How to Prevent Short Pays from Eating into Your Margins

Most collision shops have experienced short pay, where you charge more than a client’s insurance covers. When this happens, you usually have two choices: Bill the client for the difference or eat the cost and suffer the consequences.

The good news is that you don’t always have to bend to the insurance company’s whims and leave the customer with a bad taste in their mouth. There are strategies you can use to prevent short pay and maintain your shop’s profit margins along the way.

In this article, we’ll discuss some of these strategies and steps you can take to avoid short pay and improve the profitability of your business over time.

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Accurate Estimates

Negotiations with insurance companies start with accurate and defensible estimates. If you don’t have an itemized list of costs or charge three times the going labor rate, you probably can’t close the gap with insurance companies.

While estimating software has made it easier to create estimates, providing fast parts look-up and standardizing labor estimates, it’s easy to overlook potentially expensive repairs. For instance, a heavier vehicle might take longer to pull the unibody than a lighter vehicle. So, you should allocate enough time for technicians to assess damage fully and build estimates.

company is responsible for customer indemnification. And clearly state that the customer agrees to pay regardless of what insurance covers.

If insurance does not cover the total amount, you could even help the customer file a complaint with the state’s insurance department. Oftentimes, a customer providing a receipt showing that they covered the balance is enough to force an insurance reimbursement. That’s especially true if they come armed with an itemized invoice showing reasonable costs.

Auto repair software, like Mitchel1, makes it easy to create accurate estimates. Source: AllPCWorld

You should also take the time to study your market. If your labor costs are sky-high, insurance companies will inevitably fight back. On the other hand, just because other shops don’t charge for some necessary operations doesn’t mean you can’t add them as a line item.

Ultimately, you should aim for a complete and honest estimate. That way, you are armed to negotiate with integrity while delivering customers the best possible result. After all, your loyalty should be to customers looking to repair their vehicle to the proper standard, not insurance companies looking to cut costs at the customer’s expense.

Transparent Billing

Balance billing, as the name suggests, involves billing the customer for the balance of the invoice that insurance does not cover. While this may seem like a natural solution, it can be dangerous if you’re not careful in your approach.

If you surprise a customer with a bill when they thought insurance would cover the entire cost, you could end up with angry online reviews and perhaps still an unpaid invoice. This risks hurting your business in the short and long term.

If you choose balance billing, transparency is essential. Dedicate a section of your repair authorization to the issue, clarifying that you work for the customer rather than the insurance company. The insurance company is responsible for customer indemnification. And clearly state that the customer agrees to pay regardless of what insurance covers.

Direct Repair Programs

Direct Repair Programs, or DRPs, are a surefire way to avoid short pay because everyone agrees to a predetermined price for each job. They also provide a steady source of work since insurance companies will actively send referrals to your business.

But, of course, these jobs usually have razor-thin labor and parts profit margins. Insurance companies dictate how long repairs should take and what parts to use. Worse, they may not cover some necessary services, like seam sealers or hazardous waste disposal. These nit-picking calls from insurance companies could leave your business struggling to cover the cost of a job.

To be successful in a DRP, you must have a tight team and streamlined workflows that keep costs to a minimum. Understanding what’s covered and not covered by each DRP repair is also essential. And finally, you should also carefully choose which insurers you want to deal with since different insurers provide different costs and levels of pushback.

Unfortunately, many auto shops fall into a routine with DRPs and become so busy that they forget how to grow their business without them. Or, they may become overly reliant on DRPs to provide every lead. So, even if you join a DRP, you should continue to market your business to non-DRP customers to improve your profit margins and ensure stability.

Small Claims Court

Short pay is depressingly familiar, and some auto shops have started to fight back in small claims court. For example, in Vermont, Parker’s Classic Auto Works brought a suit against Nationwide Mutual Insurance and scored a victory in the state’s high court.

If you choose this route, start by hiring an attorney and having the customer enter into an assignment of benefits (AOB) agreement, enabling you to pursue the legal claim. Then, your approach should be that of a simple bill collection rather than a complex legal argument.

You should come prepared with a properly signed contract and invoice with the customer showing the shop’s charge, the amount paid, and the amount left over. The invoiced amount should be defensible based on your costs and margins rather than the insurer’s estimate.

Of course, you should also come prepared to argue for the rates you charge. For instance, you might conduct a labor rate survey by calling ten competitors and asking about their posted labor rates to help argue against the insurance company’s claims.

Small claims court may be too much effort for many collision shops to take on, but if insurance companies are consistently jilting you, they may be a good option to show them that you’re serious about defending your labor and parts rates.

Document the Loss

It’s essential to track losses associated with short pay, even if you can’t recoup them. That way, you can retroactively determine what insurance companies are causing the most issues and target certain types of work to maximize your shop’s profitability.

The easiest way to document these losses is to account for the entire job at your prices and then discount the difference between your price and what insurance covers. Then, you can look at your discount expenses to determine the financial impact.

The same goes for DRP versus non-DRP work. After all, you may find that occasional short pay and fewer warranty jobs yield more profit than a DRP program offers. And unless you’re tracking your P&L, it’s difficult to really know your profit centers.

Diligently tracking your P&L can also help identify other sources of strength and weakness in your business. For instance, you can see what repairs drive the highest margins, what insurance companies pay the most, and the impact of marketing campaigns.

The Bottom Line

Short pay is a frustrating part of the collision repair business. While they’re unavoidable if you do warranty work outside of a DRP, there are several strategies we discussed above that you can use to minimize their impact and recoup some lost profit.

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