At your current shop labor rate, can you repair enough cars in your market to pay all of your overhead, parts/materials, employee wages, loan payments, etc., and still achieve your profit goal? The answer is no.
Despite all the rising costs of business and declining margins, shops aren’t able to raise their rates due to insurer control and have fallen far behind those rising costs. According to the Bureau of Labor Statistics, for the last three years, the cost of living for common goods and services went up 18 percent, with the Consumer Price Index increasing 11.1 percent. During that time, the cost of electricity went up 27 percent, natural gas rose 24 percent and gasoline jumped 146 percent. Producer prices increased 15 percent. Closer to home, technician compensation rose 14.5 percent (according to the I-CAR Ed Foundation Snapshot 2004–2007). During this same time, the cost of refinish materials rose 23 percent. Yet collision industry studies show that shop labor rates only increased 7 to 8 percent and materials rates increased only 5.5 percent. In many markets, these rates haven’t gone up at all!
For the most part, shop owners know they need to raise their rates, but the controls insurers have through prevailing competitive rates and DRP concessions have obstructed their ability to do so. So their profits are continuing to fall to record low margins, forcing many out of business.
The Big Lie
The biggest lie might not be that the check is in the mail or that the dog ate my homework: It might just be the body shop rate. Everyone seems to know it’s a lie and that it’s inaccurate, misleading and misconstrued by everyone, but nothing to date has changed, nor has any association or assembled body made any suggestions on what to do about it.
Consider these real-world facts about the difference between the rates between comparable markets in California. A shop in southern California might charge $42 per hour, but there’s no way it could profit at that rate when it pays its technicians around $36-$46 per hour with benefits. The labor cost usually doesn’t exceed 42 percent of the cost of the repair. If that were the case, the shop rate would be around $110 per hour!
Meanwhile, the shop labor rate is closer to $85 per hour in northern California markets. Consider that the cost of living is nearly equal between northern California and southern California, yet the posted labor rates are nearly twice as high in the bay area as they are in Los Angeles and Orange County. However, despite this overwhelming difference, the bottom line total of the estimate to repair the same damaged vehicle is not significantly different.
How can that possibly be unless there’s a manipulation of the other factors used in the calculation of the estimate? This is an indictment of the current system and is yet another bit of evidence in the lawsuit consumers could bring against a shop or all shops for fraud.
Instead of an accurate shop labor rate, the technicians are paid a “flat rate” and must produce 200 to 225 percent efficiency over the “estimated” hour versus real hours. This is what the industry has come to refer to as “funny time.” What that really means is that the estimate hours aren’t real because the shop labor rate isn’t real, but neither are funny! The technician must do the repair and replace or remove and install functions called for on the repair in less than half of the time called for on the estimate.
Competitive Price Indexing (CPI) or Prevailing Competitive Price (PCP) or prevailing rate are terms insurers have used for years to describe the practice of setting the market labor rate. In the past, once insurers surveyed the shops, they would only agree to pay the prevailing rate. Under DRPs, the shops are required to comply with that rate. Outside of the program, shops are pressured by insurers that refuse to pay more than the fair market rate.
The obvious cycle is that the shop cannot comply and raise its rate, so the rate can never increase. So the shop can never increase its rate or it would be outside of the prevailing rate and then be blackballed by insurers. It would almost be funny if it weren’t so criminally manipulative.
Insurers have been smart in how they play the game. The result of this pricing and payment policy was that the door rates differed from market to market, but the general cost of a repair remained the same and artificially suppressed. Before the controls provided by DRP concessions and insurers forcing their own repair practices on shops, the balancing factor shops used was cost shifting and funny times. They would artificially over-inflate the cost of some other aspect of the overall repair to make up for the suppressed labor rate. Of course, few ever realized that they exposed themselves to fraud charges by following this practice.
The worst part of the set door rates is that the rates apply to all shops in a market area, regardless of the shops’ compliance to the default standards within the industry. The rates that are forcibly set don’t reflect differences for better services, faster processing, additional equipment, higher standards of repair, additional training, equipment or even higher customer satisfaction.
In fact, a shop would be far better off financially by saving their money, offering none of the superior services, never reinvesting in their business and avoiding any of the costly business practices and higher standards while receiving the same hourly rate! Can you imagine if our capitalist system worked this way? Lower skilled or unskilled labor jobs would be paid as much as the doctors, lawyers, accountants, scientists and engineers!
One of the clear definitions of price fixing is when there are concerted efforts to set a price or any component of the price charged to a consumer. The irony is that these efforts by insurers, and now by some states, to survey and set door rates are the exact definition of what’s supposed to be illegal.
