Whenever I have to explain to someone who is not in our industry how body shops are paid for paint and materials, he or she says, “What? That doesn’t make any sense.” I agree. However, it has been the custom since Noah painted the ark that the shop bills for paint and materials by multiplying the number of refinish labor hours on the repair order by a local hourly material allowance rate. I’ve shared the speaker’s podium with several insurance company executives over the years, and while they often agreed it was unusual, no one I’ve met seems inclined to change it.
A Losing Battle
This is my 41st year in our industry, and back when I started, the material allowance was one half the labor door rate. In those long-ago days, the door rate was $20 per labor hour and the material allowance was $10. Of course, a pint of acrylic lacquer was $2.15, too.
These days, as I travel the country, I can find absolutely no relationship between door rate and material allowance. I’m in markets that bill $36 per labor hour and receive $32 in material allowance. I’m in other markets that charge $56 per labor hour and receive $20 in material allowance, and every possibility in between. I calculate the average across the country for an hourly material allowance is about $20 to $24, with a low of $18 and a high of $36. Just like the prevailing labor door rate, the material allowance in each market is based on the insurance company’s own survey, predilection or whim.
While I agree it’s nonsensical and wildly disparate, it looks to me like this is the way it is. I often tell my shop audiences that fighting the insurance industry to change its long-held and currently functioning methods to pay for collision repair is a losing battle. I point to the efforts of the only other industry in the U.S. that’s wholly supported by third-party payers the health insurance business. The American Medical Association is one of the largest, best educated and best funded lobbying contingents in the country. How are they doing in bending the insurance companies to its will? Right.
More Refinish Labor Hours
So is there nothing that can be done to get paid fairly and profitably for paint and material? There are several things that will make an enormous difference. First, second and third is to write more refinish labor hours. You don’t have to double or triple the times to make money.
Here’s a quick example: The average repair order has between 18 and 20 hours of total labor time and is comprised of roughly 60 percent metal and 40 percent refinish. So an 18-hour RO would have 7.2 hours of refinish time and a 20-hour RO would have 8.0 hours of refinish time. At a national average of about $24 per hour material allowance, the first estimate would pay the shop $172.80 and the second $192. Given that the shop cost and amount of paint and materials is the same in both cases, an extra $20 in gross profit per RO will go a long way to making this a profit center.
Jim, if you’ve seen your material profit plummet from 35 percent gross profit to 2 percent, something is seriously amiss. One possibility is that you’re a DRP for an insurer that insists you repair a car you’ve never seen directly from the insurer’s estimate. It’s unlikely the insurance person writing the sheet will go looking for additional refinish hours!
Another method to ensure profitable paint and material sales is to track how much of each RO is sold in labor, parts, paint and materials, and sublet. Called “sales mix,” it’s a quick test to find where the problems may exist. In my experience, the shop’s true cost for paint and materials (and make sure “it” really belongs in this bucket) is between 5 and 7 percent of sales. If we use 6 percent as a middle ground for shop cost, we can quickly tell if there’s any hope of making money on a given RO. Take the dollar amount billed in paint and materials and divide by the total value of the RO before tax. If that amount is less than 6 percent, the shop is losing money; if the amount is about 6 percent, the shop is getting its cost out. If the amount is between 6 and 10 percent, the shop is making money on paint and materials.
For example, if the RO was $2,000 and the paint and materials total was $120, the math is:
$120 / $2000 = 6%.
If the RO was $2,000 and the paint and materials was $180, then paint and materials was 9 percent of
Doing the sales mix for one repair isn’t very telling, but do an average for 30, 60 or 90 days’ worth of repairs, and you’ll get a very accurate picture. If shop costs are 5 to 7 percent of the total repairs, anything between 7 and 10 percent is a great answer.
If you’re a DRP, this percentage is one of the numbers you’ll be audited on. If you go over 10 percent of the total ROs in paint and material sales, they’re going to want to talk to you. Why? Because the insurance industry’s databases say that 90 percent of all claims are settled for less than 10 percent in paint and materials. A profitable shop’s goal in a DRP is to keep its paint and materials sales as close to 9.9 percent as possible.
If you’re not a DRP for anyone, then sell away, as no one will be auditing your results. Individual vehicles are what they are and require more or less paint and materials to refinish them. The insurance company audit will look at a series of cars, with 90 days being a typical audit period.
If Wishes Were Dreams…
Tracking sales mix numbers, using the P-pages to gain additional refinish time and generally learning to write a better estimate will all help make paint and material a profit center. My experience suggests the average shop doing the average repair should be able to make a 25 percent gross profit on paint and materials. If your shop isn’t, then do something about it. Just complaining won’t help.
Right, wrong, nutty or bewildering, the method to get paid for paint and material in collision repair is to multiply refinish labor hours by the local material allowance. Do what you can when surveyed to raise the local allowance; maybe you can, maybe you can’t. The one thing you can do for sure is to learn to write more refinish hours on each repair. All the paint companies and several other vendors offer excellent classes to do just that.
Stop wishing it was different and learn from the pros how to put more hours on the repair. I routinely see shops who are making 40-plus percent on paint and materials using the same insurance-driven formulas that apply to your shop. They control their costs by mixing the absolute minimum amounts and writing the maximum refinish hours on every sheet. You can, too.
Mark Clark is a well-known industry speaker and consultant. He’s celebrating his 23rd year as a contributing editor