What Contractor Isn't Familiar With This Frustrating Story...
A contractor takes a call for service from a new client. After a brief conversation, they set up a time to inspect the customer's home. The contractor drives to the worksite (30 minutes*). While onsite the contractor spends 30-60 minutes* discussing the project with the customer, performing a detailed inspection of the conditions, taking measurements, documenting scope items, and listening to what the customer wants to have completed. The contractor drives back to their shop (30 minutes*). The contractor spends at least 30-60 minutes* researching products, creating an estimate with sufficient scope and cost details to reflect the vision of the customer and sends that to them for review. After a day or two the contractor follows up with the customer, there is a delay in response, and finally, the customer notifies them that while they appreciate all of the details the contractor provided they were able to hire someone who could do the work for significantly cheaper.
Is this just a "cost of doing business" or is there a BETTER WAY?
Episode 91 of The DYOJO Podcast will be part 2 of a discussion that we started in Episode 90 on whether contractors should charge for their estimates. For Episode 91 we will continue to review various approaches by construction professionals including providing FREE estimates, getting contracts signed prior to dispatch, using a Letter of Intent (LOI), or other means. At the end of the day, the contractor does well to develop and consistently follow a thorough screening process for all new clients so that they know what they are committing themselves to.
If the contractor does not value their own time, NO ONE ELSE WILL.
In this video promo for Episode 91 of The DYOJO Podcast:
Thursdays are forThe DYOJO Podcast - helping contractors shorten their DANG learning curve for personal and professional development.
KEYWORDS: estimate, pricing, waste, contractor, article, clients, government affairs committee, restoration, industry association, feedback,
Do you see wasting time as a challenge in your business? In our construction company in Puyallup, Washington, this has been a consistent topic of discussion and an area that we are working to lessen this drag on productivity.
Should Contractors Charges for Estimates?
In response to questions from contractors on whether or not we should be charging for estimates, we started a discussion on Episode 89 of The DYOJO Podcast. I made a promise that we would dive a little bit deeper into the hybrid concept which we call the Letter of Intent (LOI). As entrepreneurs we want to grow our companies. As business owners we want to lay a foundation for long term success. As contractors there is this battle against a perceived industry norm (or standard) that estimates must be free. We hope you will recognize what many skilled tradesmen who have become business owners are practicing, that you DO NOT have to uphold the MYTH that free estimates are just the of "the cost of doing business".
You DO NOT have to uphold the MYTH that free estimates are just the of 'the cost of doing business'
The Cost of Doing Business
There is a battle between bidding work, producing work, getting paid for work completed, and all the things in between that affect our ability to do more. Your time and expenses for inspecting and estimating a project are real. If you do not recoup those costs in some form, you are feeding the MYTH that estimates are FREE. As a small business owner you wear multiple hats. You only have so many productive hours in a given day.
Consider this entrepreneurial dichotomy:
I shared many of my thoughts on how we identified wasting time as an issue in our construction business on the Restoration Rundown podcast from Ironclad Restoration Marketing. The Letter of Intent (LOI) is something we have discussed internally for some time and decided to launch at the beginning of this year. To my surprise, during my first call introducing this process to a customer they responded, "That makes sense, send it over and we will sign it."
The host, Ben Ricciardi has also authored an excellent book, The No Bulls**t Guide To Internet Marketing For Restoration Contractors. That title tells you exactly what's in the book.
The Contractor's Letter of Intent
There's a lot of back and forth on socials whether contractors should be charging for estimates. Before we can argue this point, we need to define a few terms.
If you provide something verbal, an educated guess of an estimate, based upon rough details provided by the client, then a FREE (non-binding) estimate may be appropriate. "Based on what you have described to me, your rough cost would be in the range of $______ and $______. If it sounds like we understand your scope and the numbers are in your budget range, would you like to discuss the next steps for having an estimator perform a more detailed inspection followed by a written proposal?