Let’s view the existing shop labor rate as insurers perceive it. After all, they’re the ones that enforce the use of labor rates and compliance to the artificial rate. The posted shop labor rate is reflective of nearly nothing but a starting point to negotiate. In many ways, it’s one of the components insurers have the ability to control and suppress to keep their costs as low as possible. However, they may be overpaying by forcing all shops to follow a common shop rate system.
Are insurers really getting the same thing for the same dollar rate? The answer is clearly no. George Avery of State Farm and Roger Wright of AIG both acknowledged as much in 2007 at a Collision Industry Conference in Atlanta, Ga. When asked about the lack of truth in the itemized estimates and shop labor rates, they both acknowledged they weren’t getting “apples for apples.”
Without a clearly defined repair blueprint followed by all shops in a market area, the labor rate is based upon fiction. Further, the database used and how the estimate was written will completely change the estimate total cost. Both Avery and Wright suggested that a simplified billing system might be a far better way, but offered no solutions.
Shops are able to fix a car in many different ways with many different tools, expertise, materials, training and more, yet they’re all paid the same – at least the same shop rate in their market area. Why? Nowhere else in any industry does a consumer pay the same price regardless of the quality, workmanship, technical complexity or value. One might think that insurers would be against paying everyone the same, but they’ve distorted the system so much that now they have the ability to pay the shops that have invested the most in their business and provide the highest quality the same price as those that haven’t and don’t!
Paint and Materials
The best example of how illogical door rates are is how they’re used to determine paint and material charges. Both shops and insurers have accepted a method whereby an hourly rate is the basis of calculating the cost of the materials to be used on a vehicle in the repair and refinish process.
I’ve often used this joke to illustrate the point: “I was painting my house one day and went to the paint store to buy paint for the project. The clerk asked how much paint I needed. Having been around the collision repair industry too long, I told him I would be painting Saturday afternoon and Sunday morning so I need about 8.3 hours’ worth! Looking totally puzzled, he responded with equally bizarre logic by asking if I would be painting with one arm or two!”
The point is, how can the consumption and application of a physical product be accurately calculated in random hours and an arbitrarily determined hourly rate?
If a consumer wanted to challenge the costs of a repair and demanded a shop’s hourly records, it would clearly show that the shop didn’t really spend the hours it put on the estimate or the repair order. In response to fraud charges, a shop would declare it uses flat-rate database times, it has to make up for the fact that labor rates are artificially low, etc. Guilty! Even lawyers have been convicted for this pricing practice. Regardless, the industry continues to knowing use this funny-time, funny door rate practice for nearly 100 percent of the estimates and repairs performed.
Calculating Your Rate
If every shop had to calculate its real door rates today, most would not even know where to start. Most suggest they’re charging what they can, so the discussion stops. However, it might be valuable to see what your rate should be. There are many different ways you could calculate your door rate. Let’s examine a few:
AVERAGE LABOR RATE = Labor sales dollars / total estimated hours. Ex. $200,000 (over a period of time) / 5,000 (during same period of time) = $40 per hour.
TOTAL PROJECTED ANNUAL SALES = Projected net profit margin + total cost of overhead + total cost of sales.
PERCENTAGE OF LABOR = Total projected annual sales X percentage of revenue labor represents.
TOTAL REAL LABOR HOURS = Total # of techs X 2,080 (total number of work hours in a year based on 12 months, 52 weeks, 40-hour weeks).
AVERAGE LABOR RATE = Total projected annual sales / total real labor hours.
These formulas don’t take productive hours into consideration. Therefore, you may also need to add in an inefficiency factor (since not every hour of the day is productive) to make sure the retail price is high enough to result in a decent profit.
No Real Rates?
Remember that the labor rate surveys establish what the lowest common rate is in a market, not the highest rate charged by those shops that offer a better level of service and repair. If your shop isn’t offering the lowest common service, why are you pricing your services as such? On the other hand, why should insurers expect to pay the lowest price or the same price if you are offering something different? The problem may well be that repairers across America have done little to nothing to separate themselves from every other shop in the market. You’ve been lumped into one big, ugly bag and so, too, have your services and posted shop rates.
The ridiculous estimating and door rate surveying practice has added time, complexity and enormous costs to the estimating process but has not resulted in accurate estimates or a lower or higher overall estimate on the same repair. In fact, many industry experts have suggested that the estimating process is the single largest cause of the inefficiencies and extraneous costs related to the repair and claims process. It’s also seen as the single biggest obstacle to change.
From a consumer’s perspective, what does the rate mean, anyway? They have no preconceived notion of how that fictitious shop rate posted on your wall equates to the total repair cost since they have no idea how long anything should take. Even if they had a labor rate database or manual in their possession, the rate wouldn’t make sense. Therefore, what’s the point of having it on your wall? It only confuses and misleads. It may even be evidence if someone wanted to prove you didn’t actually spend that much time on each step of the repair you itemized. Can you imagine having to try to explain how our industry prices and bills to a jury of common consumers?
