Friday, 30 June 2006 17:00

DRPs need industry standards to ensure profitability

Written by Lee Amaradio, Jr.

Twenty-seven years after opening my business in 1979, I'm trying to figure out how our industry went so wrong. Although I have learned many things in those years, I haven't learned how to produce a profit consistently. 

As soon as things start looking like I've finally figured them out, some new challenge arises. It may be with an employee or an insurance company or even a government agency, but something always comes up that keeps me on my toes and requires me to pay attention or else. 

I keep thinking back to how I started - how difficult it was to build a business and develop relationships with various insurance companies. Naively I thought that one day I would arrive in Body Shop Heaven and my troubles would be over. I imagined having a really nice, well-equipped shop, where people just dropped off their cars, we would fix them and they would be on their way - where I didn't have to sell every customer on our credentials; somehow they would already know. They would have confidence based on our reputation - a dream come true.

Body shop heaven

My impression of Body Shop Heaven arrived in the form of a DRP. I made an agreement with a large insurance company and off we went. When there was more work than we could handle, the shop expanded; more work necessitated expanding again and again. I had finally arrived with a nice facility and customers dropping their cars off as fast as I could fix them. My profit margins were over the top, I was making money - and I loved it.

My insurance accounts were so valuable to my business that I would do anything they asked. After all, they were supplying me with more work than I ever

Where did you get those numbers?
 

All of my statistics were based on what I charged in 1979 and the rest of my research came from three sources, which were internet based, at inflation.com, and the American Institute for Economic Research and The Shrinking Value of the Dollar from infoplease.com. Please remember the 2.745 was the actual number determined to be the average for the entire country.

My second calculation of 4.65 times is what I determined to be within the collision industry for my California-based location. Your numbers may differ slightly but it shouldn't be enough to matter much because we are all being paid well beneath what we should be. Based on my actual cost of doing business today with regard to materials, government agencies, software and hardware, business insurance, and the cost of employees in California compared to 1979, I determined that my cost to operate a collision business today is 4.65 times more than in 1979.

imagined, so what if they wanted me to do something for free. I was making a profit and they treated me very well, so why not give a little extra.

The change happened subtly. The more I gave, the more I was being forced to give. It also seemed that I wasn't being treated as well as I used to be. My "direct repair partners" become more demanding and threatening, My shop hadn't changed our way of doing business, but suddenly insurers started acting differently.

Don't get me wrong. I love the DRP concept because it is a win-win situation for insurance companies and for body shops. I'm smart enough to know that DRPs save the auto insurers a ton of money; conversely, they are smart enough to know that the DRPs make the body shops a ton of money.

There are now major differences in my profit margins since first entering these agreements years ago. My profits have diminished to the point that I am being forced to reevaluate my relationships with some of my DRP contracts. Why am I struggling to pay my bills even though I have all of this work? What has changed?

Digging through some old files, I took a journey back in time to substantiate what really has changed.

The good ol' days

I began by researching what I charged for things in 1979, the year I began my business. The labor rate was $20 per hour for paint and body and $30 per hour for frame labor. Paint materials were billed at $11 per refinish hour. The average metal man/body man - what we called techs back then - made about $35,000 per year in wages.

Comparing this to 2006 prices, body and paint labor rate is now $45 at the door, but my DRP rate is an average of $34. Frame labor rate is $60 with a DRP rate of $45. Paint materials are $30 per paint labor hour with a DRP rate of $22. The average body tech's yearly wage is $68,000 per year. Since I am 90% DRP-driven, we will use the DRP rates for this comparison.

Considering the cost of living increases over the years, I was concerned to discover that everything related to the cost of running my business had gone up 4 to 5 times. While his isn't a CPI study, it is based on numbers within our industry.

Outside our industry, the cost of doing business has gone up an average of 2.745 times nationally since 1979. Using this figure, a body tech's average wage should be more like $96,075 per year. No wonder we have trouble keeping good technicians. According to this model, my door rate should be $55 for body and paint labor, frame rate should be $82 per hour, and paint materials should be $30 per hour.

Now remember, these numbers were derived using the smaller, non-industry cost of living increase rate of 2.745 times more than in 1979.

Industry changes

Many facets of today's collision repair industry didn't even exist back then. We didn't have computers within our industry, let alone estimating software. There were no environmental fees, hazardous waste fees, software subscriptions, or computer hardware and maintenance. We didn't have sophisticated equipment and multi-million dollar facilities to pay for. We were able to charge for storage and, if we searched for a lower priced LKQ part, we made the profit for doing so.

Our industry has changed drastically - the majority of which changes I believe have been for the better. Quality is better. Customer service is better. Our industry is generally in better shape today than in the past and DRPs have helped bring about all of these changes. I believe one major problem with DRPs concerns the fact that there are no industry standards to which to hold insurance companies accountable. My research brought home the fact that in 1979 I struggled to make a profit without DRPs and now, in 2006, I'm struggling to make a profit with them.

Body Shop Heaven doesn't exist. I believe its time to rethink the DRP model and start negotiating insurance contracts that will work well for both sides. Why aren't our agreements working like they were in the beginning when I was making substantial profits. As our cost of business continues to go up, our rates have stayed essentially fixed. The DRPs are demanding more and more concessions, while holding us to stricter guide lines. This would not be a problem if I were being paid reasonable rates for added responsibilities.

New Metrics

Many of us have heard of the new Metrics used to track different aspects of the repair cost. This is just another tool the insurance companies will use to determine how they can cut teir expenses by cutting into my profits.

Wake up! How can my performance be measured against other shops in this industry without first measuring the shop? Without a standard by which to compare one shop to another, the Metrics is just another way to get into our wallets. As with labor rate surveys, the numbers can be made to favor the insurance company.

Go to the DOI web site for your state and see for yourself how many One-Day's and Maacos are included in the market rate surveys. Every one of them is included, along with every other small, one-stall shop with a low labor rate. To verify this fact, I ordered the DOI's CD that includes all of the current surveys for the entire state of California. I was amazed to find shops in my area that no one's ever heard of, but rarely could I find mine. When I did find my shop listed with a certain company, I wondered where the numbers came from because the only survey I have ever filled out has been from State Farm.

As an industry, collision repair professionals are unquestionably underpaid. According to my research, we haven't even kept up with other industries around the world. Based solely on non-industry standards, auto body business professionals deserve a raise. Within the collision industry, my research showed an increased cost of 4.65 times from 1979, leaving auto body workers even further behind the cost of living curve.

If we were paid according to the actual cost of doing business in the collision repair industry compared to 1979, our body and paint labor rate would be $92 per hour - equivalent to 1979's $20 per hour. Materials would be $44 and frame labor rate would be $138 per hour. Shop owners need to share these calculations with the insurance companies to demonstrate the inequity in the pay structure in the industry and demand a reevaluation of the DRP agreements to return to the win-win concept of the past.

 

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 at lee@faithqualityautobody.com.

 

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