On Dec. 5, State Farm made the announcement that it will no longer use its Auto Repair Facility Survey program to determine auto body labor rates in areas of New Jersey, New York and Pennsylvania. According to Sam Valenzuela, president of the National AutoBody Research and creator of the Variable Rate System (VRS), a free tool provided to shop owners that supplies labor rate information through an independent third party, this move is just a sidebar in a much bigger issue when it comes to labor rate pricing.
From all of the data he’s seen through the VRS, Valenzuela says that for more than 10 years, the price of labor in the collision industry has not kept up with inflation.
“A shop making the same rate they were based on inflation over 10 years ago is the bare minimum shops should be asking for,” Valenzuela says. “Many shops are making less. Think about it. With paint and material increases, wage increases, the rising cost of health care and a number of other factors, the current rates are not economically sufficient to survive, in our opinion.”
To put this into context, Valenzuela provided the example of an insurance company paying a shop $40 per hour in 2000. In order to keep up with inflation, that shop would need to receive $57 per hour today. The VRS shows that many shop owners are being paid less than this.
“The industry is moving backwards,” Valenzuela says. “I think 2017 is the year of the labor rates. Shops need to gather their arms around their own business and figure out their worth. Then, they need to figure out a way to communicate this to consumers and insurers.”
Labor Rates: Does One Size Fit All?
“I’m thoroughly disappointed,” says Jerry McNee, Alliance of Automotive Service Providers of New Jersey (AASP/NJ) collision chairman and owner of Ultimate Collision Repair in Edison, N.J., when asked about the State Farm announcement.
McNee’s frustration stems from the fact that he’s never seen tangible proof to back up the rate that insurers pay, aside from the survey that State Farm has issued in the past and will no longer use. When he asks the insurers, he says the response that he gets back is “that’s what your market area warrants.”
“It just doesn’t make sense,” Valenzuela says.
Valenzuela says that he doesn’t believe in prevailing rates. He compares an insurance company paying everyone in a certain market the same rate to assigning everyone the same shoe size. There are a number of different variables that need to be accounted for when it comes to labor rates.
Valenzuela explains that shops need to know their value, and tools like the Variable Rate System survey can help. Depending on experience, the type of vehicle served, location and a number of other variables, there are a number of rates within a marketplace that can be acceptable. The key, according to Valenzuela, is to be able to show that the rates being charged are comparable to similar shops based on these factors.
Knowing What to Charge
McNee doesn’t put all of the blame on the insurance industry. He says that shop owners also share the burden for the stagnant industry.
When FenderBender contacted State Farm, the insurer released the following response to why it decided to stop using the Auto Repair Facility Survey program:
“We believe repairer profitability and quality auto repairs that are reasonably priced can both be achieved. This change in our labor rates brings us more closely into alignment with the actual cost of vehicle repairs and is in the best interest of our customers.”
When Paul Sgro, owner of Lee’s Garage in West Long Branch, N.J., and the national director of the Society of Collision Repair Specialists, was read this comment, he responded by saying that it probably stemmed from shops not knowing enough about the cost of running a business. Sgro says that insurers are able to make changes like this because they can source shops in the area that are paying less, but Sgro explains that those are lower quality repairs or are being done by shops that will eventually go out of business because they are not charging enough.
Moving Forward
State Farm has not communicated to Sgro yet what his area’s new rate will be, but he says even if the rate they give him is lower, he is going to continue to charge what he has been charging. The difference will have to be paid by the consumer or insurers will have to make concessions. As far as other shops in the area, Sgro thinks many facilities will go into panic mode because they will not know how to handle the situation.
“If shop owners do not know what it costs to operate their business, they won’t know what they should be charging,” Sgro says. “If those factors are unknown, it’s only a matter of time before something bad happens or they go out of business.”
“The lack of business sense is what’s hurting the industry,” McNee says. “I want everyone to wake up and start paying attention. Stop laying down.”
How exactly should this be done? McNee said it’s imperative that shop owners are able to document why they’re doing what they’re doing and be able to explain the reason behind it. Sgro agrees and says that he will continue to use Variable Rate Surveys as a tool to show documentation. That way, the shop owner can back up why it’s charging the rates that it’s charging. If more shops did this, McNee thinks insurers would have less of a leg to stand on.
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