"Why do insurance companies control a shop’s labor rates? Isn’t this price fixing?"
–– Ron Humphress, former parts manager, Good News Auto Body Shop, Salisbury, Md.
Black Law Dictionary, 7th Edition, defines price fixing as an "artificial setting or maintenance of prices at a certain level contrary to the workings of the free market."
Price fixing is illegal. However, negotiating for a lower price is not. So what’s the difference?
Price fixing occurs when a company or companies attempt to artificially control the price of goods and/or services. But there’s a fine line between artificially controlling a labor rate paid to collision shops and negotiating a lower rate the insurance company will pay. To prove that price fixing has occurred, you must prove that a company has, in fact, artificially controlled a price.
Price fixing laws were first written in the 1940s and were designed to ensure that competition wouldn’t be eliminated by artificially manipulating prices. These laws work both ways. A few years ago, a group of Louisiana dentists got together and decided to "just say no" to the prices insurance companies wanted to pay them for services. In the lawsuit that followed, the judge declared that the dentists violated price fixing laws by conspiring as a group to refuse the prices offered.
Remember, it doesn’t matter who agrees to work together to control prices — the buyer or the seller — neither side can agree to artificially control prices. These laws are designed to ensure a free market remains in place.
Why Insurers Don’t Get Busted
Why aren’t insurance companies in violation? Simple. They negotiate their rates, one job at a time. I know some of you don’t feel like you’re negotiating when you try to work with insurance companies, but as long as other shops in your market accept the lower rate being offered, this "free market" test will prevail. The key is to remember they’re not fixing a price they’ll pay you; they’re simply negotiating with you for a price that they want to pay you.
Many shop owners confuse negotiating with price fixing. For example, a shop owner tells an insurance company his shop’s labor rate is $50 per hour. The insurance company responds by saying, "In this market, we only pay $45 per hour." This is negotiating, not price fixing — as long as the insurance company can prove it’s paid this rate to other shops in this market.
The existence of price fixing would require that insurers respond to the owner’s request by stating, "The insurance company rates for this market are set at $45 per hour." I know both of these statements sound very similar, and I know over time most shop owners have simply given up on trying to negotiate a better rate from insurance companies. Also, I think I should point out that every major insurance company trains its people in the "art of negotiating." So be forewarned. When it comes to discussions with these people about rates, you’re dealing with a trained negotiator.
Understanding Labor Rates (or How Things Got So Crappy)
Before we start banging our drums about how the insurance industry controls us, it might be advisable to take a look back at how collision labor rates fell behind service labor rates.
Let’s go back to the ’70s, the Age of Aquarius, sex, drugs and $20 per hour labor rates. Rates for both collision and service work were roughly equal back then. Today, labor rates for service work are nearly double that of labor rates for collision work. What happened?
Well, the answer is like one of those 3-D, hidden image puzzles, the ones you stare at awhile before you see the true picture. If you look at the difference in today’s labor rates for collision and service, the effective hourly rates of pay (income) for both are nearly equal. Actually, collision rates are slightly higher in most of the surveys we perform. There is, however, a huge disparity in the way hourly rates are calculated. Before I explain the differences, let me explain what I mean by effective hourly rates.
In 1970, an hour of service labor took the technician about 30 to 45 minutes to produce, as did one hour of collision labor. In the mid-’70s — when the inflation rate was high and gas prices doubled, tripled and then quadrupled — service shops began to increase their labor rates to keep up with inflation. For the same reason, insurance companies encouraged their field staff to hold the line on collision shop labor rates. I know from personal experience that they did a great job of keeping down labor rates paid to shops. I also know that straight time allowances went through the roof. Material allowances increased dramatically and, in the late ’70s, we saw the introduction of frame time allowances. Shop owners were happy co-conspirators in this scheme to "control labor cost." They were willing to accept more straight time and higher frame and material rates in exchange for a reduced hourly labor rate.
Since service shops didn’t have these allowances to offset their increased cost of labor, they were forced to learn how to sell their services at an ever-increasing rate. Collision shops, on the other hand, began focusing on total ticket income by implementing altered book rates, frame rates and straight times to cover their labor costs.
As time passed, the gap in advertised rates grew farther and farther apart. However, effective rates –– the amount of labor dollars earned for every technician hour available to earn labor dollars –– remain nearly identical. This is evident by comparing the proficiency (hours billed/hours available to bill) of the service technician to the collision technician.
