Do the Math Before Accepting the Lowest Price - BodyShop Business

Do the Math Before Accepting the Lowest Price

What is your shop's profit on P&M? Including your favorite PBE jobber in the calculation will ensure you have the best combination of low costs and high service.

Any prudent business person strives to maximize their net profit and minimize their expenses. Any collision shop’s biggest expense is their employees’ wages, followed by their expenditures for repair parts.

I calculate that a typical body shop spends about 35 percent of its total sales on labor and about 30 percent on crash parts, followed by purchases from their jobber at about 7 percent. Jobber purchases include both paint and materials (P&M), shop supplies, and tools and equipment.

Next are expenses for any sublet operations and occupancy costs (rent, utilities, phone) at about 4 percent of sales each. Other shop expenses are plentiful, but each represents a smaller portion of the total cost. The shop’s return on its labor expenses is evident every week when the ROs are closed and repaired vehicles delivered. The shop’s profit return on its crash parts sales is clear, too – it’s the difference between total parts billing and cumulative parts purchases at shop cost. But unlike labor and parts, the P&M profit return is a fuzzy calculation.

A Mighty Strange Plan
Nothing like the straight “dollar sale minus dollar cost” math for parts and labor, but the “sale” and the “cost” are squishy numbers for P&M profits.

I’ll be the first to agree that our industry’s customary system of using a region-specific P&M allowance per refinish hour as the basis for our “sale” is a mighty strange plan. But after 44 years in our business, I have no expectation that it will ever change, which leads smart shops to learn how to write more refinish hours rather than spend their time campaigning to change the system. If your shop is selling approximately 10 percent of the total repair order (no taxes) in P&M, then your flagged refinish hours are sufficiently high to make a nice profit. If your shop’s P&M sales average less than 6 percent of the ROs, you’ll struggle to make money.

If the “sale” number is both fuzzy and squishy because of our industry’s unique methodology to charge for P&M, the “cost” number is a moving target for many shops, too. The paint company and PBE jobber trend of offering shops a cash pre-bate to do business with them has become a common, if odd, practice. Those monies have to be included when searching for the shop’s real “cost” for P&M, too. In addition, whatever discounts the shop is able to command from the jobber serve to further reduce shop cost – not to mention the substantial difference in printed user prices for various paint brands and product lines within brands. So, what is the “sale” price and what is the “cost” for P&M at your shop?

Cash Money
Let’s spend a minute talking about the cash money up front. My stand is that it isn’t as much as you might think over the long haul.

Imagine that your shop is so desirable a customer (desirable to vendors because you pay your bills promptly and have a growing volume of work) that some paint brand and their local jobber are willing to offer you $50,000 to switch brands and suppliers and do business with them. Typically, these contractual agreements are for either five years (60 months) or some cumulative dollar purchase commitment (which may turn out to be many more than five years’ worth.)

In my example, the 50K is for a five-year contract ($10,000 per year/$833 per month). There are 4.3 weeks in a month, so $193 a week or $38 per day. With a national average door rate of $42 to $45, the $38 is about 50 minutes of labor time, per day, for one tech. If your new paint brand and your new jobber cause a production delay because of poor color matches, system unfamiliarity, redoing paint work, waiting for technical help or even delayed delivery, the 50 minutes is quickly used up. Not to mention the shop gets an IRS Form 1099 on that income and will pay typical corporate income taxes of about 25 percent, making the $38 only $28 per day net or just 37 minutes of labor time.

Jobber Service

As a former PBE jobber, I have a bias toward a high service model. An educated, well-run jobber can save customers much more than an hour of labor a day. How?

Start with the easy stuff: a full local inventory, regular sales calls, prompt deliveries and a formal program to manage the shop’s P&M stock. The typical PBE jobber has half its assets on its shelves in its inventory and, out of necessity, does a good job controlling it. The typical shop is good at repairing collision damage and not so much at choosing, stocking, replenishing, counting and reporting inventory. Trusting your jobber to suggest the most profitable products for your situation and then monitoring and reporting your usage monthly is a proven, profitable solution.

Even higher service levels include formal training opportunities in all aspects of shop operations. (You don’t know what you don’t know!) Providing knowledgeable advice about equipment replacement or additions, informed jobbers know why one style/brand is better than another for your shop. The best vendors also provide timely help in maintaining and updating the shop’s color tools and mixing computers.

At the highest service levels, the best PBE jobbers provide on-site technical help and collision business consulting. Most paint companies have extensive benchmarks and classes about how to get better; the best jobbers bring that help to your door. Sadly, the days of providing these high-service, value-added benefits to every customer may end soon.

A typical PBE jobber makes about 35 percent gross profit on its sales; a typical body shop makes about 40 percent gross profit on its sales. Demanding or expecting huge discounts from your jobber significantly reduces the jobber’s ability to provide much in the way of
service help.

The typical jobber nets about 2 to 3 percent of sales, meaning operating costs are about 32 to 33 percent. If they offer your shop a 25 percent discount, they’ll make 10 percent gross against a 32 percent cost – a quick path to business failure! Yet you know shops that claim to be getting 30 percent and higher discounts on paint. How can this be?

