Articles & White Papers
AUTO BODY SHOP LABOR RATES
by James A. Castleman, Esq.
As I have related numerous times in various articles in several auto body industry trade publications, the very first question that I ever got as an attorney for the body shop industry, over thirty years ago, was: “What can we do about the labor rate?” Over the years, I have given assorted answers and suggested diverse strategies. Some strategies were for individual shops to pursue. Some were larger in scope, suggesting concerted efforts by associations to take legal, legislative or regulatory action.
Over the past few years, legislation has been filed, supported by various auto body repair trade associations in Massachusetts, that, if passed, hopefully would greatly improve the situation for the better for body shops in the state. But, even if labor rate legislation is enacted, it cannot be viewed as a panacea that will cure all of the ills in the industry. No matter what, body shops will always have to fight to get paid a reasonable amount for a labor rate.
All of this being said, how can you, as a body shop owner or manager, fix your labor rate problem? What can you do to assure that your shop gets reimbursed an adequate amount for the time spent by your techs in fixing your customer’s cars? Following is an outline of what to do.
1. Figure out what you need to get as a labor rate
It does no good to complain about not getting reimbursed a satisfactory labor rate, if you do not know what you need to get. What are your costs to fix a car, including wages, benefits, overhead, etc.? How much an hour does it cost you to pay your help and keep your doors open?
After figuring out what it costs to keep your doors open, you have to figure what a realistic number of cars will be that you will fix in a given week or month, and how many man hours it will take you to fix each of those cars. This is necessarily an estimate. But, if you have been in the business for any length of time whatsoever, you should be able to come up with a pretty good figure.
Next, you have to determine a factor for unforeseen circumstances. There may be that week or month when business is slow. There may be an employee that is out sick for a period of time. There may be an employee that leaves, and it might take a while to find a qualified replacement. And, even if that replacement is qualified, will he be able to fix cars as fast as the person that left? Are your rent or mortgage costs fixed? Are you paying real estate taxes, and, if so, in what direction are they going? How about utility costs? Are they fixed, or are they going up like everything else? Will some of your equipment have to be replaced or repaired in the near future? Will you have to make accommodation for technology advances? What is the trend in your insurance costs? It is not enough to know just what your current operating costs are; you also have to project what they might be in the foreseeable future.
Finally, you have to add in a factor for profit. It does no good to set a labor rate that just covers your costs of operation. If you are not making a profit, then you may as well go to work for someone else or find another line of business. There are not many people in the auto body industry that think it is worth the headaches of the business just to pursue a hobby.
There are other things to consider as well. After all, hopefully you are making a profit on parts. This is another element that you should be able to fairly accurately estimate. And, perhaps your shop can complete certain repairs in a shorter time than the flat rate crash books provide. On the other hand, maybe it sometimes takes a longer period of time to complete those repairs. Whatever peculiarities pertain to your shop, you have to factor them in; but only you know what they are.
It is only after you have gone through this exercise that you can figure out what you need to get as an hourly labor rate. In the end, there are some factors that are necessarily only estimates. But, without going through this exercise, you do not have a realistic idea of what it costs to operate your business, and you cannot legitimately decide what you need to get as a labor rate.
2. Set your labor rate, post it in your office, and put it on all of your estimates.
It does no good to figure out what you need to get for a labor rate, unless you are going to do something with it. Do not tell me that it doesn’t matter because you have to accept what the insurers write for a labor rate anyway. If you take that attitude, it is going to be a self fulfilling prophecy, and your labor rate is never going to increase. At the very least, you have to try to get what you need for your labor rate. And, that starts with posting it in your shop and writing it on your estimates.
By regulation, in Massachusetts you are required to write your own appraisal in all circumstances anyway. This includes original appraisals and supplemental appraisals. At the very least, you need an appraisal to give to your customer as an estimate of the cost of the work that you are going to do. And, by law you need to write an appraisal for negotiation purposes.
Blindly accepting an insurance company appraisal is not only illegal, but it is a terrible way to do business. You have to develop a method of determining what you believe you really need to get to fix a car. The only way that is going to happen is for you to write your own appraisal. And, setting your labor rate and plugging it into all of your appraisals gives you a good idea of what you need to get as a bottom line figure, even if your plan is to negotiate your labor rate with insurers. You need to know what you really need to get to fix a car, pay your overhead, and make a profit. The only way that that is really going to happen is if you write your appraisals initially with the labor rate that you have figured that you need to get.
Posting your labor rate, writing your own appraisals, and putting your posted labor rate on your appraisals has other advantages, as well. It gives insurance appraisers notice of what you believe you need to get as a labor rate. It may not have an effect today. But, if you do it for long enough, and if enough other shops also do it, then at some time the message is going to get through.
Another thing to possibly consider is using your labor rate on your final bill to your customer, while adjusting the number of hours on your bill to make the bottom line work out to what you are actually accepting. There is a danger in doing this, in that it is possible that some insurance representative may some day determine that you should be able to fix cars faster, since your bills reflect fewer hours than the appraiser writes. But, this is a small risk, and you are being consistent with the labor that you charging to all of your customers.
