Prevailing market practices, pricing or the king's decree?

Jan. 1, 2020
Shouldn't a shop's labor rate be a direct reflection of what's necessary to maintain operations at an acceptable profit level?
In the medical industry the term "reasonable and customary" is often used to determine a price for a specific service from a doctor or hospital. The term is often written into medical policies and in many cases the customer is expected to pay the difference between the policy payments and the total fees. At times the doctors or hospitals will discount the difference through a network agreement, and the customer is not responsible for the difference. Does some of this sound familiar?

The term "prevailing market practices and rates" has been around for some time now, but is increasingly considered a questionable representative for our local markets, due to the lack of evidence and independent verification of actual prevailing market practices or rates.

One increasing concern is who determines these prevailing practices and rates and the type of auditing that is being done to verify their accuracies. Currently, the results are being provided to our industry, as they would in a king's decree during the Dark Ages. The surveys or determination of these practices and pricings are not open to public scrutiny or third-party validation.

The amazing part is that the results are often very different from market to market. Is this due to a lack of education among local repairers in what is necessary to properly perform repairs? Is the information readily available? Are these items "cost shifted" or grouped in other operations or charges, or are they just based on the beliefs of one person in charge of a specific market area?

How prevailing rates and practices are determined is certainly a point of concern throughout our industry. In California, this practice has recently been challenged and is in the process of being changed. Prevailing rates and practices should be determined independently and not be representative of the favored pricing of the direct repair providers within the market.

I am sure you have had someone in negotiations say, "When I was in business, we never charged for that." Of course the first reaction by many is to fire back, "And maybe that is why you 'were' in business, and you're not 'in' the business anymore." Perhaps at the time when those former operators were running their shops, the paint and materials rate of their local market included those items, or possibly the vehicle designs didn't need it. Today they may. Locally, paint and materials allowance rates may include costs of items such as undercoating, weld-thru primer, flex additives and other items that may or may not be listed separately on an estimate.

It's important that these determinations are made at the local market because of the understanding of how estimates reflect pricing. This includes deciding whether to use a rate factor for paint and materials or a paint and materials calculator. Whether shop supplies are billable as a rate factor or itemized line item along with hazardous waste charges, seam sealers, corrosion protection and other possible items also should be left up to the local market to decide.

It also seems to me that for a market practice or pricing to become a "true market practice," it must be a reflection of what the local market is doing and charging without interference, coaching, restriction or any outside influence by those who do not perform them. In this way, a free market will decide what the "normal and customary" practices and charges of the local market really are.

But is this happening or are influences being placed upon the local market, creating market practices and pricing that the king wants to achieve? The solution to this may simply be what many associations are working to achieve: a yearly independent survey of these practices and pricings that can be posted on the Internet for all to see.

It is also critical that education and information are available to understand the proper repair procedures required for the new vehicles that are introduced each year. Without this information, we would be comparing apples to oranges. For this reason, it is critical the information providers include this needed information within their estimating systems. Inter-Industry Conference on Auto Collision Repair (I-CAR) has also committed to provide online training programs for vehicle-specific information for new models as they have very specific repair needs.

Another set of considerations is also in discussion. Do we need pricing based on shop classification? Should the pricing of a shop with all the proper equipment to repair today's vehicles be considered more heavily than a shop who's pricing is based on a 20-year-old crossflow booth, a 10-year-old MIG welder and a few pulling pots in the floor? How will this be monitored and identified?

And finally, shouldn't a shop's labor rate be a direct reflection of what's necessary to maintain operations at an acceptable profit level? In most cases, I have not seen that the labor rate being charged has any relationship to the costs of operating a business. In fact, most of the shop operators have little knowledge of the costs of operating their business, and do not know how to determine their labor rate based on them.

This education needs to become common knowledge. Otherwise the industry will never become king of its own domain and always will be considered a court jester.

Please send your comments, questions and potential discussion topics you would like to see addressed in future columns to [email protected] . For additional information you can also visit www.aeii.net.

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