There is no such thing as a free lunch, someone is paying. STOP perpetuating the MYTH of the free estimate. In the free estimate scenario, you are paying all of the costs to bid the work. AT A MINIMUM, please screen your clients so that you know what you are getting into. We discussed the Client Intake Process on Episode 86 of The DYOJO Podcast. If you have a clear, thorough, and consistent process for client intake, you will generate credibility with the client and set your team up for success. You will know whether the juice (Free Estimate) is worth the squeeze (Your actual costs of inspecting, writing, and producing a free estimate).
How often do contractors receive arbitrary rebuttals to their inclusion of overhead and profit in their estimates for insurance claims? The answer is often. Sometimes the issue is easily explained by clarifying the complexity of the work or the number of trades involved. In this article we will briefly review a few scenarios, ensure that we have the correct understanding of indirect (overhead) costs verses direct (supervisory) costs, and share a sample email format for requesting clarification from the adjuster on a denial of overhead and profit.
Work Complexity and O&P
If complexity is the barometer, O&P should be added to every claim without question (especially program or third party administrator work) as the level of compliance (i.e. complexity) for an insurance claim exceeds "normal" contracting scenarios. The insurance claims process for mitigation or renovation is inherently more complex than home improvement or remodeling when insurance is not involved. If complexity is a condition of the insurance policy, the carrier representative should be able to point this out to the customer and the contractor. A good question for the customer to ask would be, "Please show me where it states in my policy that overhead and profit is a condition of complexity."
General Overhead are expenses incurred by a General Contractor, that cannot be attributed to individual projects, and include any and all expenses necessary for the General Contractor to operate their business.” - Xactware
Direct vs. Indirect Costs
As we wrote about previously, "Indirect costs are all of those necessary expenses that a contractor incurs but are not directly related to an individual project. If a contractor, or any business, does not account for their overhead expenditures in the costs of their goods and services, they will not be in business for long."
Indirect Costs are necessary for a contractor to remain in business. The insurance company may not care about this, but they sure understand their need to be profitable and protect that with great force. In most industries the overhead and profit are embedded in the costs. For example, when you buy an apple at the grocery store, they do not break out what their overhead and profit factors are for that item but they are certainly charging for it.
O&P are not optional for any business that wants to remain in business.
General Overhead expenses are not included in Xactware’s unit pricing, but are typically added to the estimate as a percentage of the total bid along with the appropriate profit margin. These two costs together constitute what is normally referred to in the insurance restoration industry as General Contractor’s O&P, or just O&P.” - Xactware
Supervisory labor (aka project management time) is as much a real cost that should be accounted for an compensated for the work as temporary power or restroom facilities. Supervisory time is a direct cost and should not be confused with or "traded" for overhead (indirect) costs. It is not included. It is necessary. It is common to either bid supervisory labor as a percentage of the estimated labor or submitted as a breakdown for billing at project intervals (i.e. bi-monthly).
A Sample O&P Email
If you receive a denial or a request for clarification for why you are requesting overhead and profit (O&P) as a contractor, this is a sample email that you could discuss with your customer and then send to the insurance carrier representative with the customer cc'd. Understand, this is not a guarantee that an adjuster will see things your way but it should help your customer and the adjuster to more clearly understand your position.
Why wouldn’t overhead and profit apply? Overhead and profit are normal and necessary costs for a general contractor to remain in business.
Xactware, the estimating software utilized for this estimate as is common for insurance claims, states,
“General Overhead are expenses incurred by a General Contractor, that cannot be attributed to individual projects, and include any and all expenses necessary for the General Contractor to operate their business.”
Overhead and profit is normal and necessary for all companies including insurance companies. The insurance company included overhead and profit in their policy fees to the insured, correct? Where in the policy does it state that overhead and profit are excluded from the cost for an approved scope of work?