Any simple suggestion would be far too simplistic for the complex mess we’ve created in this industry. However, the first step toward clearing the mess out could be to establish a retail list price and figure out your shop’s real cost of repair.
Retail List Price
If shops were not held in check by insurer tactics, what would they charge and how would they set the price? Isn’t the shop labor rate you charge to insurers already a negotiated and discounted rate? If so, why should you be posting the discounted labor rate that you charge insurers? Why not post the rate you would charge before negotiations start with an insurer or consumer?
To begin to establish a foundation of fairness and logic, shops should establish a retail list price as their baseline. The retail list price should be set according to what they would charge a consumer for one hour of work with no discounts or special volume considerations. It should reflect the total cost of business operation for that single hour. The retail list price isn’t necessarily what a shop would charge an insurer or all consumers; it would simply represent the hourly rate before the negotiations and weekly specials start. It would probably end up being similar to what mechanical repair and auto service businesses charge – or what the labor rate in northern California is.
Imagine if every shop in America posted a retail list price hourly rate tomorrow. Starting tomorrow, when they wrote an estimate, they would see how much it should be before they discount it to an insurer or their favorite customer. They would have a starting point to illustrate how much they’re discounting and giving up to compete and play in the game as it is today. Insurers might appreciate the facts of life, too. At least they would know how much they were beating out of the shop through their cost containment practices.
Strive Toward Legitimacy
If a store or dealership didn’t have a retail list price, how could the consumer negotiate? How could those stores offer appealing specials, discounts and incentives when they needed to sell more? How could they profit according to supply and demand and become more efficient when they had to if an unrealistic and arbitrary list price was established in the model of current posted shop labor rates? Even employee compensation is distorted and misleading with the prevailing flat-rate and commission-based pay plans.
The current system is founded on the most illogical and misleading component in the mechanism to establish a charge for a repair. The whole system is a Ponzi scheme that uses cost shifting and funny time to make it work. Perhaps with a retail list price, shops could begin to unravel the spaghetti that serves as the foundation for their business – even if they never actually charge anyone that full price. This retail list price would establish a foundation for a variety of consumer-oriented strategies and a more accurate picture of just how big of a discount repairers are really giving insurers.
A retail list price also allows shops to migrate to more consistent and realistic estimating and compensation plans. If nothing else, the establishment of a retail list price would bring repairers, insurers and the entire industry one giant step closer to more legitimate business practices and an industry of excellence.
With a retail list price, consumers would see the discount they’re receiving when they get an estimate. It would show that it’s discounted for them. If they wanted to pay for the repairs themselves, as nearly 36 percent of the entire market does, using a retail list price would create a far better starting point to begin to negotiate or discount special price services for those consumers. Until now, we’ve had no realistic way of offering pricing specials. Remember, everyone likes a deal and receive special treatment. A retail list price allows shops to have a margin they can use to negotiate and provide “specials.”
Insurance companies have different policies at different costs. Mechanical, auto detailing and retail stores have different products at different prices to sell to the consumer – all but collision repair businesses. What if you wanted to offer a certified collision repair versus a normal one? Would it cost more? How would you price it differently? How would you communicate to consumers and insurers that you offer a different level of repair? If you used only the best techs and best materials for a particular service, should that service not be higher priced? After all, if you buy a luxury car, it will cost more than the economy model.
Shops in Australia and Europe have offered different levels of service and repair for decades, and they price accordingly. Shops in the U.S. would be well advised to have different rates posted instead of waiting to fight it out with an adjustor after the fact. It works for other countries as well as nearly every other industry.
Focus on Reality
Trying to change the posted door rate that insurers control through surveys and other methods might be as silly as wishing for wings to fly or thinking that one day you’ll win the lottery. The reality is that changing the rate without reprisal or far- reaching ramifications might be somewhere between impossible and extremely improbable. Perhaps the best idea is to avoid wasting too much time trying to change it but instead focus on creating a new reality and baseline by establishing a retail list price. The retail list price might never be charged to any single person ever – but it sets a reality that has been missing in our industry.
Writer Scott Biggs is currently the CEO and founder of Assured Performance Network, a shop-owned co-op founded in 2004 representing approximately 5,000 independently owned collision repair businesses in the U.S. He’s the former producer and host of BodyShop Video Magazine and president of Business Development Group. He has received many awards including Industry Achievement, Hall of Eagles and Most Influential Leader of the 20th Century. He has toured thousands of shops and delivered more than 850,000 hours of management education to the collision industry. His organizations have provided marketing, technology, management services and consulting to thousands of body shops worldwide since 1984.