Tuesday, 31 July 2007 17:00

DRPs in the collision repair industry: good or bad?

Written by Lee Amaradio, Jr.
In the beginning it was good. We all wanted them and we were lucky to get them. They helped us build mega-shops and attain success as shop owners that was never before possible. We gloated in our success and became the professionals we always wanted to be. We had more work than we knew what to do with and all was good.
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Amaradio

It was like a new marriage – we were so happy that we were willing to do almost anything to keep them. When our DRP partners asked for something more, we gave them whatever they wanted. We wanted to keep them happy and worked hard at it.

This trend continues to this day, only now it’s like a marriage that is on the rocks. Marriage is essentially a contract; it takes both sides working together to be successful. If one partner continues to take and take, the other will feel neglected and taken advantage of. If this type of attitude continues, the marriage will soon be in serious trouble.

It doesn’t matter how someone treated you in the past or how nice they used to be. When things get bad, all of the nice gestures of the past no longer matter much. What matters is what steps you take to correct the problems. A solution that both parties agree with must be reached or the problems will just get worse. Compromise is the key to success.

The present state of the DRP relationships in our industry, in my opinion, is an unhappy marriage with one-sided contracts. Some serious changes are needed for shops to value our present DRP relationships. I believe it can be fixed if both sides are willing to work at it.

Force their hands

What now? Unfortunately I believe the only way to change things will be for us to force the hands of the insurance companies; they have a good thing going and need to be persuaded the same way a labor union persuades a large employer. We need to unite as an industry. We watched high school students in California get the President of the United States’ attention by walking out of class. No one knew it was happening until it happened. They organized the walk out through the internet from a web site called, “my space.com.” If California high school students can pull this off, the collision repair industry should be able to do the same.

Insurance companies don’t create claims, they process them. Accidents happen all by themselves. Lower labor rates won’t create work in a shrinking market and working cheaper isn’t going to solve this problem. What we have, is what have, and DRP contracts are going to gravitate to the shops that can handle a large volume of repairs. The smaller shops think that if they work cheaper they will be handed some huge contract. This is never going to happen. State Farm proved this by cutting their program in less than half. They realized that they were doing 90% of their repairs in 60% of the shops on their Service First program.

More shop owners need to become number crunchers. Look at your profit margins. As shop owners, we need to change the way we think, educate ourselves on the DOI laws and use them when necessary. We need to switch our focus from more cars to regaining control of our industry. We must become better businessmen with profit driven guidelines.

When insurance companies ask for a labor rate survey, put your current non-discounted rate on the survey. Don’t think that by showing a discounted rate it will somehow bring you work. It will only establish the guidelines you can’t afford to live with.

We continue to do whatever the insurance companies want and it has come back to bite us. Look at the beginning of DRP programs. Our discounted labor rates used to be only $2 less per hour than our door rate; they paid us $5 for the photos; they let us repair the vehicles using our judgment, and they processed their own totals. I remember those days. Now my discounted rate is $11 less than my door rat; they tell me how to repair the car and who to order parts from; I process totals for free; pay rental bills and finance them with my accounts receivable; etc. .etc. etc. All of this changed because we were willing to agree to anything for more cars.

 

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A proposed DRP profile that is fair to all 

1.     DRP rates should be discounted no more than 10% of our door rates across the board (SB 1492 by former Senator Jackie Speier suggested this). Every time we raise our door rate we automatically raise our DRP rates.

2.     A claims processing fee should be charged at 1.0 hour per estimate to include all photos and uploads. This is a bargain when you consider what independent adjusting firms charge. 

3.     LKQ parts should be marked up 35 %. This equals a 25% discount off list which is comparable to OEM parts, plus a 2% handling fee because of the extra time involved with the ordering process. If I buy a LKQ door for $100, and mark it up 25% I make a $25 profit. If I buy a new OEM door at a list price of $133.00 and get a typical discount or mark down of 25%, I pay $100 and I make $33 profit.  There’s a big difference between mark ups and mark downs.

4.     We should do only one LKQ search and document it with a reference number. Our time is very valuable and it costs us money when wasted.

5.     If any LKQ part is received unacceptable then we should be allowed to order OEM and not be required to lose time waiting for another LKQ part.

6.     Shops should be rewarded on the percentage of LKQ parts we use with a bonus incentive.

7.    If, for financial reasons, aftermarket parts are used, those aftermarket parts should be marked up 35% because, in most cases, these parts are marked up rather than discounted from list. I used the same formula as I did above with mark ups versus discounts, so 35% is a fair mark up.

8.     Every vehicle should be torn down and a complete estimate uploaded to the insurance company. They should review any photos and have a maximum of 24 hours to respond before repairs are started. After repairs are started or completed no labor adjustment should be allowed. 

9.     Set-up and measuring are two separate procedures. Set-up is installing the vehicle onto the frame rack and measuring a vehicle is installing a measuring system under the vehicle for the purpose of measuring the structure.