Most contractors, if not all companies (including insurance), embed their overhead and profit costs into the lump sum pricing. Presenting overhead and profit as a markup is unique to insurance claims estimates in Xactimate. The software company advises,
“General Overhead expenses are not included in Xactware’s unit pricing, but are typically added to the estimate as a percentage of the total bid along with the appropriate profit margin. These two costs together constitute what is normally referred to in the insurance restoration industry as General Contractor’s O&P, or just O&P.”
Please advise if you need any further information to approve the total submitted scope and cost from our estimate as we know our shared customer is eager to move forward with restoring their home to resemble pre-loss conditions in a timely manner.
Contractors often struggle to find the "right" price for their services. There are many means and methods for bidding anything from drywall repair, tile floor replacement, kitchen remodeling, to whole home renovations. Whatever the cost estimation platform is or the estimating software that a contractor chooses to use to try to hone the science of their process, there is always an element of art in determining the materials, labor, and equipment for a project. In this segment from The DYOJO Podcast Episode 82, Steve Patrick of Level the Playing Field shares a story about a mindset change for a plumbing contractor that affected how they priced their services.
Estimating and Closing Work at the Right Price
During our conversation regarding using questions during business negotiations, especially with insurance claims adjusters, Steve Patrick shared a story that he heard during a sales training. The story goes something like this,
There was a plumber in Chicago who immigrated from Yugoslavia. He was a master plumber and he was selling the work for a higher price than anyone else in Chicago. He was closing almost like 90% of the jobs that he went out on. The owner of the company asked him one day,
"How is it that you're able to close such a high percentage of the work you estimate?
The owner obviously wanted to clone this plumber who could bid work higher than their team members and converting a high percentage of those estimates into contracted work.
The owner told the plumber "I want you to train all the rest of our plumbers. I want you to show them how you are able to close 90% of the work you estimate when you are selling it at a higher price than anyone in Chicago."
This causes the plumber to pause. He doesn't know why he closes more work than anyone in the organization or how he is able to charge more than them either. The plumbers says, "I don't know. I just go in and explain what needs to be done and the customer hires me to do the work."
Steve asks The DYOJO Podcast audience, "So, what happened to the plumber's closing ratio after the owner told him he was charging the highest price in Chicago?" Unfortunately, we know the answer, his close rate plummeted the 40%.
The Mindsets and Habits for Estimating Success
Why was there such a drastic reduction? As Mr. Patrick says, "Mindset change. The plumber's mindset changed. Back when he thought he was bringing tremendous value to the client, they bought the value that he was selling. Once the owner told him that he was charging the highest price in Chicago, all of a sudden the plumber thought, oh my goodness, I'm overcharging the clients. And guess what happened?"
Isn't that interesting? It's all about what is in between our ears. Mindset change.
As a former adjuster, Steve trains roofing and restoration contractors how to succeed in the challenging world of insurance claim's repairs. In the extended conversation of Episode 84, Mr. Patrick shares, "It's your mindset. You know that you're right. You know you bring a tremendous value to the client." The contractor should take the confidence of the value they bring to helping the client navigate the insurance claim repairs process. Steve says, "Whenever you are dealing with an adjuster, 80-90% of the words coming out of your mouth should be in the form of a question." Mindset change.
In this podcast conversation with Josh Zolin, I asked our guest if there was a recent business or leadership catchphrase that bugged him, without skipping a beat, the owner of the rapidly growing Windy City Equipment (WCE) in Phoenix, Arizona answered,
Yes! Give it your best effort.
This video is a snip of what will become The DYOJO Podcast, Episode 88. With our guests, Josh Zolin and Kelsey Isaacson. The video also introduces the article that will be released in Cleanfax Magazine titled Goals, Effort and Results, Developing Your Team. Josh wrote the skilled trades advocacy book, Blue is the New White and hosts a weekly podcast by the same name.
