News: Consolidator Report
Not getting paid properly? Cost shifting is not the solution, and is just plain bad business.
Editor’s Note: This article originally appeared in the March 2007 edition of BodyShop Business.
The origin of cost shifting evolved innocently enough. It’s an adaptation of the interpretation of a language spoken by a select group of people and understood by almost no one.
Yet this language – as confusing as it is and as ambiguous as it can be – has served the collision repair industry well. It’s gotten us where we are today, and it’s made insurance companies and a few body shop owners rich.
And let’s not forget the customers. Millions of collision repair customers have driven away from repair shops as happy as can be because their cars are like new again.
The problem is, cost shifting serves one purpose and satisfies only one group of people: auto damage appraisers.
Insurance appraisers and independent appraisers are the masters of this form of communication. They’ve developed it as a defense mechanism – a form of survival. Like a translator at the United Nations involved in helping to negotiate a trade deal or a cease-fire among several countries, the appraiser has to understand three different languages and be able to help all parties understand each other, even if it means some inventive translation to avoid offending one of the three parties:
- The customer wants his or her car repaired to pre-accident condition (or better) with little or no out-of-pocket costs.
- The repair shop wants to make as much money as possible, while at the same time creating satisfied customers and building a great reputation.
- Insurance companies want to make as much money as possible by paying as little as possible for repairs, while at the same time creating satisfied customers and building a great reputation.
And then there’s the auto damage appraiser, who has to make the dreams of these three parties a reality.
The customer expects the appraiser to settle the claim as quickly as possible and in such a way that his car looks better than it did before the accident (you know, four new tires because replacing one just wouldn’t be prudent, plus a complete paint job because, what the heck, it’s someone else’s money).
The insurance company expects its employee (the appraiser) to closely follow its rules and pay for only what the talking heads in the high-rises think the body shops need to perform the miracles their customers expect.
The repair shops expect to be paid enough, or more than enough, to perform the miracles their customers expect.
This is a tall order to fill. If we liken the auto damage appraiser to a United Nations interpreter trying to facilitate communication between the diplomats of three different countries (in our case the customer, the insurance company and the repair shop), there has to be some creative translating done to enable the appraiser to handle the communication between the three parties without starting a war.
Like an interpreter, the appraiser has to trick each party at his little summit into understanding one another. He has to keep the customer completely in the dark, lie to his employer and convince the shop manager to play along in his little game. And once everyone thinks they understand one another and are satisfied with the treaty, he can move on to solving another crisis.
This system has worked well for years – that is, if you think lying and trickery are the products of a well-running system.
But now, with insurance companies using sophisticated software to analyze every estimate and reinspectors following appraisers around second-guessing their work, life is getting more difficult for the appraiser. Worse yet, consumers and their lawyers are taking a closer look at the repairs, the repair process and the practices of our industry. We’re being held accountable, and guess what? Lying, cheating and fraud are illegal.
Suddenly, it’s as if every country is bringing its own translator to the negotiating table. Our clever translator who kept the peace all these years now finds himself in a tough position. His translations are being scrutinized and audited.
That’s not a bad thing – and could actually be a good thing for our industry.
If an appraiser wants to cost shift, that’s his business. But we as collision repairers should be writing accurate estimates and charging for exactly what we do.
No One Wins
If the insurance appraiser pays you 0.3 hours for undercoating because his superiors would be offended if he paid you that same 0.3 hours to R&I a door handle – something they don’t “allow” when blending a door – and you don’t undercoat, you’ve just lied to the insurance company, cheated the customer and put yourself in a dangerous position.
All this happened because some exec 3,000 miles away decided it was unnecessary to remove a door handle when painting or blending a door. Of course, that same exec has also decided that if the clearcoat starts peeling around that door handle because it wasn’t removed, it’s your fault.
Or here’s a good one: The appraiser offers to give you 2 hours to straighten an apron that has no damage because he’s not allowed to pay to color sand and buff. He knows you nib and buff every car but because he can’t pay you for that particular procedure, he commits fraud so he can move on to the next estimate.
This is stupid. It’s moronic. It’s a lose, lose, lose situation. And the appraiser, who, by the way, thinks he’s won, has really lost.