10.  Set-up should be 2.0 hours at frame rate. Measuring should be 1.5 hours at frame rate to guarantee that the vehicle is measured correctly. A computer printout would be required to get paid.

11.  Frame replacement should always be at mechanical rate as it is a mechanical repair. Some DRPs are already pushing that this be done at body rate.

12.  Blend times should be adjusted on a case-by-case basis and partial paint time should be eliminated. We all know it takes more time to blend a panel than to paint it and there really is no material savings because we usually throw away enough to complete most panels.

13.  Paint caps should be eliminated as they are illegal. With the rising cost of materials, this is another way of bending the rules to cut into our profits. Shop owners are entitled to a profit on every job -- unless we make a mistake.

14.  Each vehicle should be repaired to the vehicle manufacturer’s specifications so as not to diminish the value or warranty to the consumer. OEM certifications should be required in order to force shops to a higher standard.

15.  High dollar vehicles should be repaired at a premium labor rate and not the standard DRP rate. These vehicles are more costly to repair for a more demanding customer.

16.  Cycle time should be 2.3 hours per day (according to our industry surveys) with all circumstances considered. Only where the shop is undisputedly at fault for late completion should they be required to pay for any rental reimbursement. After all, we don’t collect the rental premiums.

17.  There should be a bonus program giving credit when we deliver vehicles under the expected cycle time. (Say $2.00 per hour?)

18.  Washing and cleaning a vehicle for delivery is part of the repair process and we should charge .5 hours for this procedure. This is a separate department and costs money to operate. I can’t take my car anywhere and get it washed for free. Why do we agree to this stipulation?

19.  We should be paid 2 hours at body rate to process total loss vehicles. (They take hours to estimate and process, not to mention the free storage.)

20.  CSI is a serious issue in our industry. I have never been able to match the insurers CSI with my own in-house numbers (mine are always much higher). I believe they should be able to be disputed and adjusted accordingly.

21.  Shops should be rewarded for an above average CSI in the way of a bonus incentive.

22.  All shops should be certified and classed with an A ,B, or C, rating in terms of facility, equipment and certified training. Labor surveys should use this same profile when determining rates for an area. This would correct current market surveys and allow the insurers to raise an individual shop’s labor rates based on their certification without having to raise everyone’s across the board. This would reward the best shops because we are all very different in terms of equipment and quality. This would encourage shops to “step up.”

23.  DRP contracts should be nationally standardized for all and no longer one-sided. They should require a commitment from both sides.  Shops make large investments with no guarantees that their current DRP contracts will continue.

24.  Concessions should be capped by our legislature. We need to contact our  representatives and become part of the solution by speaking up and standing up for ourselves. We could create a shop owners union for the purpose of being represented as a whole. There is safety in numbers. Insurance companies break antitrust laws everyday and nothing ever happens to them. What are we afraid of?


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A more level playing field

What I’m proposing with my standardized DRP profile is two-sided, more like things should be, good for both sides. How many times have our DRP partners invited us to a meeting to discuss changes before they are made? Never! We are told after they have decided to implement some trial program without them even considering our opinion or the effect it may have on us.

I am not anti-insurance company or anti-DRP. My shop is DRP driven, but it is also profit driven. All of the work in the world means nothing without profit. Why would I, as a successful shop owner give back a DRP with over a million dollars in gross sales? Because after crunching the numbers I was losing money.

Some boundaries should be established with the insurance companies. We all have boundaries in our marriages. We all know there are lines we do not cross. As the repair experts, we should dictate how the vehicles are repaired.

Choose only the best

We should cater to the insurance companies that want quality and are easy to work with – ones that allow us to maintain a reasonable profit margin. We should write fair, honest estimates with fair labor times. We should help them retain their customers by giving them the best service possible. We have to educate our customer through advertising and communicate to them who the best insurance companies are. We should take a stand against any insurer that wants us to perform a substandard repair. We must lose the attitude that we need to maintain our DRP relationships at all cost.

I have some ideas how the DRP problems may be solved, but our industry must be willing to take a stand. At this point it will be quite a battle because we have allowed the system to get so out of control. The only way for us to change the current DRP model is by force. The insurance companies will fight us every step of the way, so we will have to stand up for our rights even if we lose some DRP contracts along the way.

I have halted my DRP relationships with two major insurance companies, each bringing me gross sales of over a million dollars. With one company, I had paid approximately $60,000 in rental bills last year and demands were only getting worse. Now I’m getting paid $45 per hour instead of $33, and even though we now do substantially less for this company, I’m making more money. Sounds strange but this account required a full-time manager and took a lot of man hours to maintain. They process their own totals now and pay storage of $40 per day. Cycle time isn’t an issue and their adjuster is in my shop everyday. Their loss!

