What Exactly is a Prevailing Rate and How Does It Affect You?
Written by Ed Attanasio, Autobody News
Published February 9, 2022
If you’re a shop owner anywhere in this country, your labor rates have been a serious concern since day one and the numbers have likely kept you up at night more than once.
You work so hard to make OE repairs and provide quality to your customers, but in the end, you’re struggling because your labor rates won’t cover your expenses.
With the goal of creating momentum as we enter 2022, the Auto Body Association of Texas (ABAT) recently asked AkzoNobel Senior Services Consultant Tim Ronak to make a presentation, “Economics 101: What Exactly is a Prevailing Rate?”
Ronak discussed labor rates and the effects of inflation. Up front, he explained everything he shares in his presentation is his opinion and his alone, and is not necessarily the opinion of AkzoNobel.
The main question Ronak asked the ABAT members in attendance on a Zoom call was this: how much do shops need to do repairs while making a profit and what exactly is a prevailing rate?
Ronak presented the two components needed to determine the labor sale amount---labor units and the labor rate (example: 10 units X $60 per unit = $600 labor sale). The "rate per unit" is only part of the labor sale equation.
“Getting a labor rate increase is valuable, but in many cases, it’s not as vital as billing for all of the items or procedures required to fully return the vehicle to the ‘pre-loss’ state promised in most insurance policies,” Ronak said. “Many shops use things like BillableGenie that help shops to identify procedures typically overlooked and get paid for things many shops don’t get reimbursed for.
"So, don’t think that if a rate increase is not coming your way that it’s the end of the world; there are other parts of the equation that you need to be able to bill for---it’s not just all about the rate. Actual billed operations often fall short of what you can actually justify as required procedures.”
Ronak then talked about a lawnmower repair shop that was charging $50 hourly in 2000, while auto body shops were getting $40 per hour for labor.
“Everything you need to fix a lawnmower can fit into a 12-inch by 10-inch box that you can carry with one hand,” he said. “But, in our industry, we need measuring machines, welders and spray booths while charging $40 an hour.
"In January 2022, we found another company repairing lawnmowers in Illinois and in this case, they charge $85 to fix lawnmowers, while most of the body shops I work with are charging $40 to $50 an hour. It’s a completely inadequate return for what you need to get reimbursed.
"Consumers are familiar with labor rates that are considerably higher than what we have in collision repair," Ronak said. "In December of 2021, the average retail auto repair came in at between $75 to $130 per hour for labor. In addition, you can expect dealer rates to be significantly higher than that. I am speculating, but I can bet that the difference in automotive and collision labor rates in Texas is $25 to $40 an hour, with deviations based on the specific shop and its location.”
With the experts predicting another year of decades-high inflation---7%---Ronak asked, what are the consequences of that in the real world?
“Over the last several years, we have watched the amount of dollars in parts sales per RO have grown from $890 per RO to $1,300 on average," he said. "Labor used to be the largest portion of the collision repair sale and now it’s parts by far.
"During the pandemic, insurers were forced through legislation to reduce their rates to consumers. But now they have justified a return to their former rates because more and more consumers are driving more frequently at higher average speeds, so the mandated refunds are history," he continued. "So, there is a huge gap between the annual percentage increase in auto insurance and what it costs to fix a vehicle, and most insurers will tell you that the higher premium increase exists due to the high costs of personal injury cases.
“Inflation was at 7% in December and it’s been crazy how quickly inflation is sneaking up on our industry. We’re saddled with this increasing level of inflation that is two times more than originally forecasted," Ronak said. "Right now, the experts predict another year of record high inflation while other sources like with the Bureau of Labor & Statistics believe that inflation will peak this summer.
"Two percent is considered by the federal government as a healthy level of structural inflation, but now it’s the highest in 20 years," he said. "It’s like dead men walking---we haven’t faced the impact of this inflation yet. No one isn’t reacting and that is shocking to me. When the federal government puts a trillion dollars into our economy during the pandemic, it devalued our dollar and made every unit less in value. So, now it is going to take more of these dollars to buy what we need to repair vehicles, so what can we do about it?
