Proper Estimating.
This is going to be a long one, so please forgive me!!
One of the easiest ways to achieve a near 20% net profit, is to just raise our prices. ‘IF’ we have unlimited customer demand, then we have a niche. We all have plenty of work right now, but you MUST understand this. We are at the top of a market cycle and this WILL NOT last forever.
I am one of the most positive people you will ever meet, but I need to give you a quote from the late Global Investor John Templeton: “The four most expensive words in the English language are, THIS TIME IS DIFFERENT.” His Templeton funds were worth $13 billion in 1992 before he sold them. The collision repair business is a mature business. Otherwise, we are not necessarily in a ‘niche’ business.
Over the last 3 years, my shop has grown on Avg. 23% annually (43.2% in 2019, 3.9% 2020 & 21.4% in 2021). Our goal for 2022 is to grow another 20% and we currently have the same staff we ended 2019 with. FYI: We are currently looking for the right fit to add another Admin/Tech. I honestly never thought this type of growth to be possible. With the proper bonus structure and equally important the elimination of waste with Lean thinking and coaching, it is possible. About the time I feel we have hit the ceiling on production, we get to a higher level of awareness by visually seeing waste and eliminating it. Boom, goals become easier and we are at a new levels. It’s just crazy to be honest. FYI: The growth is not from adding another DRP either.
Anyway, back to Estimating.
Some shop owners almost like to brag about how they charge the vehicle owner the short pays from insurers. Funny how these same shop owners pay insurance companies premiums, out of their own pockets for their own vehicles. I then question, their logic on charging their customers short pays?? It’s a like a double standard IMO. I pay over $70,000 per year in insurance premiums. If I have a claim and have to pay more than my deductible, let’s just say I am the type that would picket in front of an insurers headquarters. Disclaimer: We do ask our customers who are only being paid by the insurer for aftermarket parts, if they want to pay the difference for new OEM? Many gladly do so, but no matter what you will rarely ever see a Keystone truck at my shop. .3% (not 3%) of my gross sales, is what my shop spent with Keystone in 2021.
As my Lean coach quoted to me years back, “When we focus on quality in everything we do, the outcome will be SPEED”. Very few reading this, will really understand the core of this statement unfortunately. So, as far as AM/LKQ vs OEM parts in my shop, we price-match new OEM for almost every part. If you have long cycle times, you need to be careful with this practice! For those who chase parts and paint Gross Profits, this is Cost Accounting or Management by Objectives. I focus on Throughput Accounting, which allows me to operate at a lower cost than most shops, but I have digressed.
So, back to charging customers.
If I have a $2,000,000 per year Gross Sales body shop and I decide I am going to take the gloves off with the insurers. I then start duking it out with them, after I raise my estimates by say 25%. Let’s say, I get an extra 15% from the insurers and charge the short pay of 10% to the VO. Now I have a $2,500,000 business. Great! Here’s the trouble, 85% of the shop owners that go down this road become bitter about most everything in life. The other 15%, can still grow their shops on an annual basis of 10-12%. MY HAT IS OFF to the 15% group, as they are very very smart and superb operators at marketing/educating the customer along with negotiating. For the other 85% of the owners, they lay awake at night with bitterness, ulcers, high blood pressure, and a near hatred inside. Their employees, also become imbittered about the industry, due to their boss’s demeanor. Their business moving forward, spend large amounts of $ on marketing just to keep work coming in the door. Then the flip side, their expenses keep going up every year while their sales start dropping from $2,500,000. As expenses keep creeping up, net profit keeps dropping from say 20% to 15% to 10% to 5% and then eventually they struggle with cashflow.
I know of two shop owners that were radicals to the extreme. They would have very impressive 350-375 estimate lines for quarter panel replacements. The trouble was, they could rarely collect on these claims. They would hold their customers vehicles hostage at near gun point, for months on end. Both of these shops are now defunct due to insolvency. I totally agree that the insurer needs to indemnify the insured and I have zero fear, when I need to file a complaint against an insurer with our states Dep. of Insurance. Trouble is, I would be the last person in the country that ever want to take my car to one of these two shops. It’s like the old song by the Eagles, ‘Hotel California’. Once the car goes in, it will never come out. With word of mouth, online reviews and social media, a shop can get a very bad reputation just overnight. Most consumers buy their vehicles for a reason, they need them!!
So, what is my stance?
I for sure do not agree with what the MSO’s are doing with the quality of repairs, parts, paint, and labor discounts to insurers, stealing techs and paying their admin folks low wages. In my rural market, I actually do have a little bit of a niche business. My competition is there, but no one is looking to grow, and they are content with mediocrity. We do have three DRP’s, but I don’t have 2 Gerber locations just down the street to compete on price with me either. My average severity right now is $5,000. When it comes to negotiations, I got out of that business as much as possible. At almost 55 now, my tolerance for stupidity is nearly zero. So, one of my younger and more intelligent than I admin guys, is my negotiator. He can get things paid for that I never imagined. By the time he is off the phone, he knows where the appraiser lives, what college he went to and what sports teams he likes. Here is the best line he uses near the end of the conversation, ‘Here’s the deal, I don’t care what your supplement looks like, you can write anything on it you want, just focus on getting the bottom # the same.’ Funny how the supplement comes back just pretty close.
Now do we get short pays?
Of course, we do. The best and easiest way for us to combat short pays, is by our hitting our Break Even earlier in the month. Trouble is, I would guess less than 30% of the shops even understand what a Breakeven is. Worse yet, less the 5% of the shops understand what an Owners Breakeven is!!