Originally published May 1, 2006
The stakes are high for the players involved in the issue of repair vs. replace, and repairers need to understand the motivations of them all
In the collision industry, the decision to repair or replace a part has many stakeholders. In simpler times, the decision to repair or replace was conducted between the collision shop estimator, technician and vehicle owner. Depending on the vehicle and its use, the vehicle owner made the decision that benefited him/her the most.
Economics and restoration of value were the two key factors. The vehicle owner using their car for work, school or basic transportation opted for the less expensive repair. If repairing the panel was cheaper, the customer often chose it. Customers with nicer vehicles who wanted to restore the vehicle to pre-wreck value often chose to replace panels.
In this case, the customer was more concerned about the car being restored to pre-wreck condition, hence, quality was the most important criteria used for repairs. These customers preferred a new panel to repairing the old one even though it was more expensive. This was generally true for damage approaching the cost of the panel. Cosmetic damage was usually repaired except for the very discriminating customer who would only settle for a new panel.
Repair versus replace has become much more complex in today's collision environment, and there are a number of stakeholders in the decision. Some of stakeholders are forthright in their vested interest and others (who exert great influence) try to be obscure in their position. This covert proxy representation complicates the decision-making process for shops and consumers. Those proxy representatives may struggle with ethics.
Transparency in business has become a very necessary ingredient in today's consumer affairs. The excesses of corruption revealed in recent corporate scandals should be a reminder. The full light of the sun in business dealings is the best disinfectant.
Today's stakeholders
The first stakeholder in the decision to repair or replace is the vehicle owner. The owner of the property should make the final decision once he/she has all of the facts. His/her stake is the most important one as the decision affects the condition of their property. If the vehicle is financed, then the lienholder is a stakeholder and has a vested interest to protect the value of the vehicle, their collateral. Returning the vehicle to pre-wreck condition is the lienholder's main concern.
If the vehicle is insured, the next stakeholder is the insurance company. Insurers may be involved in one of two ways. If the vehicle owner is filing a claim on his/her own insurance policy, then the insurance company is obligated to fulfill the insurance contract. After any applicable deductibles are satisfied, the insurance company must make the policyholder whole. The insurer's stake in this process is mitigating the expense of its loss. If the loss is a third-party claim, the reasonable cost to restore the vehicle to pre-wreck condition is the expense of the at-fault driver (tort feasor), who is a stakeholder.
If this loss is a result of a tort, it falls under the jurisdiction of civil law. If the at-fault driver has an insurance company, that insurance company has no contractual obligation, legal stake or right to interfere in the repair of the vehicle or in the repair decision. The at-fault driver's insurance company is responsible to its policyholder for the cost of the claim.
The insurance company may act covertly to affect the repairs by way of its relationship with the repair shop. If it has an official relationship with the shop, it may have guidelines for repairs that are contrary to the desire of the customer. The shop may have insurance company interests ahead of the interest of the customer. The leverage the third-party insurance company may use to get its position adopted is the threat to sever the relationship with the shop if the insurance company's interests are not met.
Shop owners who are intimidated by this tactic have allowed the customer's position to be usurped by an insurance company. This covert proxy relationship may cause the shop to give advice under duress to the customer and perform repairs that favor the insurer and are not in the best interests of the vehicle owner.
Other stakeholders in the repair-versus-replace decision include the vehicle manufacturers. They are in the market to sell parts. Their bias may be to replace the part more often than to repair it. With a monopoly on parts for the vehicle they manufacture, competition has been non-existent and part prices did not reflect true free market forces.
Competition for collision parts has surfaced in the past few years with another category of stakeholder, aftermarket parts manufacturers. Some mechanical aftermarket parts suppliers have existed for decades, and in some cases, there are aftermarket parts that are superior to original equipment manufacturers (OEMs).
However, some aftermarket manufacturers rely on price alone to compete. Quality is secondary to their competitive strategy. An offshore collision parts manufacturer is an example of a stakeholder whose objective is to sell cheaper parts and thus make replacing parts more cost-effective than repairing them or replacing them with OEM. These parts have become a cost control strategy for stakeholders, whose main objective is to save money. An ethical conflict of interest may arise between a collision shop that advertises superior quality repairs to consumers and then compromises that quality to satisfy their insurance partners with cheaper prices.
The next category of stakeholders is salvage part companies. Recycling salvaged vehicle parts provides an alternative to the higher cost of new OEM parts or lesser quality aftermarket collision parts. Salvage parts are generally OEM parts and are comparable to the part that is removed from the vehicle. They should be the same year, with similar mileage and use.
Material manufacturers are also stakeholders. Manufacturers of body filler, sandpaper, grinding discs and power sanding equipment have a bias to repair more often than to replace. They advertise and train salespeople to demonstrate that repairing parts is more cost effective and provides comparable quality to replacing parts, especially compared to offshore imitation parts. After all, they argue, the original part is still on the car if it is repaired.
