During a recent three minute video, that I recorded while I was taking a walk, I discussed some thoughts on the topic of labor supervisory hours for insurance claims. Most of my comments were geared towards the repairs or reconstruction side of the insurance claims process, but the principles apply to water and fire damage mitigation as well.
Supervisory Labor for Construction
In the construction realm, supervisory labor (i.e. project management time) is something that is regularly charged for, but it is embedded in the lump sum pricing. When a consumer hires a contractor to remodel their kitchen, they likely will receive a one page document that says,
This is lump sum pricing and it's common. There is nothing out of the ordinary or wrong with this pricing model or estimating presentation.
Project Management Time for Insurance Claims
For the typical insurance claim, carriers prefer to see estimates itemized in what's referred to as unit or standardized pricing. Often an estimating program called Xactimate is utilized to create these estimates. In this format, the scope and pricing are presented as line items. The bid is build line by line and room by room.
In unit, or standardized pricing, those items like supervisory labor, overhead, and profit are not embedded in the cost. Supervisory is separated out as an additional line item while overhead and profit are factored as markups at the end of the estimate similar to the way sales tax is accounted for. Again, in construction, these charges are normal but they are presented in a different manner. For an insurance project, since they are listed separately, it gives the impression that they are up for discussion or optional; this is not the case.
The charges are common, but the format is not. It's important for the consumer and the contractor to understand these unique elements when working through an insurance claim.
Project Management is a Direct Cost
Supervisory labor, or project management time, is the primary focus of this article. Even contractors misunderstand that this element is not an overhead cost, it is a direct cost of the project. Overhead costs are considered indirect costs. These are real costs for every construction business but they are are aspects of business that are not specifically attributed directly to the individual job.
Examples of indirect costs (aka general overhead) might include your business licensing, company insurance, office rental, administrative labor, utilities, etc. All items that must be accounted for or the company will not be able to pay their bills and won't be in business for long.
On the other hand, supervisory labor includes the direct costs of having a representative on the work site, meeting with the client, lining out the project, making sure materials are properly ordered, and that the work is progressing along it's key intervals. These are direct costs. The company pays for their managers, supervisors, foreman, and safety personnel to be onsite. These costs should be charged for and not lumped into general overhead.
Charging for Project Management
Supervisory labor is a direct cost that should be accounted for and approved on the front end. It is common to factor supervisory as a percentage of the total estimated hours or to be tallied and charged at the end of the project. The charges and factor should be agreed to in writing at the project outset. On a large project, it is recommended to send regularly updates on the hours applied so that the total hours and charges are not a surprise to all parties at project completion.
An example of how a contractor would present their charges for project management, including any applicable credits, might look like this:
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Project outcomes in the skilled trades are tied to the estimating process. Good estimating is marked by the thoroughness of data capture (site observation) and the accuracy of data input (bidding). Author Jon Isaacson, The Intentional Restorer, shares his two decades of professional experience to help anyone involved with, or interested in, the art of estimating to shorten their DANG learning curve for improvement.
How To Suck Less At Estimating, was written for:
Early Reviews for This Book:
With his latest book, Jon Isaacson again demonstrates why he is a “go to” resource for so many people in the property restoration industry. - Luke Draeger
As usual, Jon provides great material with actionable details. - David Smith
It’s so refreshing to finally see all of this often-guarded information transcribed from an industry expert to words on a page. - Josh Zolin
About the author:
Jon Isaacson, The Intentional Restorer, is a contractor, author, and host of The DYOJO Podcast. The goal of The DYOJO is to help growth-minded restoration professionals shorten their DANG learning curve for personal and professional development. You can watch The DYOJO Podcast on YouTube on Thursdays or listen on your favorite podcast platform.
This is book 4 in the Be Intentional series from The DYOJO - thedyojo.com/book4
Business owners want to reach their goals. Management staff understands the need to achieve certain metrics of performance. Yet, there is often a dissonance within the organization between their clearly stated goals and their consistently achieved outcomes. Accountability for outcomes can only be established when the process is clear and the follow-through is consistent. Being intentional with developing and improving your estimating process requires a few simple steps.
Lack of clarity = Lack of Accountability
As a person in a position of leadership, you can help your organization grow by being honest about whether your system is dumb by design (revealing intentionality) or whether negative outcomes are the by-product of dumb design. If the project outcomes are inconsistent, a great place to start is to ask whether you have been clear and consistent as a leadership team.
Increased Clarity = Increased Consistency
Team members cannot consistently perform if they don’t understand what they are supposed to be doing. Communication needs to be clear to those who are receiving the information. Developing your team's leadership skills includes helping members of management to learn to understand how their team learns as well as how to best communicate with them to relay information.