He’s done something dishonest to please his boss, who wouldn’t be pleased if he’d done the honest thing. And if the boss catches the appraiser lying to try to please him, he won’t be pleased at all, and the appraiser could get fired. Follow?
The insurance company loses because, well, their own appraiser just got one over on them.
The body shop loses because even though it got what it needed to do the job correctly, it didn’t really. It got paid to do something else – something it didn’t do. And if the customer compares the insurance appraisal to what was done or the insurance company sends someone out to reinspect, you’ve got a problem.
Your customer will be on the phone to that lawyer with the three-page spread in the Yellow Pages, and the insurance company will label you a crook when they’re the one who framed you.
The only party who doesn’t actually lose from all this craziness is the customer. If this game has been played fairly and all the liars and cheats have been honorable, trustworthy and sportsmanlike, the customer’s car gets repaired to pre-accident condition.
The customer may not lose, but he doesn’t win either.
The end doesn’t justify the means when the means can get everyone involved into trouble if a customer decides to critique your work like some engineer from Consumer Reports. And you can bet, if he’s anal-retentive enough to notice that the insurance appraiser paid you 0.3 to undercoat and he can’t find any undercoat because, after all, you only fixed a ding in his hood, he’s probably got enough time on his hands to remedy the situation – or at least enough time to call that lawyer in the Yellow Pages.
What You Can Do
Cost shifting has infected our industry like a computer virus. In my area, after years of decline, cost shifting is now getting worse.
As our labor rates rise, the pressure on appraisers to reach agreed repair prices with shops is causing many to brush up on their cost-shifting skills. Also contributing to the increase in cost shifting: Many of the shops in my area are demanding to be paid for what they do and are actually doing everything they get paid for.
That’s the key – the most important part of this battle. If you get paid to do something, do it. If it doesn’t need to be done, don’t do it – but document that you didn’t do it and don’t charge the customer. Leave it up to the customer to decide what to do with the extra money.
Cost shifting isn’t going away. As long as our industry allows insurance companies to dictate what they will and won’t pay for, and as long as we continue to work at artificially deflated prices, insurance appraisers have to continue cost shifting to reach agreed prices.
But you don’t have to involve yourself in this illegal activity. You can get out. As much as it may seem sometimes, this isn’t the Mafia and you aren’t stuck for life.
It will, however, take hard work on your part to separate yourself from this nonsense:
Start by analyzing your business and understanding your costs so you can set a realistic labor rate. As long as you continue to write estimates at what the insurance company feels is fair, you’ll have to actively engage in cost shifting. And guess what? Writing four hours on a one-hour dent is cost shifting. It’s dishonest and may be illegal. Set an honest labor rate, and start writing estimates using that honest labor rate and honest labor times.
- Write estimates for every repair. Don’t be lazy and work off of the insurance estimate. That’s just asking for trouble. Very few insurance estimates are accurate. And very few explain exactly what you did to the vehicle. Write your own estimate and convince the insurance appraiser to meet your bottom line. I seldom even look at insurance estimates anymore.
- If possible, stop billing in hours. Some states require you to estimate and invoice in hours, leaving you with no choice. But if it’s legal in your state, start billing in dollars only. Did you ever see a doctor’s bill with labor times and labor rates? They bill by the procedure. Consider yourself a car doctor. Give your customer estimates in dollars only.
- When the repair is complete, write a supplement or revise your original estimate to reflect exactly what you did to the vehicle. This is the blueprint for your repair. This blueprint will help keep you out of trouble should there ever be any question about what you got paid to do compared to what you actually did to repair the vehicle. Be certain your invoice clearly states that the vehicle was repaired by your attached estimate or blueprint. When the repair is finished, you can print an invoice with the heading, “Blueprint of Repair” – so you’re not invoicing with an estimate.
- Be honest. One of the problems many insurance appraisers have with shops is that they can’t trust them to do everything on the estimate. Some appraisers refuse to pay for certain items because they know the shop won’t perform those operations. You need to be trustworthy, and your paperwork has to be precise – to the penny. Eventually, appraisers will trust you. Your reputation as an honest businessperson will filter its way up the corporate ladder. And sometimes, this will help take some of the pressure off the appraiser because his superiors might give him more negotiating room with you.
