When the collision industry was asked about how they’re paid by insurers for paint and materials, the consensus was that the system is flawed.
As explained in a study presented at the April Collision Industry Conference (CIC) meeting in Oklahoma City, 94 percent of respondents in a survey on the issue said the methodology for how shops are compensated for paint and materials needs to improve.
Enter Rick Palmer, CEO of ComputerLogic. Palmer has been involved with the industry for more than 30 years and works regularly with paint companies and body shops. His company commissioned the study presented at the spring CIC meeting.
Palmer recently spoke with FenderBender about the issue and what he thinks is a clear solution.
Can you talk a bit about how this project began?
We’ve been around for more than 30 years in the collision industry, and our clients have included major paint companies. We provide the information systems for all those companies.
We’ve been in a lot of body shops over the years. In all the people we’ve worked with—jobbers, suppliers, manufacturers, body shops and insurance companies—they kept saying we don’t have a good estimating system for paint and materials. That’s how we got into this project with PMCLogic, a calculator for paint and materials costs. PMCLogic is a division of ComputerLogic.
The CIC about a year ago formed a parts and materials committee, and in that committee they formed a paint and materials subcommittee. They wanted to include all sectors of the industry, from jobbers to manufacturers to body shops and insurance companies. They had a meeting more than a year ago in Salt Lake City, Utah, and hosted a panel discussion on the status of the paint and materials compensation issue.
There were mixed results from that discussion. Some people felt the system still worked, while others felt it was terrible. It was unclear how the industry as a whole felt about the issue.
I knew of a great researcher, Steve Lanza, whose family owns a collision shop. He’s never been involved with the industry, but he could get a clean survey of how the collision business felt about paint and materials compensation.
So basically, I said to him, ‘I’d like you to go out there and find out if it’s an issue. If it is an issue, why? And what would they do to solve the problem?’
So what did you find in the results of the study?
The results were that 94 percent of people surveyed said not only is paint and materials compensation a problem, but it’s a big problem. It’s a travesty.
Everything in this industry is billed by invoice. When you buy a part, for example, you get an invoice for it.
With paint and materials, because there can be 200–300 items used in a repair, and because it varies in cost so much from vehicle to vehicle, it seems like it’s nearly impossible to accurately bill for what was used.
Many years ago, shops would get an annual allowance for paint and materials based on how many hours they think they spend on paint and refinish. So if you’ve got 15 hours of refinish time, they’d get $150 for paint and materials. Back in those days, without acrylic paint and the sophisticated painting systems that we have today, that may have worked. But the types of paint systems have changed—you have two stages, three stages, metallics and pearls. You can paint a car red, for example, and any red is going to be two to three times as expensive as white. But even within red, a type of red might be $300 per quart, while another might be $700 per quart. The variance within the cost of paint is huge. There’s no calculation for that in the way shops are compensated.
Why has it stayed the same all these years?
The reason is it’s so hard to keep track of, and the insurance companies and body shops are constantly fighting about costs. Every dollar that the insurance company can save on their cost helps their bottom line.
And there is no one number for typical paint and materials costs. One shop for example might be paid $21 per hour for paint and materials. Let’s say that’s 10 hours of refinish time, that’s $210. But in other parts of the country, some shops get $50 an hour, or $500 in compensation.
Paint and materials cost the same in both the shops, but compensation is inconsistent.
What’s the reason for the inconsistent compensation?
Over the last 30 to 40 years, the only way shops have been able to get an increase is by begging, cajoling and threatening for a raise. Market by market, they’ve slowly hammered out better rates. The average rate of compensation—between CCC, Audatex and Mitchell—is between $29 and $30 per hour. But if all the shops were getting compensated for the manufacturers’ suggested retail price for the paint and materials, just like insurance companies have a reference point for the cost of parts, that number is significantly more than what shops are getting paid.
What’s preventing shops and insurance companies from accurately calculating the cost?
Well, with the consolidation and competition in the industry, the insurance companies are using this as leverage. Over the last seven years, the cost of paint and materials has gone up over 50 percent. Yet the average compensation, for all shops, has only gone up about 23 percent. That’s a 27 percent gap. This year, since the beginning of the year, costs have gone up about 8 to 10 percent. And very few shops have gotten a penny of an increase. When they try, insurance companies are using a methodology using the prevailing compensation in the market. The body shops tuck their tails and say, “OK, I’ll just take the $30 per hour.” But they do that year after year after year.
So what’s the solution to this problem?
The bottom line and answer to this whole issue is invoicing.
The shops just have to line item invoice for all the paint and materials they use, and get away from this guesstimation. It’s a lot like what has happened with clips and fasteners. These things may cost 20 cents or 30 cents each. It doesn’t sound like a lot of money, but for a body shop, that may be $30 per car for clips and fasteners. In the past, they used to eat that cost. But if you take a shop that does 1,000 cars a year, that’s $30,000. Where does that cost go? That goes straight to the bottom line.
So they never were able to bill that out until several companies came out with an invoicing system where they now have a computer sitting on top of cabinets. A guy takes a barcode on the part and scans it in, just like checking out in a grocery store. That invoice is given to the insurance company at the end, and there’s absolutely no objection from the insurers paying on clips and fasteners.
When we talk about this issue, I ask shops whether they were getting paid for clips and fasteners 10 years ago. Nobody raises their hands. Then I ask them how many get paid for those parts today, and everyone raises their hands. I say, “Well, what’s the difference?” They say, “Well, we invoice.”
I say, “Well, that’s the solution.” We have to invoice for what we use for paint and materials.
What’s holding shops back from doing that?
Our company does have a paint and materials calculator that shops can use. Some shops will try to invoice using that system, but the insurance adjuster will say that’s not the prevailing practice in the market and they’ll only compensate so much. They know it would cost them hundreds of millions of dollars a year. And shops don’t want the insurance company to get mad at them, so they just eat the cost.
It’s competition, and it’s the fear factor. Like any change, it takes time, courage and tenacity. The good news is there are more and more shops that are standing up and saying, “I no longer have an ‘estimate’ for paint and materials cost, because there is no estimate. We invoice for everything.”
I try to teach shops to do the right thing, for the right reason, and the right way—the three-legged stool. If you make a big contribution to the Cancer Society, it might be the right thing to do. But if you only did it for the publicity and the recognition you get, that’s not really the right reason to do it. So I tell shops that they need to invoice for paint and materials. It’s the right thing to do. The reason is that it’s fair and equitable for all parties concerned. Of course, it’s also important to do something the right way.
I think shop owners and operators know how much the materials cost, but they aren’t getting paid what they deserve. We’re trying to say, they need to get away from that.