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Wednesday, 28 January 2009 09:45

Amaradio---California’s North vs South—Why Are Labor Rates So Different?

Written by Lee Amaradio, Jr.

I recently met with a gentleman who owns a body shop in Northern California.  I was showing him around my shop and as we talked about how we processed cars and managed systems, the subject of labor rates came up. He was quite surprised at the labor rate difference between his shop and mine. While he was impressed with our shop, he wasn’t impressed by the fact that we were only getting paid half of what he was.

    His door rate is $90 per hour and he is struggling with one insurance company in particular that will only pay him $75 per hour. While he was complaining to me, I showed him that my door rate was $48 per hour and this same company refused to pay us more than $38 per hour. I told him that I wished I had his problems. These are not made up numbers. The difference was big enough to spark my interest and do some research.   
    I track labor rates across the country and I understand why small differences in rates exist. But what I couldn’t figure out was why there is such a big difference in California between the North and the South. Does Southern California pay less for everything, therefore we can charge less and still make a profit?  If that’s the case, we would assume that Northern California must just pay more for everything so they are entitled to charge more.
    I decided to find out the truth behind the labor rate differences by researching different costs related to collision repair between the North and the South. I started with the cost of real estate and did a comparison of everything from paint materials to the cost of labor. You will be surprised at what I’ve discovered.
    We have all heard that with a higher labor rate you just total more cars so I added this to my research list. I looked at total-loss thresholds and tried to find the truth.
    Please keep in mind that there are exceptions to every rule and while I did do extensive research this is not what I would call a comprehensive study, but my personal inquiries that I believe prove my point.
    With this in mind, here’s what I’ve discovered as I talked to shop owners, parts vendors, paint suppliers, different employees, and researched shop profiles via the internet, etc.
    Common sense would tell you that the North must have a higher cost of doing business when it comes to fixed costs, such as real estate, especially because their labor rate is the highest in the Nation. I researched industrial property in the North and compared it to the South. This proved to be eye opening because the more I looked, the more I found that the South is actually more expensive. Now, as I said, there are exceptions to every rule, but my research revealed that the South as a whole was more expensive.
    Next I checked paint materials and the staple items. As I compared the price of the everyday materials we use I found that these prices were not higher in the North and in the South, where waterborne paint is required, the paint actually costs more by quantity.
    Next I checkd to see if the insurers charged more to insure vehicles in the North than they do the South. I expected to find that premiums would double. Once again I was surprised to find no significant difference.
    The same with total-loss thresholds. I have watched them become much lower (some as low as 50%) in the South. This is just another way to price fix. Lower the total-loss threshold and this will drive the cost of repairs down because the repairer will adjust the estimate to make the vehicle repairable. I say let the vehicles total. It hasn’t seemed to matter in the North. I would rather make more money on the vehicles that I’m repairing than lose money on saving totals.
    So why are the Northern shops able to get these rates? It makes no sense that a shop that has lower fixed costs gets a higher labor rate. Even a shop that has nothing close to the cost of training or equipment that I have invested in, gets twice my labor rate just because of their location.
    I continued my research and decided to look at labor costs and compare the two. They must be paying out much more than I am. We have all heard of the unions that the North had to deal with and we all felt sorry for them. As I continued my research I found the labor in the North was now diversified as much as in the South and there are few unions left. The more I continued my quest for information the more I realized that the reason the North is being paid twice that of the South is because they “ASK FOR IT”.
    This may sound simple but it means they are smarter in the North. It may have started with the unions, but it ended with all of the body shops in the North receiving double what the rest of the country gets. Because they asked for it, they got it. The flawed labor rate survey system (to which I am opposed) rewards any frumpy, dumpy, backyard body shop in the North with double the Southern labor rate, even for shops like mine with millions invested just because it is located in Northern California.
    So why do the insurers pay them these rates but refuse to pay them to us? One reason is we are more divided in Southern California. They stick together more and they have reaped the benefits.
    We need to get our heads out of the sand and raise our rates to match theirs. There is no reason not to. If they can justify those rates in the North, we can use the exact same formula to justify them in Southern California and the rest of the country.
    Yes, we would all be better off in the South if our rates were, say, $75.00 per hour. Wow, we would be so happy we would probably agree to almost anything, but that would be missing my main point.     Remember that Northern California is fighting to get $90 per hour. Is this because they are bunch of greedy shop owners? No, it is because we are so “UNDERPAID” and we have failed to realize that this is what the rate SHOULD BE for collision repair through out the nation. A fair and reasonable rate would be $90 per hour.
    The price fixing of the insurance companies has reduced our rates to less than half of what they should be. Do the research for yourself and compare our rates with mechanics, with hair dressers. Even the nail lady who does my wife’s nails makes more than most body techs per hour. I had my house pressure-washed and the labor rate was $40 per hour to run a pressure washer (Is that more skilled labor?).
    Times have changed! As this New Year starts, research for yourself, and then “RAISE YOUR LABOR RATE”. Not because of what you may be able to get, but based on what you “NEED”!
    We don’t need the insurers to throw us a $2 bone. We need double what we’re getting. We need to get what the North gets and we need it nationwide.
    So you think this sounds too easy to be true, then explain to me why Northern California’s labor rate is double ours. It is because they needed it and they ASKED FOR IT. There’s no other reason.  
    P.S. To all of you frumpy, dumpy, backyard shops, you will benefit also if you quit undermining everyone else by keeping your rates too low.