From the jobber’s standpoint, they blend in the really low margins with the regular gross profits. So instead of making 35 percent, they average out to making 30 percent (or some lower number). Still, no one can make 30 percent and spend 33 percent for long, so they cut staff and the value-added things that made their customers more successful.

On many large shop deals, the paint companies will rebate some portion (certainly on liquid only, not sundries) back to the jobber. So if the jobber gave your shop a 25 percent discount, the paint company might kick back something on the 70 percent of your purchases that are paint.

The deepest discount deals I’ve heard about remove virtually all services from the sales equation; the jobber’s responsibility on a big discount deal is to slow the delivery truck down to 20 mph and shove the stuff off the back once a week! Who will those shops call for technical help, emergency deliveries, custom color matches, marketing advice, tool repair, hard-to-find items or general assistance? Beats me.

Be Prudent
Prudent business people strive to minimize expenses, but profitable business people accept help from knowledgeable vendors. So what is your shop’s profit on P&M? Including your favorite PBE jobber in the calculation will ensure you have the best combination of low costs and high service. Do all the math before you accept the lowest price.

Mark R. Clark is the owner of Professional PBE Systems in Waterloo,
Iowa; he is  a well-known industry speaker and consultant. He is
celebrating his 26th year as a contributing editor to BodyShop Business.

Why Does the Collision Industry Still Use Paint Dollars Times Hours to Calculate P&M Cost?

If virtually everyone in the collision repair industry agrees that the prevailing method for paying for paint and materials (fixed dollar amount times refinish hours) is not “fair” to at least one of the two parties involved in this transaction, why does this practice continue?

Let’s look at the three most frequently mentioned reasons why the industry has not moved away from this antiquated and unfair methodology to a better, more equitable payment system such as invoicing and explore why these reasons are no longer valid.

1. It’s not easy for shops to document what P&M was actually used for a specific vehicle repair. This is the first reason usually given. That premise may have been valid many years ago, but it’s not true today.
Almost all shops today mix their paint and other liquids on a paint system smart-scale. These systems provide a cost and sell report for each mix based on the unique vehicle color. With this information, a shop is already halfway home toward creating an accurate final invoice for its P&M. Gathering accurate information on the materials used, however, takes a little more effort, but this too can be done quickly and easily.

There are several P&M estimating systems on the market today that can provide a shop with a list of all the materials (sometimes called “dry goods”) that are predicted to be used for a specific job. If a shop would just print out that list and place it in the “travel jacket” that goes along with the vehicle throughout the repair process, it would take the tech who worked on that vehicle only a minute or so to look over each line item for accuracy and note on that form any necessary adjustments that need to be made. When the repair is finished, all that’s needed then is for someone to make the necessary adjustments (adds, edits and deletes) on the computer program to generate an accurate “final list,” or invoice, of all the P&M that was used on a specific vehicle repair.

2. The feeling that no matter what the shops do, the insurance companies will not change the way they pay for P&M. This assumption is also false. Henry Ford once said, “The man who thinks he can and the man who thinks he can’t are both right. Which one are you?” Today, thousands of shops are regularly being paid off of a paint and material invoice, not just on an exception basis, because they’ve taken the high road and have done things for the right reason the right way.

It was not an instant success story; it was a journey. It took patience, persistence and persuasion to finally accomplish that goal. The first thing they did was use the tools mentioned above to track their P&M cost per vehicle, and they monitored their P&M usage to make sure they minimized waste as much as possible. Second, in advance of their move in a new direction, and in order to prepare insurance companies for the potential of future adjustments in the way they do business together, they let the insurers know that they were using a new business tool to better control their P&M cost. Finally, with accurate information at their disposal, they took a strong stance for getting paid off of an invoice for each specific vehicle repair rather than use the old methodology. They refused to accept payment based off of an old methodology that has no legitimate basis for calculating fair, accurate and reasonable compensation based on the work done for a specific vehicle repair.

3. People and companies have a built-in adversity to change. This is true, but it doesn’t make it right. Everything is constantly changing, and those people or businesses that do not embrace change will not be around in a few years. “Repairers must first change the way they do business, if they expect to change the way insurers do business with them.” This statement is a truism that covers all aspects of the repairer/insurer business relationship and is certainly applicable when it comes to how repairers want to get paid for their P&M.

Getting paid properly for paint and materials is a three-step process. First, shops need to know their true cost for P&M based on an accurate accounting of what’s being used to repair each and every vehicle that goes through their shop. Second, with accurate information at their disposal, they can more accurately establish the selling price needed on each job to generate the expected gross profits they desire. And, finally, they need to ask for the sale.

Today, thousands of shops across the country are using a paint manufacturer’s smart-scale system and other tools like the new P&M estimating systems to better track and manage their P&M and get paid properly for these items. Are you one of them? – Rick Palmer, president and CEO, ComputerLogic

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