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The decline of effective labor rates is a reality

Friday, July 13, 2012 - 06:52
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Technicians who have been in the industry for more than 10 years say it's much harder to make the same living (turn the same hours) as they used to. Now, you may just think they are whining or have begun to lose a step or two; however, much has happened over the last decade that makes this true.


Tony Passwater

One of the downsides to a flat rate/commission pay system is that typically your costs are based on a fixed percentage, regardless how much real time it takes to actually complete the tasks. Back in the day when it was normal to have 10-15 units estimated to repair a panel, and a "good" technician could do it in half the time, the effective labor rates were as high as mechanical labor rates.

Our estimating systems are designed to provide flat-rate labor times that should apply to an average technician using average tools to perform the tasks in the operations listed. This is why accurate information and procedure pages explaining what is included or not are so critical. Flat-rate times mean just that — they are a flat rate regardless whether the technician gets it completed in less or more than the time listed. In most cases over the years, the times listed were beaten by technicians, due to their skill or tools available. The effective labor rate is the hourly rate actually produced by the technician in an actual clock hour. As an example, if the shop's door rate is $50 and the technician is 200 percent efficient (meaning he produces two flat-rate hours in one actual clock hour) then the effective hourly rate is $100/hour.

But today, effective labor rates are declining, and not because our technicians are getting slower or not working as hard. There are many factors that are changing these rates, and there has been a methodical and consistent focus by insurers to lower their costs, while affecting our gross profits.

The term "average" is a moving target. What was average for technician skill in the past is not the same today. However, often forgotten is the fact that the cost for businesses to raise these standards is real and continuous.

Insurers have been lowering time allowances for almost every operation, so much so that we have to make up for missed operations, poor database times and poor estimating in general. Today it is critical to write it right because funny times are gone.

There was a time when frame/structural time was actually figured at frame labor rates, and often exceeded 10 units for the job, whereas now many insurers believe that the maximum possible allowable is four units. Also, when repairing a panel instead of replacing it, even if the economics allowed it, many insurers only allow a maximum repair time listed – often under eight units.

In the past, a very productive technician could have repaired a panel or frame in six actual clock hours, for which 12-15 units were allowed. In the past, they often used well-maintained equipment and tools, as well. Today, it still takes a good technician six hours to repair the same damage while using equipment that needs updating and repairs, but the allowed labor only includes 8-10 units.

The same cause for concern happens when a repair to a panel should be listed at five units, but the estimator agrees to do it for 3.5. On paper, the gross profit percentage remains the same, but try to deposit gross profit percentages into the bank. It's not that the technician took too long, the sale was inadequate.

At the same time, the data in the estimating systems for typical remove and replace operations have been tracking closer and closer to real times, rather than based on what the past defined as an average technician with average tools. This dramatically impacts your effective hourly rate.

The Database Enhanced Gateway has been doing a great job identifying thousands of database time errors that are primarily due to the lack of time studies being performed, or poor guessing. However, one startling revelation is that the time changes being added or agreed to are getting very close to real time, with no buffer to account for the effective labor rates we have built our business rates on.

The hourly rates that are being charged today are very close to effective rates in many areas. If we don't wake up and realize this soon, it will be almost impossible to sustain a collision repair business in the near future. Your labor rates are designed to include the cost of doing business. Why are Northern California labor rates hovering at $100 while the rest are below $50? It's time you looked at your labor rates differently.

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