The other company was also a very large insurer that supplied a huge volume for us. It just kept getting harder and harder to make a profit. Things were very tight with no margin for error. I requested a raise formally with a letter, explaining the reasons we required a raise citing that I hadn’t received an increase in three years. They responded by telling me that they didn’t think it would be possible to give me what I was asking for. I said I couldn’t afford to continue without the raise and they removed me from their program. Their rate went from $36 to $45 and they have started steering customers away from us.

I’ve started a new advertising campaign to attract customers from both of these companies. We’ve become salesmen again instead of order takers; we sell our customers on the value of picking us as a repair shop. The pressure from this DRP is gone and we are making more money on their claims. I think this is a good thing.

More cars does not equal more profit

My approach may seem extreme but I assure you that more cars will never mean more profit. I approached both of these companies in a professional way asking for a rate increase, even though they told me no, they both gave me more than I was asking for by discontinuing our DRP relationships. I still cater to seven other DRP accounts and may be forced to drop one more if we can’t come to reasonable terms. This will make room for more work from the companies that are easier to do business with. I refuse to repair vehicles in a substandard way just to generate a profit, and I’m not in business to turn dollars.

We’re sometimes used as industry guinea pigs to try processes that are doomed from the start .Because someone sitting at a desk has some idea they think will work doesn’t mean it should be implemented at our expense without allowing us to have a say in the matter.

For example, I’m sure you’ve heard that some insurance companies think they could purchase the parts for us and give us a handling fee. We know this is one of the most difficult jobs we have and they think they can do it better – but they haven’t asked us. That’s like not allowing my wife to buy the groceries but expecting perfect meals daily.

What about our lost profits or the problems that would arise with wrong parts or the delays that we would be held responsible for? The point is that this would just be another one–sided decision from the insurance company without them ever asking our advice or being concerned on how this would affect us.

We need to create a reasonable DRP profile that is the same for every company. Many DRP accounts are holding us to their 4 hour per day cycle time. Industry studies show the national average for cycle time is 2.3 hour per day, not 4. This means that if you take the total labor hours on an estimate and divide it by 2.3 the number you end up with is the total days allowed.

For example, the estimate has 23 labor hours on it and when it is divided it by 2.3, the result is 10. This would allow 10 days to complete a 23 hour repair without any abnormal circumstances. The insurers created the 4 hour per day cycle time guideline based on what would be best for them. It wasn’t based on any real time studies from our side.

 

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Just say no!

We can start by saying no to any more concessions, and anything else we disagree with, such as paying rental bills. Reset labor rates and procedures to a more equalized profile. If a compromise can’t be reached, discontinue the DRP agreement with that company. We survived before DRPs and we will survive after. The insurance companies are very aware how cost saving direct repair is, but I’m convinced they will continue to push us until we put a stop to this.

The DRP programs are here to stay. They save the insurance companies billions of dollars; they expedite the claims process for us, as well as the consumer. The insurance companies are only taking what we allow. We need to quit acting like things will change by themselves. They won’t!

The only discounts we should be giving DRPs should be nominal. Start today and say no to anything unreasonable, even if it costs you the account. Start by selling your jobs and promoting your shops. They won’t be able to keep the work out. They need us; we’re processing their claims for free, and do quality repairs and keep their customers happy. This is a winning situation for them. They have decreased their overhead while we have increased ours. They should realize that we are only bound to them by their one-sided contracts that state either party may terminate this agreement anytime for any reason. This includes us.

What if tomorrow every shop in the nation cancelled every DRP contract with every insurance company? Why not? Sounds drastic but it would work and there is nothing legally they could do about it. We’ve been brainwashed into thinking we need DRP contracts to survive. These present contracts may be our demise. I could write an estimate tomorrow without any DRP contracts which would allow me to put a vehicle through production without any problems.

On the other hand, if these contracts no longer existed, the insurance companies couldn’t function tomorrow without hiring a large number of people and opening claim centers nationwide to process their claims.

We would be treating them the same way they treat us and would be within the legal rights of our contract’s termination terms. It’s like a bad marriage that will only get better if both parties are willing to listen to the other. Where is our voice being heard? Nowhere! Our concerns fall on deaf ears.

Work it out

My point is this! Through compromise these issues can be worked out, but we may have to create a crisis to get their attention and make them believe we are serious – like packing a bag and walking out the door. Sometimes this is what it takes. What price are you willing to continue to pay? How serious are you?

I know fair and reasonable compromises can be made and a uniform DRP structure can be developed that is fair for both and equal for all. I don’t believe there is anything unreasonable with my proposed DRP profile. This can work in a positive way for both parties.

     In business for 26 years, Lee Amaradio, Jr. is the president and owner of “Faith” Quality Auto Body Inc. in Murrieta, California. With 65 employees, he attributes his success to surrounding himself with good help, claiming to have some of the best office staff and techs in our industry. Amaradio has been in this industry long enough to see the handwriting on the wall. He feels that now is the time for us to unite as an industry before it’s to late. He can be reached by e-mail at lee@faithqualityautobody.com.

 

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