- Remain firm and businesslike. In 25 years, I’ve only thrown out one appraiser, and that was because he crossed the line and got personal. There are appraisers I deal with who’ll never get agreed prices with me, but they’re always welcome in my shop because every repair is different. Every repair is an opportunity to reach an agreed price. You can still disagree with someone and show respect.
- Be willing to say “no.” If you cave in and accept insurers’ artificially suppressed rates and pricing, you affirm those rates and prices. You have to have the will to say no and possibly lose a little work. Appraisers hate not reaching agreed prices. It causes headaches for them. Taking a firm and honest approach with respectful persistence will help you get your bottom line.
- Don’t discuss labor rates – focus on the bottom line. Tell the appraiser you don’t care if he writes his estimate at $2 per hour, as long as he reaches your bottom line. If he has to cost shift to do it, that’s his problem. Stay out of it. You’ll be working from your paperwork.
If an appraiser consistently meets your bottom line, protect that appraiser. Check your state laws first, but you probably have no obligation to allow a reinspector into your shop to critique the appraiser’s work.
The reinspector won’t have a job if he doesn’t find something wrong with every estimate. Don’t help the reinspector keep his job. It’s pressure from the reinspectors that put the squeeze on appraisers and drain income from your business. Send reinspectors packing. They can reinspect the vehicle once it’s repaired.
Shifting How We Do Things
Cost shifting is our industry’s dirty little secret. Ideally, we could end the practice overnight if we could replace all the shop owners in this country with educated businesspeople. Reality is cold, heartless and brutal though. It’s not going to happen in our lifetimes.
Most insurance companies turn a blind eye to cost shifting, and that’s a shame. Insurers are the ones who can put a stop to it. They have the money, the political power and the people needed to crack down on it. Unfortunately, until those in our industry become better businesspeople, insurers will have no incentive to end the practice. They consider cost shifting a necessary negotiation skill needed to deal with us.
Cost shifting is such an embedded element of the collision repair industry that insurers sometimes don’t realize when they encourage the practice. I once had an insurance manager try to get me to join his direct-repair program. I told him I wouldn’t consider it because of their low labor rates. The manager then said something like, “Come on. You know how to write an estimate so you can make money.”
Yeah, I do, but I’m not going to lie, cheat and steal just because an insurance company gives its blessing.
A couple of years ago, I had a conversation with a fleet management company. They wanted to sign me up for their referral service. They’d steer work my way, but I’d have to give them 10 percent of the invoice. Not the gross profit, but 10 percent of the total repair cost. I asked the guy how any shop could possibly afford to give up 10 percent of the repair cost, and his reply was similar to that of the insurance manager. Not only that, he came right out and told me to inflate my labor hours. No one would be looking at the vehicles. I should be able to make plenty of money.
While we in the collision repair industry see examples like this every day, insurers will never acknowledge that cost shifting is taking place or that they’re enabling it. Why should they? We’re the ones who will go down if ever there’s a problem.
The Bottom Line
Why should you avoid cost shifting? For one, it’s to stay out of jail. It’s illegal. It’s fraud. Though few have been prosecuted for cost shifting, that could change any time. Cost shifting produces inaccurate paperwork. Reinspections will uncover it. And how can you warranty something you haven’t done?
Let’s say you repair a vehicle working off the insurance estimate. Instead of the appraiser paying you a fair labor rate, he pays you time to set up and measure the vehicle and some pre-pull time (this happens constantly). Three years go by and the car comes back to you for a problem that may be related to the accident, maybe tires are wearing poorly. You look at your paperwork and see there was frame time on the repair. How are you supposed to remember you didn’t actually touch the frame? If the unibody was damaged and you repaired it like the paperwork shows, then you screwed up. But if your paperwork shows that you didn’t do any frame repairs and the frame is damaged, it either could have happened after the fact or it could be missed damage and the insurance company could still be liable.
Will not cost shifting mean that shops will have to start writing accurate estimates using realistic labor rates? Yes. Which would, by the way, be a very good thing for the industry.
Will it mean that shops will make more money? Maybe, maybe not. But I can tell you this: They won’t make less.