According to Tim Ronak, Senior Services Consultant with AkzoNobel – Vehicle Refinishes, it will be critical for collision repairers to invest in their facilities, equipment, and training to stay current and capable to properly repair vehicles.
Since this will most likely be a significant additional cost of doing business, he encouraged shops to take the time to build a pricing model that allows companies to accurately identify these additional costs. The purpose would be to quantify the actual amounts the company will need to seek to get reimbursed for this significant new and ongoing investment of capital.
“Once you know the amount costs have increased, you can use this information to calculate a suitable adjustment or increase in prices and will help determine the shop’s new desired labor rates,” said Ronak, during a recent SEMA 2016 presentation: “You Charge How Much for Labor?” “Savvy business owners will recognize that they require additional returns on the recurring additional invested capital.”
When calculating how much your business should charge for labor, Ronak advised shop owners to know their costs before trying to figure out a price. “It is not something that is dictated to you by the insurance industry as many people might seem to think,” he said. “Figure out what it is going to cost you, including technology, facility and people in a capable fashion and then work backward to determine what you need to sell that for to preserve the profit level you enjoyed before the additional capital expense.”
New technologies such as onboard safety systems, telematics, and hybrid power systems are expected to be at the forefront of development for another two decades. In addition, there is pressure to increase vehicle fuel efficiency due to CAFE requirements. He said these two factors are driving advancements in both technology and vehicle construction methods and materials.
How much should a shop invest? Ronak said it depends on a shop’s individual circumstance.
Some considerations include:
Aluminum repair equipment ($75,000 to $150,000)
New measuring/fixture equipment ($15,000 to $20,000)
Hybrid technology ($15,000 to $35,000)
New welding equipment requirements ($15,000)
OEM certification training ($2,500 to $12,500/tech/year)
Certification documentation fees ($2,500+/year)
Carbon fiber repair (?)
Ronak created a three-part spreadsheet for shops to enter their data in terms of labor. Although individual results will vary, he said it was devised to help shops identify, quantify and track what they are currently spending and perform the calculations.
Training: With training expenses increasing as shops attempt to keep pace with changing and emerging technologies, the idea is to annually track all training-related expenses (including tuition, testing, wages paid while training, travel expenses, etc…). By clearly identifying this aggregated annual training expense, Ronak said it will more accurately determine how much to allocate the following year per unit produced/billed. The key is to spread the expense out over ALL of the potential billable units to get reimbursed for the valid usable life of the investment made to ensure that technicians remain capable of repairing the technology-laden vehicles.
Facility: Ronak mentioned two different strategies. One is expanding the facility, in which he said owners would need to look at additional volume. This is a different return model than taking an existing workstall and reconfiguring it for an alternate specified use (i.e. using it for aluminum repair) and ensuring there is a payback on the expenses for that unique type of work being done.
Equipment: As more complex technology is developed, the cost of new equipment for the industry is rising while during the same period shops are realizing a return that is decreasing due to old technology and tooling being displaced too soon by new technology. Ronak said many shop owners are finding they need to purchase new (updated) equipment every year or two in order to repair vehicles properly per OEM specifications. Ronak said this is a difficult investment option as many scenarios result in equipment becoming obsolete before a real return is captured.
After determining these costs, Ronak said shops would have a better idea on how to price labor to ensure they can price in such a way as to create a sustainable investment cycle. According to an industry survey, Ronak said a decreasing percentage of shops reported that net profit improved despite reporting significant increased net sales. “This increase in sales with decreasing net profit is an unsustainable trend as it will choke out investment,” he said. At the same time according to PCI, claim dollars paid through insurance providers increased $2 billion or roughly 10 percent from $19.9 billion the 12 months ending Q1 2015 to $21.9 billion the 12 months ending Q1 2016.
Ronak said that the information seems to imply that while the expenditures are going up, there is pressure on severity that is forcing facilities to dramatically reduce what they charge for repairing vehicles. “Facility net profit is declining, and a large part of that decrease in profitability may very well be through this massive increase in financial investment required to understand this new technology,” he said. “These investments are not optional and in fact just to be able to be capable of fixing the technology, in addition to significant equipment and facility investments they are also being faced with massive annual per technician training expenses.”
He said businesses need to recognize it’s now an ongoing and recurring expense and the only option available is to adjust what they choose to resell that labor for. “To remain profitable, you need to consider ALL of the costs of providing capable labor, including training,” said Ronak.
He added that the annual costs associated with being capable of repairing these new vehicles is going to continue to accelerate, and keeping up with the additional training expenses will also be a necessity. “Technology is not going away and all reports indicate it will continue for another two decades; Just like Moore’s Law regarding Transistor compaction, vehicle technology is likely going to increase by doubling every 18 months,” said Ronak. “Clearly understand your costs … and figure out a way to get paid for it!”