Labor rates have always been an area of contention between shop owners and insurance companies. From time immemorial, the two camps have been divided on the issue, and monumental arguments have arisen any time this subject is broached. So before we can arrive at any real answer to the labor rate question, we must first look at the components that impact rates.
What Is a Contract?
In an effort to bring some uniformity to how much a shop should charge or a consumer should pay per labor unit or labor hour, the idea of a standard labor rate was proposed (some would say forced) and adopted.
The ever-changing nature of economic factors that impact rates within a particular region include cost of living, cost of goods, previous labor rates, operations being performed and, lastly and sadly, what repair facilities are willing to accept. That last factor — what we’re willing to accept — is a vital part of the equation and relates to what we’re going to examine next. It’s important to understand that the true basis for why rates work the way that they do is a legal term called an “implied contract” or an “implied-in-fact contract.” The definition for this is, “A contract where the agreement of the parties is indicated by their conduct.” Let’s take a closer look at this …
The basic elements of a contract are offer, acceptance, agreement, capacity, consideration and legality. So does the insurance company dictating a labor rate constitute a contract and, if so, how?
- Offer — Was the labor rate seriously intended, communicated and certain? If the insurer communicated the rate in writing (on an estimate) and provided it to you before the work was completed, it’s a valid offer.
- Acceptance — Did you, by repairing a vehicle for a specified labor rate, accept the rate that was paid? If you repaired it for the rate that was listed, then you accepted it.
- Agreement — Did you agree to the labor rate by completing a repair for that rate? Like it or not, through your actions of performing the work for the listed rate, you agreed to it.
- Capacity — Unless the person completing the work for the collision facility was under 18 years old (21 in some states), mentally unstable or drunk when he agreed to the rate, then you have capacity. (Some would say that for us in the repair industry, this is the trickiest element of a contract!)
- Consideration — Was there an exchange of something of value (money for labor)? If you did the work and they paid you, this element is met.
- Legality — Is there any illegal activity that’s being required or demanded? With the exception of a chop shop situation, this isn’t usually an issue.
So now that I’ve bored you with a remedial layperson’s view of
contracts (I’m not a lawyer), let’s consider the elements above and
decide if we entered into a contract or an implied contract by our
Most of us would have to concur that the reason labor rates are what they are in our regions is because they’re the rates we’ve accepted and, through our actions, we’ve agreed to be a party in an implied contract. So yes, we’ve entered into a contract.
Back to the Question
So how do we get insurance companies to pay the labor rates we want them to pay? Perhaps the most surefire way to not let insurance company rates affect you is to not abide by them.
In the city where I live, there’s a very successful highline repair facility owner who understands that the “local prevailing rate” isn’t adequate to provide his customers with the level of repair that they demand. For this reason, he has potential customers who bring their vehicles into his facility for repairs sign a document stating that they understand that the labor rates at his facility are higher than the prevailing insurance labor rates and that they agree to pay the difference between these rates.
Although I think this approach is novel, it’s not practical to the everyday body shop that depends on insurance company business to occupy stall space. The most practical approach to skinning this cat is three-fold:
- Make sure all insurers in your area follow the highest “prevailing rate” set by the largest of your area’s insurers. Use the same logic with insurers that they use on you when they say, “The guys down the street will do it for this much.”
- If you can’t single-handedly lobby for and receive higher rates with an insurer, attempt to have the rates increased through pressure. This pressure can either be in the form of customer feedback or pressure applied by a strong local industry association. I’ve been successful in doing this if the increase requested was already being paid by one of the larger companies. I’ve also seen local associations make some inroads into this as it relates to capping of paint materials, but not yet for rates. Just be careful here not to violate any anti-trust laws.
- If your efforts to raise labor rates fail, agree to complete repairs at the dictated rate, but make sure they pay you everything that’s owed at that rate. If you have an estimate that has 10 labor units paid at $40 per unit (10 hrs. x $40 = $400) and the labor rate should be at $43 per unit (10 hrs. x $43 = $430), then take a look at the difference. You only need legitimate labor operations that can be added to an estimate that equal $30 to make up for the improper labor rate.
Using the $40 labor rate that the insurer has agreed to, this is only .8 labor units (.8 X $40 = $32). I can promise you that if you audit every estimate and repair order being generated at your facility, you can find a legitimate .8 labor units to the estimate.
I’ve told smaller insurance companies that tried to get work completed for a rate far below the “prevailing rate” set by the larger insurers that we don’t do work for that rate. When the adjuster told me that the shops down the street do it for that lower rate, I explained that it would probably be better for them to have the vehicle taken to those shops since they’ve already negotiated a lower rate.
If you do this, then at least you won’t have a spread of rates to contend with on repairs. You can then work on trying to raise that one rate.
In my opinion, No. 3 is the most effective way to handle labor rates. A shop isn’t usually going to want to pressure a large insurer to pay a higher rate than the prevailing rate in the area unless that shop can show that every shop in the area charges a higher rate. Making sure that you get paid for every operation you’re entitled to is the most effective way, in my opinion, to affect your bottom line.
Skinning that Cat
Although I can’t answer the question with one magical response, hopefully you now have a better concept of how labor rates are determined and how to affect them.
The moral of this story: Our actions determine labor rates. If we agree to what’s being offered, then that’s all we’re going to get.
Writer Randy Trahan is the director of collision and reconditioning training at Manheim, which includes paint and body instruction and training, as well as condition report writing, estimating, NAAA frame instruction and soft skills training associated with both the collision and reconditioning divisions of Manheim. He also runs the Manheim Technical Center and manages the three instructors attached to it.