News: CIF Announces Support for Repairers Impacted by Hurricane Ian
I’m firmly convinced that if you can’t measure it, you can’t manage it.
In my experience, more than 95 percent of body shops run their fiscal year in concert with the calendar year. As a result, most of you just calculated how you did in 2017. Even the most numbers-averse shop folks look at year-end numbers. “What were our sales? What was our net?” asks every shop owner, everywhere. I hope they were good for your shop and that you remain pleased to be in our unique industry.
While consolidation continues at a rapid pace in our business, the good news is that deer still roam the roadways and it still rains on Friday at 5 p.m. Collisions will likely continue at about the same pace in 2018. Both consumers and insurers will patronize well-run collision repair businesses, independent or multi-shop. Smart shop owners of any size will try to complete more ROs in 2018 than in 2017 and make more money doing it.
By dividing your annual sales by the number of repairs, you can quickly establish an average RO value. Several comparisons can then be made, not the least of which is your dollar average repair in 2017 compared to 2016.
For example, my imaginary shop, PDQ Collision, had sales of $1,632,452 before any taxes and they posted 689 completed repair orders (RO). Divide $1,632,452 by 689 ROs for an average value of $2,369.30 at PDQ Collision in 2017. Only the folks at PDQ could tell us if their 2016 average RO was higher or lower, but I could compare their $2,369.30 average to a “typical RO” in the same market.
To establish the “typical repair value” in any market by my method, we need to agree on several variables: an hourly labor rate charge, how many total labor hours are included on the average ticket and what percent of the entire repair is labor time.
Let’s start with the BodyShop Business Industry Profile that appeared in the May 2017 issue. Sixty percent of respondents said their average repair was between $1,500 and $2,500, so PDQ is clearly not only in that range, they’re on the high side of a national average RO. But as I always hear from skeptics, “Yeah, that’s great, but MY shop isn’t like the national average shop, we’re different.” By starting our calculations with the door rate in your market, we’ll get a local number.
Collision labor charges are billed by the tenth of an hour, or in six-minute segments. I visit markets where the local door rate is $40 per hour and other towns where the same hour of labor is billed at $65 (or $125 if your body shop is in the heart of the San Francisco Bay Area!). I’ll do the typical RO math a couple of times. We’ll use both $49 per labor hour and $59 to figure the local typical RO.
The next decision is the total labor hours billed on the “typical” repair. It depends on what kind of sheet you write, but national averages are somewhere between 17 hours and 23 hours total labor, which includes everything: mechanical, structural, metal, refinish, detail. In my experience, something in the middle works, and we’ll do our “typical” RO math at 21 hours of labor time per repair.
The last decision to be made is what percent of the entire repair order is labor time. The repair ticket includes labor, parts, paint and materials, and sublet. Industry sources vary in their definition of a “typical” sales mix, but somewhere between 43 percent and 50 percent of collision repair charges are for labor time. I use a sales mix of 47 percent labor, 39 percent parts, 10 percent P&M and 4 percent sublet in my classes and find it works well. As with any industry math, round numbers rule the day: 45 percent labor or 47 percent labor, same, same.
In a market with a $49 door rate and 21 hours of labor, the total labor charge is $1,029. If we say that represents 47 percent of the total RO, then $1,029 ÷ .47 = $2,189.36. Round off to $2,190 for a “typical” RO at a $49 local labor rate.
In the neighboring market with a $59 door rate, the labor sale is now $1,239 (21 X $59), and if it’s 47 percent of the total amount, their typical RO is $2,636.17. Round off to $2,640 for a typical $59-an-hour repair.
So how did PDQ’s 2017 average of $2,369 compare? It was very good in the $49 market, but less stellar in the $59 market ($2,190 @ $49 vs. $2,369 @ PDQ or $2,640 @ $59 vs. $2,369). Use your own local door rate to compare your shop’s results to a “typical” repair.
How will PDQ improve their average repair value? By selling more labor hours, because they won’t be able to change the local door rate by themselves! Another 1.0 hour of added labor time per repair over the course of 2018 would bring in another 689 hours (689 ROs X 1.0 hr.) of total labor. At a $49 door rate, that’s $34,000 more; at $59 per hour, it’s $41,000 more.
It gets better. If the labor time split is the industry average of 60 percent metal shop and 40 percent paint-shop time, that adds another 275 hours of refinish labor, which in turn brought in another $7,150 in P&M income (275 hrs. X $26/hr. material allowance). I would assume that PDQ would enjoy another $48,000 income without increasing their expenses; same labor hours and paint and materials cost to do the work, just got paid more time.
My Favorite Number
As regular readers know, I’m firmly convinced that if you can’t measure it, you can’t manage it. As a result, I can and do calculate hundreds of numbers you could use to manage a body shop: sales mix, production efficiency, square-foot values, parts-to-labor ratios, administrative overhead and hundreds more.
My favorite number is close rate (or capture ratio or batting average), which measures the portion of the estimates the shop wrote that turned into repair orders. Simply divide the number of repairs, 689 in the case of PDQ Collision, by the number of estimates written. Imagine that PDQ wrote 1,060 estimates last year, which makes their close rate 65 percent (689 ROs ÷ 1,060 estimates). That would be my guess at the national average, even though recent BodyShop Business survey results suggest our readers are approaching a 75-percent close rate. (Clearly smart people read this magazine!) If PDQ could increase their close rate to that benchmark, they would fix 795 vehicles (1,060 estimates X 75% closed = 795). An additional 106 repairs next year, from folks who were already in their office, at an average RO of $2,369, creates another quarter million dollars ($250,000!) in sales that just needed a little extra nudge to say, “Yes, fix my car.”
Whatever changes 2018 brings for collision repair, I know for certain that lots of body shops won’t be looking at many numbers again until January 2019. If another $250,000 in sales and another $48,000 in labor profit from a shop doing $1.6 million sounds like something you would like at your shop, start measuring something today. Use a 90-day average for the best results, but start collecting some useful numbers later today. Few repair businesses can generate gross margins like body shops – it’s what attracts venture capitalists. Be sure you get your shop’s share and then some by measuring performance with actual numbers.