Issued on February 15, 2005, the Independent Glass Association (IGA) Beacon Bulletin details what the upcoming National Auto Glass Specifications (NAGS) rebalancing and the subsequent industry reaction means to independent auto glass shops.

The text of the Beacon Bulleting reads as follows:

February 15, 2005

THE PROBLEM WITH THE FLAT LABOR RATE

The whole NAGS rebalancing was predicated on shifting a shop's profit from the sale of glass to labor charges, where it belongs. But, now we find major auto insurers are offering a flat hourly rate, rather than recognizing that jobs vary in complexity and take different amounts of time. Or, where insurers offer an hourly labor rate, the rate is unrealistically low, sometimes lower than the cost of labor to the shop. Some insurers and networks say their offers are "revenue neutral," but that is revenue neutral compared only to the lowest network price, hardly "neutral" really. The new NAGS and net priced parts innovations mix about as well as oil and water. We can predict that many more shops will leave the networks as they try to cope with this volatile combination.

Those shops which accept a flat rate or a low hourly rate, rather than invoice based on the costs and competence of the technician may have these problems.

1. A flat labor rate means loosing money on some jobs because some jobs take 1 hour, some take 3 hours.

2. There is no way to adjust to cover such things such as inflation, two man sets, corrosion, etc.

3. If you accept a flat rate for labor, it makes it easier for the networks to reduce prices in the future.

4. An hourly rate makes it easier to substantiate the logic and validity of a shop's invoice in arbitration and small claims court. After 2/28, many shops may switch over and set their invoices based on their costs. Judges understand the hourly rates of auto dealers, comparable industries and the trades, whereas they might not as easily understand why the glass is marked up 200% over NAGS list.

5. No other auto repair industry uses flat rates.

6. Uniform flat rates distort the market.

7. Flat rates make the glass seem overly expensive relative to the labor to set it.

CHAOS REIGNS SUPREME

Consider the following inconsistencies.

· "…PPG will not implement the February 28, 2005, NAGS rebalanced list pricing as the basis for its customer pricing."
· In "A" markets, Lynx went to 3% off, $35/NAGS labor hour and $20 flat for kit.

· Commerce Ins. Co. out of Webster, Massachusetts has declined to change to the new NAGS pricing and will stay on the current pricing.

· We have reports that Farmers has sent out different pricing within the same market, but one of their offers is 46% over, while Kemper is 113% over.

· State Farm wants 3% off the new NAGS, with a $100 cap on labor - which amounts to a flat labor rate.

· Insurers with Safelite have gone to $40 "base" labor, plus $35/hour.

· Allstate who wants 17% of the new NAGS, with $35/NAGS hour for labor and $22 for KIT which is not "revenue neutral."
· BEST IN SHOW honors go to Progressive for their move to 46% off.

Are you puzzled as to why some Safelite insurers are offering a "base" labor rate of $40, then go on to offer $35/hour? The concept of base has no independent justification other than to cut the value of your marginal (last) hour on a job. Compensation under this method makes the more complicated jobs automatically less profitable than the less complicated ones. This is unfair and unwise for many reasons.

Also, those that try to compensate shops this way obviously do not want shops thinking in terms of the true, effective average hourly rate. That true rate comes dangerously close to the guy who comes to your house to snake out your toilet.

(Never mind that the very life and safety of the customer depends upon the voluntary conscientiousness and quality of the work of the auto glass technician -- or that the technician's primary tools will fillet the thumb right off his hand given a split second lapse in concentration.)

The other reason for the "base" rate plus the hourly rate, we suspect, is that insurers and their administrators now have 3 separate variables with which to decrease prices - three ways to improve their profitability at your expense ("base", hourly rate, and glass) -- instead of just 2 (hourly rate and glass). This allows them to alternate among these, making their incremental decreases look smaller.

The next question you might have is; how much should you charge as an hourly rate? Only you know the answer to that - because, after everything is said and done, this question ultimately depends upon what your costs are and what the market will bear. If net priced parts, flat labor, and NAGS don't combine to make you profit and keep you in business, then you are entitled to base your invoice on your costs and what is necessary to stay in business - like every other company on earth.

We've talked with over 100 glass shop owners since Progressive announced their new, improved lowest price ever and every one, without exception, was adamant that they could not bill at those rates and still cover their costs or stay in business. We are just reporting what has been said to us.

When an insurance company or network unilaterally announces a new, lower price, does that make the price a "market price"? No. But what if all the shops charge that price, then is it a "market price"?

Upper management knows full and well the decision as to whether or not these announced prices become the new "market" price is your decision - the decision of the market --not theirs. PPG said yesterday, "It is up to each glass service provider to establish their own pricing…" That's how a market works.

We imagine the managers at Progressive are right now all gathered around the water cooler, on bended knees, fingers crossed, hands clasped in prayer, begging the Almighty that the vast majority of shops accept their "announced" price, because if the vast majority don't, well, they'll just have to announce a new price - a market price.

SOME MORE FOOD FOR THOUGHT

State Farm acknowledges time differences per installation, yet caps labor at $100. This is effectively a flat labor rate and inconsistent in our view. Next time you need a plumber, tell him that you're going to cap his labor rate and see what he says. Write it down, you may wish to use it later. State Farm is also pricing labor higher in rural areas (where it is cheaper). This also seems to be evidence of non-market forces at work and would probably be hard to justify in court.

THIS IS STILL AMERICA…

where the rule of law governs. You are welcome and entitled to charge for your work based on your cost. After all, the insureds policy states the insurer will pay the fair and reasonable amount required to indemnify the insured. Call the car dealership in your area and ask them what their posted hourly labor rate is, then ask them if that is the amount they would charge you to change your windshield. That's what their market will bear. We believe hourly labor rates similar to comparable industries will remain eternally defendable in court. You may want to consider asking judges and arbitrators to resolve your price disputes to see what happens. If you are trying only to fairly compete, cover your costs and make a reasonable profit, we think the law is on your side.

For a more detailed discussions of this and other issues, get to the IGA conference 2/24 - 2/26 in Orlando. Check our web site for more info about the conference. www.iga.org

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