During the years, we’ve worked with thousands of collision shops and service shops. We find the average service technician is roughly 85 percent proficient — meaning that for every hour he’s available to work, he produces about .85 billable hours. On a $60 per hour labor rate, this is calculated out to an effective income per hour worked of $51($60 x 85 percent). Now we all know that collision technicians are much more proficient than this. As a matter of fact, we find the average collision technician’s proficiency to be about 170 percent. This means that for every hour he’s available to work, he produces 1.7 billable hours. For an average collision shop with a $30 per hour rate, the effective income rate is $51 per hour ($31 x 170 percent).
So, before you start crying foul about price fixing and artificial controls, you might want to calculate your effective hourly income rate. The formula is simple:
Income Labor Dollars ÷ Technician Clock Hours = Effective Hourly Income
This can be applied to any time frame you choose. We prefer to track this monthly.
Secrets for Increasing Your Labor Rate
Since I may have burst your bubble here, let me share some tips on how you can improve your shop’s labor rates. We work with a lot of shops around the country that do an outstanding job of controlling their hourly income for labor. The following are some of the things they do to improve their labor rates.
• First, remember that labor rates are negotiable and that you’re most likely dealing with a trained negotiator. Do your homework and get your facts straight before requesting a higher rate. We put these facts together by doing our own labor rate survey of the market. We do this two ways:
First, we hire temps, give them a list of shops we want them to visit to obtain an estimate and put them in a wrecked vehicle. Second, we hire more temps to go through the phone book and call a list of collision shops. They tell the shops they’re performing a rate survey of that particular market and ask them if they’ll share their rates for metal, paint, frame and materials.
In the 15 years we’ve been conducting these surveys all over Mexico, the United States and Canada, I’ve never encountered a market that didn’t have several shops charging rates higher than the average.
We also find, upon review of the actual estimates written by our surveyed shops, that many shops are charging set-up times, blend times, inspection times and disposal times our shops didn’t believe were possible to obtain. As consultants, we find ourselves constantly reminding our customers of the old adage: "If you don’t ask for it, odds are you won’t get it."
Once you have a good market survey and copies of your competitors’ estimates — and you can prove this information was gathered by an objective third party — you’ll be in a strong position to negotiate for a better rate.
• Shop owners can also improve their rates by properly configuring their estimating databases. I’m amazed at how often we encounter shops that only have one configuration set up in their estimating databases. And usually, the one they have is almost always the one for the largest insurance company in their market. Of course, the largest insurance company usually pays the lowest rates.
This isn’t unusual. Remember, the largest volume customer in any market can usually command the lowest prices because they control so much volume. We recommend you establish insurance rates based upon the volume of business the particular insurance company does with your shop. Companies that send you lots of work are entitled to a better rate than companies that only send you work occasionally. This requires an analysis of your shop’s sources of business, an establishment of different rates and a set-up of different estimate writing configurations for these companies.
• Finally, I strongly recommend you track your effective hourly income. Technician proficiency (output) has a tremendous impact on the number of labor dollars your shop brings in. By measuring this, you’ll see how other aspects, besides what the insurance company pays you for a flat rate hour of labor, impact your business’ success.
Every year we visit collision shops with technician proficiencies of 225 percent or more. On a $40 per hour labor rate, these shops have an effective hourly income of $90 per hour.
Fixing Your Profits
I hope I’ve given you the answer you’re looking for. If not, remember, I’m a consultant, not a politician. But this doesn’t mean insurers have gotten the better of you. In fact, this may actually be an opportunity. Since you’re now more aware of the insurer’s prowess for negotiating, you can hone your negotiating skills as well, which has a number of uses. Maybe you can talk down a bill at a restaurant or get a great deal on a lawnmower at a garage sale.
But like the guy selling the lawnmower, you and the insurer are in business to make money. In this drive for dollars, it may appear that shady deals are going on, but often this simply isn’t the case. There’s a difference between a practice being unethical and it being illegal.
Rather than crying foul over alleged price fixing, your energy might be better spent maximizing what you get out of your labor rates. Once you’ve done that, you might be amazed at how insurer negotiating policies become less important to you — and your profits.
Writer Larry Edwards, C.M.C., is a certified management consultant and president of Edwards & Associates Consulting, Inc. in Harrisburg, N.C. Edwards & Associates specializes in body shop management consulting for both dealerships and independent body shops. You can reach Edwards & Associates at (800) 979-9904.
| Who to Contact
If you think an insurance company is violating price fixing laws, contact the insurance commissioner in your state to voice a complaint.
• District of Columbia
• New Hampshire
• New Jersey
• New Mexico
• New York
• North Carolina
• North Dakota
• Rhode Island
• South Carolina
• South Dakota
• West Virginia