This thought-provoking question that Mr. Zolin dropped during our discussion has caused me to think through our understanding and implementation of EFFORT versus RESULTS in our local contracting company, ARES Restoration based in Puyallup, Washington. Josh continues, "This was a big mindset shift for me. Look, it's a good indication of character. But that's about where it ends."
In preparing for this podcast episode, which you can view on YouTube or listen to on Spotify, I did some research. I found an article called The Effort Effect from Stanford magazine. In addition to our discussion with Mr. Zolin, we're going to be talking about the research efforts of a professor of psychology, Carol Dweck. We will also review several quotes from other business minds on the topic of effort versus results including this one from Mark Cuban whom you may recognize from the television show Shark Tank.
“The one requirement for success in our business lives is effort. Either you make the commitment to get results or you don’t.” - Mark Cuban
It appears that Mark blends the concepts of effort and results, and to some degree they are inextricable. What Josh was trying to get at is that it becomes more of the "work smarter rather than work harder" mentality once you have a level of competency in your field. But, when you don't know necessarily what to do you can't just start out working smarter. As you develop your skills and abilities, you have to gather the pennies (see video below). Once you are proficient in gathering pennies, or whatever work you can find, they will eventually turn into nickels. Then eventually your nickels will turn into dimes and so forth until you are up-and-running to the point that you have quarters (better quality work).
Gathering pennies is a reference to a rather old video and article (see above) title The Five Phases of Business Startup. Distinctives of Business Startup Phase One include:
In this first phase of business, the entrepreneur is asking, "Where can we get our name out there with fairly low cost and high exposure?" Often, these opportunities are in the various networking meetings that not everybody likes going to.
“The best results are achieved by using the right amount of effort in the right place at the right time. And this right amount is usually less than we think we need.” - Tony Buzan
For The DYOJO Podcast, Episode 88 we consider this question from Josh Zolin and review several others, such as the one above from Tony Buzan, with Kelsey Isaacson, a successful realtor in Pierce County, Washington. It is important for people in a position of leadership to question whether what they believe, practice and reward is leading their team down the right path to achieving their shared goals. Dweck's research uncovered many interesting insights about goals, performance, and achievement which we will discuss in this episode and dive deeper into for the Cleanfax article. As people in a position of leadership, it is important to take a step back and determine, with brutal honesty, whether we are developing the right mindset and habits for success; both for ourselves as well as for our teams.
Please join us on Thursday as we help you shorten your DANG learning curve!
How often is there a miscommunication between the estimator (scope of the estimate) and the production team (agreed-upon scope of work)? What if there was a resource readily available to every member of your team that could help you reduce miscommunication and increase profitability? In this article and accompanying video we will discuss how you can improve project outcomes with THIS simple tool.
Watch The Video
Prevent Scope Creep & Increase Profitability
Doing less than you estimated and having to go back is costly as it takes resources that could otherwise be performing profitable work offline to return to a jobsite that should have been completed. Doing more work than you estimated and not capturing the revenue means your teams are working for free. Both outcomes will impact project completion, profitability, and customer satisfaction.
One simple tool, that is already in the tool kit of every estimator, is the video function on their smartphone. Did you know that conducting a job walk through video recording what they are seeing and uploading that to a shared database, can help offset miscommunication during the project lifecycle? Save your team time, your company money, and your customer frustration by making a recorded initial scope walk a habit.
Conducting a Video Construction Scope Walk Through
A video construction scope walk through does not have to be anything complex, but it does need to cover a few key points.
The estimator walks through the project and verbalizes what they are seeing on-site, unique aspects of the work, specific directions from the client, and how they are approaching the estimate. Having this video in the shared database will help everyone downstream to have a better understanding of what IS and what IS NOT in the agreed-upon scope of work (contract).
If this is helpful, tune into The DYOJO Podcast - helping your shorten your DANG learning curve - Thursdays on YouTube, Spotify, and Apple podcasts.
Jon Isaacson, The Intentional Restorer, is a 19 year veteran of the property restoration industry and a business coach through his organization The DYOJO.