"I have shop customers who currently have three-week backlogs and can’t find people to do the work, and more consequences are coming," Ronak said. "The experts are also predicting that the feds will raise interest rates twice in 2022. So, if you need to borrow money, now’s the time, because the rules are going to change fast.”
When supplies shrink, prices go up, and compounded with record inflation, prices are poised to increase exponentially, Ronak said.
“That means salaries for your technical staff might go up from $25 to $35 per hour because your competition will be the first ones to raise their rates in order to raise their rates to afford to pay people what they deserve. Their groceries, gas, energy costs are the unavoidable expenses of living that are going up, so they will logically be looking for more money to pay their bills.”
Ronak outlined the terms associated with labor rates.
A retail rate is a shop’s individual posted rate.
“The market rate is the average rate of all shops’ retail door rates in the local area,” he said. “A contracted rate is the rate agreed to by a third-party contract conditional on receiving work volume through a DRP, and a prevailing rate is an ‘asserted’ market rate by a third-party using a survey method they define (which may incorrectly include contracted rates).”
Typically, when inflation comes along, small businesses are the losers, primarily because they're reactionary and unsophisticated and do not track their expenses on a month-to-month basis, Ronak said.
“Usually, they're very slow to act; small businesses basically wait for pain. They wait until the employees are saying, look, I need a raise, and they lose maybe a couple of employees," Ronak said. "Then to be preemptive, they agree to a pay increase to keep a valuable employee before they realize an increase in their posted rate. It is then a shop owner realizes, I don't make enough money to pay my employees in order to keep them.
"They figure that they’re going to have to raise their labor rates, but they usually wait too long," he said. "After the cost increases, that's typically how a small business does things. They wait until after they see the cost increase and suffer significant lost profits.”
What are some of the main factors that can affect labor rates?
“In many cases, it is influenced by exterior factors outside of your area,” Ronak said. “If capacity is tight, shops can dictate their prices. Or if the market area is expanding rapidly and the supply of shops is really constrained, that can affect rates.
"If there's far too much demand on your business, the best way to get rid of a four-week backlog is to double your price," he said. "And all of a sudden, you can work that backlog back down and make a lot more money for the work that you're working on.
"There's also a consequence of facilities that are consolidating into fewer locations, as some of these consolidators are buying up competitive shops, market opportunities and options are changing the dynamics in some of those markets," he said. "Consolidation can stratify a market and consumers may choose not to go to a chain and opt for a more individualized family repair center.”
Geographic or political restrictions can also limit new shops entering or exiting the market, which can impact labor rates and door prices.
“I used to joke that in San Francisco, the growth rate of body shops in San Francisco was minus one," Ronak said. "The government basically wanted to kick body shops out of the core of San Francisco, so that any of the ones that were left there were not allowed to expand or their taxes went up and they just closed the doors because it was too expensive to do business there and keep the body shop going. All of the remaining shops raised their rates to $130 to $150 an hour for collision repair.”
Many shops that are over their breakeven sales can afford to say no, Ronak said.
“If I say no to taking on your business, I may make less money, but I'm still making money as I am still over breakeven," he said. "So now you know I don't really need your work, and I'll suffer the consequences. This typically happens in more mature markets with shops that have been around a long time and have all of their assets paid for. Mature businesses will tend to be little more militant on their labor rate than those that are highly leveraged and brand new and desperate for work and cash flow.”
After covering a wide range of topics, Ronak wanted to make one point crystal clear.
“One of my concerns is that shops sometimes use negotiated rates on surveys," Ronak said. "Nobody to this point has gone after shops or considered this potential model of price fixing that may be occurring within this hub and spoke arrangement. So, in order to insulate yourself from any Clayton Act consequence, shops should only complete surveys with your own impartial retail rate. A survey is used to compare data with the balance of the industry and determine a range of prices in a market.
"So, if I'm going to leave a message behind here, save yourself from any potential anti-trust complications and Clayton Act repercussions," he said. "Don't use a negotiated rate as your surveyed rate, and make certain to only use your retail rate.”