the individual price.
• Surcharges for special services: Express surcharges (immediate repairs), weekend or night surcharges and pick-up services are additional sources of revenue with high DB, as there are hardly any variable costs.