Clarity + Consistency = Accountability
As Anthony Nelson, President of Premier Restoration, learned, “Quite often our younger Millennial and Gen Z technicians will refuse to tackle a given task until they understand the ‘why.’” It follows that skills like empathy and communication are at a premium for aspiring managers and business owners. Those who can learn to help their team members understand what needs to be done as well as why it is important will reap the greatest (and most consistent) reward.
Dumb By Design
Owners, managers, supervisors, and anyone in a leadership role will see elevated results when they dumb their processes down so that someone who has no industry experience can understand what they need to do and why it is important to the team. Your communication is affected by the company you keep. While it is important for you to challenge yourself by being around other leaders, it is also important for you to connect and communicate with those at the entry level of your organization. Build clarity and consistency from the bottom-up, so that you can practice accountability from the top-down.
If you would like to learn more about this concept, read Module One of Jon Isaacson’s NEW book, How To Not Suck At Estimating: Habits For Better Project Outcomes. This book will also be a training course offered through Restoration Technical Institute. The book should be available by August of 2022. In the meantime you can subscribe to The DYOJO Podcast for more content that will help you shorten your DANG learning curve.
Jon Isaacson, The Intentional Restorer, is preparing to release his fourth book. This title, How Not To Suck At Estimating: Habits For Better Project Outcomes will also be a course that the author will distribute through the Restoration Technical Institute. Elements of the books have been peer reviewed by various property restoration contractors and insurance claims professionals. Rob MacPherson, Manager of National Estimating Services at DKI Canada says the following,
Jon hits the nail on the head again. His insight into the industry can help all restorers easily understand the process and procedures to help them succeed. I can’t wait for book #5. - Rob MacPherson, Manager of National Estimating Services at DKI Canada
The target audience for this construction estimating book and training course is fourfold:
It is important that insurance claims contractors don't confuse supervisory labor, a direct cost, with your overhead (indirect) costs. Educate the customer on the unique format of insurance claims estimates. Be sure to accurately track your supervisory labor and include those cost breakdowns in your estimate.
Indirect Costs For Contractors
Xactimate is a common estimating software used as a means of establishing a common language between restoration contractors and insurance claims professionals. According to Xactimate, general overhead (aka indirect costs) are,
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.
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. Examples of general overhead, according to Xactimate, include but are not limited to:
Xactimate does not include consideration for these indirect or general overhead expenses in their unit pricing. Instead, they advise, that the contractor should add these costs 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." While contractors and carriers have become comfortable with a 20% markup, this amount is not stipulated by the software.
Direct Costs for Construction Projects
Supervision is common, i.e. industry standard, for construction projects. This role is often the responsibility of roles including project managers, site foremen, superintendents, departmental supervisors, safety managers, etc. Supervision is critical to successful project outcomes and is a real cost of the work being performed. Xactimate states that indirect costs or job-related (specific) overhead,
Are expenses that can be attributed to a project, but cannot be attributed to a specific task and include any and all necessary expenses to complete the project other than direct materials and labor. Examples (including but not limited to): Project managers, onsite portable offices and restroom facilities, temporary power and fencing, security if needed, etc.
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. 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).
What is the right price for a home improvement or remodeling project, or for anything? The right price is what a willing buyer will pay a willing seller for their goods and services. It may be helpful to know what your competitors are charging, but the reality is that many contractors DO NOT know how to price things right. Often contractors miss scope elements, undervalue their labor, and don't understand overhead costs or profit goals.
How Much Should Remodeling Cost?
In the world of insurance claim repairs, a common estimating tool called Xactimate provides standardized pricing based on feedback from various sources. Unit pricing, rate and materials comparisons, national averages and other factors can help a contractor to confirm their pricing strategies. Market "norms" and software programs can be useful benchmarks but they do not account for all of the elements that go into drafting the right price for your services as a contractor.
If you are a contractor and you want to sharpen your skills for estimating, check out Jon Isaacson's fourth book and estimating course - How Not To Suck At Estimating: Habits for Better Project Outcomes (Coming Soon).
How Much Do Insurance Repairs Cost?
Focus on the scope of work, the vision of the customer, and your unique approach to the project. Contractors and consumers should focus on the value exchange between the two parties. To that end, Steven Patrick, of Level the Playing Field, joined us for The DYOJO Podcast Episode 82. He shared an informative story about a plumber that was providing great value to their customers but once their boss told them they were, "Charging more than anyone," their mindset shifted from value to cost and their habits changed.
Why Are Contractors So Expensive?
Please don't misconstrue the words of this author to encourage anyone to "price-gouge" rather, most contractors should be charging more for their services, especially when they provide the service and quality to match. Most contractors are hesitant to raise their prices or charge what they should be charging to build their businesses (i.e. hire more people, pay their skilled labor more, invest in retirement, provide benefits, etc).
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