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Every single body shop in America is struggling to combat massive inflation and suppressed labor rates. No one is immune to the struggle: neither the consolidators nor the independent shop owners.
Tanking profitability and, in a lot of cases, single-store locations losing money every month to the point of bleed-out has a lot of shop owners on edge and anxious. Compound that with the challenges of retaining, finding and/or offering retention bonuses to current employees amidst the massive amounts inflation that seem to inflate daily, and you’ve got trouble in paradise. These issues have become ground zero and body shop owners’ No. 1 challenge.
Lack of Business Skills
After observing the collision industry for 30 years, I can say it is a fact that most body shop owners are reformed body or paint technicians who turned into owners. Consequently, they lack the business skills, knowledge and/or background needed to wrap their minds around how to get a labor rate increase. Furthermore, most shop owners have not worked for an insurer and therefore do not understand the chess moves involved to get the green flag from upper claims management for a labor rate increase.
Additionally, since so many shops are shorthanded, many shop owners are now busy working “in” their businesses rather than working “on” their businesses. Finding the time to sort out and implement a solution may feel like they’re trying to climb Mount Everest.
The Perfect Storm
What most shop owners don’t know is that right now is truly a perfect storm for obtaining labor rate increases. Here’s why:
- There is no human who isn’t aware of the rate of inflation. A gallon of diesel is $5.50 to $6 a gallon in most parts of the U.S., up from $1.89 a year ago. A gallon of milk was $3 and is now $6 or more. Most shops have realized three paint and/or associated material rate increases in the past six to eight months. Some of these increases are over 30%, not to mention utility bills going up by the day. Any human, specifically insurers, cannot avoid the reality of inflation. Insurers are aware, trust me — my homeowners insurance doubled on my May renewal!
- The consolidators are working hard on their side fighting for labor rate increases. They have lots of hands and support, and they know how to get labor rate increases. The time for independent collision repairers to put the brakes on the bus, grab the bull by the horns and implement these same procedures to obtain labor and material rate increases is right now! Think of it as the ol’ one-two punch: Consolidators are the first punch, and the independent repairers are the second.
Increasing the Labor Rate
So how do we get labor and material rate increases?
- You and your staff will need to commit to the attention and focus that will be required. You must acknowledge and appreciate how much time, commitment and focus will be required to realize the increase. Asking once or twice is not going to work. If this is your approach, do not waste your time.
- Ask for them — I know that sounds easy, but you have to be strategic and unrelenting, yet kind.
- How are you going to ask for the increase? Common sense prevails here: in writing, verbally, text message or any other means of communication to managers, adjusters, inside claim reps or whomever you speak with each and every time. It can be, “Hey, by the way, due to inflation and staff retention, we’re requesting a labor and material rate increase.” It may seem weird and even uncomfortable telling the same adjuster 30 times and handing that person a copy of your letter 40 times, but this unrelenting stamina is what is going to be required for this and every go-round. Submit your request with all your supplement requests. Email it daily to adjusters, managers, etc. Make a distribution list and make the email part of your daily routine like your coffee. I reiterate: Asking once or twice is not going to work. If this is your approach, do not waste your time. If the requests fall on deaf ears, you may need to ask for a manager or someone else. If requests are heard but a bad attitude or poor treatment ensues, kindly ask, “Why are you upset with me?” Combat the answer with how much a gallon of gas was one year ago and how much it is today. Remind them of all the ways gasoline prices affect your business, from parts deliveries, employees’ cost of coming to work (which equals pay raises), employees needing raises to offset inflation, paint being made from petroleum, etc. Be creative.
- Maybe make a game of it with your estimators and/or management staff by telling them, “If you approach 10 insurance folks in one day with the request, you’ll receive a $25 gas card.”
- Keep it light; do not ever get a tone with the insurance points of contact. I know we all would like to play hard ball, but that never works in any situation. Make a joke of it: “Here is my daily request for a labor and material increase. Sorry to be a be a daily thorn in your side, but ….” And change it up each day by mentioning a challenge you’re having as a consequence of the rates not being adequate.
A Different Approach
Some shops have adopted an “I do not care what the insurer charges, my rates are XY and Z” attitude. This model unfortunately does not work for all shops. It sounds good in theory, but for smaller and or newer shops, this is not a route I would suggest. For a shop that has been around a long time and is maybe super niche and has a strong repeat and/or referral clientele with a lot of cash reserves, this might be a good solution. Profitability will be higher, and you’ll likely fix fewer vehicles and have less stress, but anxiety could be hard to manage as you’re transitioning into this model. I recommend doing a lot of homework with this model before jumping into this pool.
Are They Enough?
A lot of collision shop owners run their businesses by their checkbooks. They do not review their financials monthly and usually rely on their accountants to provide feedback regarding profits. Consequently, when those checkbooks run low, many shop owners get frustrated. That frustration, compounded with ridiculous amounts of inflation, creates a perfect storm of frustration, anger and lashing out at their employees.
Hence, before you request labor rate increases, you truly need to know and understand your numbers. When I say numbers, I mean:
- Understanding how to quickly read and identify issues with your profit and loss statement
- Where you’re making money vs. losing money
- Where your profit margins are and what they need to be to be profitable
- Understanding your breakeven point
- Business plans for growth and what resources are needed and adjusting your needs accordingly with sound reasons.
Once you have a handle on the numbers, you can truly begin creating your strategy by identifying what your new rates should be and will need to be to remain profitable.
In my next article, I’ll walk you through step-by-step on how to identify your breakeven point and determine a reasonable profit margin so you can go after and solidly support your labor and material rate increase requests.
David Luehr of Elite Body Shop Solutions: Don’t Ask, Don’t Get
We still live in a free country, so a shop can charge whatever it wants. However, it must also understand that, as in any business, the price of the service must be commensurate with the quality of the product or service; otherwise people will shop elsewhere. The argument that “insurers don’t pay what I deserve to get” isn’t always an educated argument when a shop hasn’t invested in the tools and training required to properly repair a car in the first place. The reason I mention this is that quite often, the people doing the most complaining act like victims instead of professional businesspeople who understand their numbers and can confidently demonstrate why they require a higher labor rate.
A prevailing rate, although still a bit of a mystery, is supposed to be the labor rate that most shops are charging in a market area. So, is it fair that a shop that has invested in the best training and equipment should charge the same as the shop with none? Of course not. My advice is to first know your numbers. Then, create a posted door rate that makes profitable sense for your shop and charge that amount whenever possible. For years, I successfully operated this way, and while my door rate was not always what I got paid from a bill payer, I always did indeed ask for it. Don’t ask … don’t get!