Defining repair versus replace
Now we're ready to establish the criteria for repairing versus replacing a part. First, panels that are damaged severely enough to need replacing are not considered for repair. With outside pressures aside, generally when the cost of repairing an existing panel approaches the retail price of a new replacement panel, a new panel is recommended.
There are also some additional things to consider, including the labor cost to replace the panel, the area to be painted, edged and blended, invasion into original construction, and the length of time the vehicle is in the shop for repairs. If the panel is a bolt-on fender, the threshold to replace the panel is met earlier than a welded-on quarter panel. The reason for this is the quarter panel is much more expensive and labor-intensive to remove and replace. Replacing a welded-on quarter panel disturbs more of the original construction, such as seams, welds and corrosion protection, so more repair time can be allocated before the replacement threshold is met.
There are two models for making this decision. The first model just compares the price of the new fender to the cost of repairing the fender. The second model considers all of the procedures and related expenses in each operation of repair versus replace.
In the second model, if a fender costs $100 and the estimating guide allows two hours to replace it, let's calculate the economic value of the replacement cost. (For simplicity, this is a general exercise and not a comprehensive one.) Assuming the shop's labor rate is $40 per hour with a material rate of $20 per hour, then the replacement cost is $180 (2 x $40 + $100 = $180). Now we need to add in for painting and the paint on the vehicle is a single-stage color.
The estimating guide allows two hours to refinish the outside of the fender and one-half hour to paint the underside. The door and hood will need to be blended and the estimating guide allows one hour to blend the door and two hours to blend the hood. The door and hood will need to have the trim removed for blending so the total allowed in the estimating guide to remove all parts is two hours, one hour for each panel. Assuming the fender is damaged on the front only and is repaired, it could be painted and blended within the panel.
The cost of the fender plus the replacement labor time is $180. Both operations (repair and replace) would require painting the fender so there is no outer panel paint savings between the two. However, when replacing a new fender, it must be edged so that adds $20 paint labor and $10 materials to the cost for a total of $30 ([$40 x .5] + [$20 x .5] = $30). The hood would have to be blended in either operation so there is no savings.
However, the door would not have to be blended if the fender is repaired since the fender could be painted and blended within the panel. The door would not need the trim and parts removed for blending. Labor saved not removing parts for blending from the door is $40 (1 x $40 = $40). The paint blend savings of not blending the door is $60 ([1 x $40] + [1 X $20] = $60).
To calculate the cost to replace the fender, add $100 for the new fender, $80 labor to remove and replace the fender, $150 to refinish the fender inside and out, $180 to blend adjacent panels and $80 to remove and install trim and hardware on blend panels. The total cost then to replace the fender is $590.
First model
The first model most estimators used to calculate the threshold between repair and replace is performed by dividing the retail price of the fender by the labor rate. In this case it would be $100 ÷ $40 = 2.5 hours. The most that could be allowed for repairing the fender using this model is a total of two hours. This model ignores the other savings that may result between the two operations.
Second model
In the second model, the steps to determine how much time can be allocated to repair the fender and still be more cost-effective than replacing it are:
- Refinish the outside of the fender, $120 (2 x $40 = $80, 2 x $20 = 40, $80 + $40 = $120)
- Blend the hood, $120 (similar calculation as above)
- Remove and install trim for blending on the hood, $40 (1 x $40 = $40).
The associated cost to repair the fender without the labor included is: $120 + $120 + $40 = $280. The replacement cost less the associated repair costs is: $590 - $280 = $310. Since the shop's labor rate is $40 per hour, then $310 ÷ $40 = 7.75 hours.
The shop could charge up to seven hours to repair the fender. Even though the repair costs exceed the price of the fender, the total repair order costs are less. Some other considerations that could be calculated into the equation are cycle time (rental car), productivity in the body shop, productivity in the paint shop, material costs and profit.
Comparing the two models
A shop that prefers more replacement parts, faster cycle times and larger sales volume may want to choose the first model. This kind of shop's ambition is to increase the number of sales (repair orders) produced by each technician and reduce the amount of time the vehicle is to be out of service. This model may use more aftermarket and like kind and quality (LKQ) collision parts, and it reduces the amount of time the customer is without the use of his/her vehicle and the amount of time spent in a rental car. Claims are handled more quickly and thus closed more quickly.
A shop that prefers more gross profit per repair order generated from increased labor sales may prefer the second model. This model will generate more labor per repair order, reduce invasion into original construction and retain more OEM panels. Technicians who are very competent working metal and plastic filler may prefer this model. These technicians may have a higher productivity rate than a technician who changes panels.
The decision to repair or replace should be made with the participation and best interest of the most important stakeholder — the vehicle owner. Explaining fully and honestly the repair options and best repair practices to the vehicle owner will help keep the collision repair industry ethical and honorable. Understanding how and when to make a repair versus replace decision is helpful when preparing an estimate with a customer, to provide the most value for their money.