3. Make a decision as to how you intend to handle labor rate disputes
This may be the toughest part of setting your labor rate policy. You want to be able to set your labor rate. You want to be able to set a rate that is high enough to make sure that you can operate your business and make a profit. You want to stick to your rate, so that it may be possible that some insurers may agree to it, or at least that some insurers may agree to it in the future. Meanwhile, though, you want to stay in business. How do you handle this situation? There are a few options, but none are perfect.
Option Number 1. One option is to stick to your labor rate and charge it to all your customers, no matter what. Make your customers aware from the beginning what your labor rate is, and that they will be responsible for any amount that their insurers will not pay. In these circumstances, you can ignore what a particular insurer reimburses for a labor rate. Your contract is with your customer, and your customer will be agreeing to pay your labor rate. You charge what you need to charge, and you get it in all circumstances.
The obvious problem with this first option is that most customers do not want to pay anything out of their own pockets, and you may lose a lot of customers if you operate your business this way. But, if you do specialty repairs, or if your are a small shop that can attract higher end vehicle owners that are willing to pay money out of their own pocket to obtain quality repairs, then perhaps you can do it. There are some shops that have been able to operate their businesses this way. And, sometimes they actually get insurers to pay a higher labor rate for repairs. Certainly, truck reapairers often get pair a higher rate, as do shops that do specialty repairs requiring unique equipment not available in other shops.
But, based upon my experience, the number of shops that are able to command a higher rate is limited. It is a fact of life in the auto body repair business throughout the country that insurers pay for the vast majority of auto repairs and that most repair shops cannot stay in business unless they are able to accept what insurers will pay - even if that payment is not determined until there has been hard fought negotiation.
Of course, another disadvantage of using this tactic, is that you can never be a referral shop for any insurer. Not that this is such a bad thing.
Option Number 2. As suggested above, you may be able to negotiate as best as you can with an insurer, so that you can hopefully get to a bottom line that is satisfactory to you, and then you can readjust your hours to reflect what you are actually receiving. You can still charge your posted labor rate, but your labor hours are going to be less than what your customer’s insurer is writing. You have compromised the way that you write appraisals in the way that you charge for repairs. But, you are getting what you need to operate your business and make a profit, and you are being true to your stated labor rate. And, your final bill can accurately reflect the repairs that you actually performed.
Note that, if you use this tactic, you can still qualify to be a referral shop, if you so choose. Notably, you do not even have to admit that you are accepting the insurer’s labor rate. There is a directive issued many years ago by the Commissioner of Insurance, that says that an insurer has to consider you to be qualified on their referral list, even if you charge a higher labor rate, if you can show that you perform repairs in an otherwise more economical fashion. In other words, if you can establish to the insurer that your bottom line will be the same as theirs, then the insurer has to take you as a referral shop, even if you have a higher labor rate on your appraisals and final bills.
Option Number 3. A third alternative is to just accept insurers’ labor rates and make up the additional amounts you need in other areas. Perhaps you can negotiate additional hours to perform repairs. Perhaps you can find P-page allowances that you can add onto your appraisals. Perhaps you can get insurers to agree to pay administrative costs. Perhaps you can make it up in frame time. Whatever works for you is acceptable, as long as you actually perform the repairs that you put on your appraisals and final bills. The hours that you charge are flat rate hours anyway, so it does not really matter that they may exceed what the crash guides may otherwise provide. And, it also does not matter whether or not you spend that many actual hours in performing a repair. What matters is that what you are charging shows up on your estimates and on your final bills, and that the actual repairs written are performed and that the actual parts written are replaced.
And, utilizing this last method, allows you to be a referral shop for any insurer, if you so choose. You are going to negotiate your cost of repairs with the insurer, and their final appraisal and supplements will be what you have negotiated.
Of course the danger of utilizing the final method, is that your labor rate may never increase. If every shop in the state is using this method, then there is never any incentive for an insurer to increase the labor rate that they are reimbursing. No one is asking for a higher labor rate, no one is posting a higher labor rate, and no body shop is writing a higher labor rate. So why should an insurer pay a higher labor rate? There is no reason.
Yet, I suspect that the final suggested method of doing business is the one most often chosen by repair shops. Does it make sense? You decide.
“The labor rate” has been the single biggest issue that body shops have asked me about for over 30 years. There may be legislation in the works that might help the auto body industry in Massachusetts. But whether that legislation passes or not, the issue will continue, and each shop owner will have to continue to grapple with how to handle “the labor rate”. Whatever you do, please take the advice suggested in this article, and actually figure the true labor rate that you need to get to operate your business and make a profit. It may not be easy to do, and it will never be entirely accurate. Yet, it is the only way to assure that you will be able to stay in business and not lose money.
After you determine what you need to get for a labor rate, you then must make your own individual business decision as to how you want to handle the problem that exists of insurers refusing to pay that rate. The choices are not great. But, there are options. And, you have to determine what works best for you and your shop.
James A. Castleman is a managing member of the law firm of Paster, Rice & Castleman, LLC, in Quincy, Massachusetts.