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.
The DYOJO Insurance Claims Standard is a guiding principle that will assist owners, managers, and aspiring professionals to train their mindset and habits for success in the property restoration industry.
"Restore the property to resemble pre-loss conditions, with materials of like kind and quality; no more and no less."
The content of the video below is adapted from Chapter 1 of Jon Isaacson's latest best-selling book, How To Suck Less At Estimating: Habits For Better Project Outcomes. The same content will SOON be released as a training course through the Restoration Technical Institute. Included in this segment is an explanation of The DYOJO Claims Standard as well as a common scenario that a restoration professional might come across and how they would use this resource to help set the right expectation with all parties involved in the insurance claims project.
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Have you ever heard, “You should always get three bids,” in reference to determining the cost of a home improvement project? While it may sound like good advice, it often overlooks a more important factor and may not be in your best interests in many situations. In this article, we want to discuss some of the reasoning behind this thought process as well as whether it is true when dealing with a property damage insurance claim.
Most people think about the price when exploring home improvement options. Price is an important factor, but it’s not the only one (see our prior article on determining the cost of remodeling). When dealing with an insurance claim restoration, renovation, or repair, price is one of the least important variables. Your adjuster or insurance agent (broker) may advise you to get three estimates for your insurance claim, but before you do so you should ask these questions:
Are 3 Estimates Necessary For An Insurance Claim?
For the majority of property damage claims, the two initial questions are
If you have a broken pipe and water spewing into your home, you likely will call a plumber to shut the water off. Do you need three plumbers to tell you what it costs before you decide who to hire? More than likely a homeowner in this situation will hire whoever can get there first. Expedience precedes cost and is the best value for this phase of the work to be completed.
The value in this situation is rapid response leading to reducing further damage by addressing the immediate threat, e.g. the broken pipe, and shutting the water off. If that call is at 2 am or interrupts the plumber's current workload (even during business hours), it is going to come at a premium.
Your homeowner’s insurance policy typically owes to cover legitimate and reasonable costs for services rendered. This may not include repairing what is considered the source of the loss but usually extends to damages resulting from the covered (or non-excluded) source. Whether your insurance is paying for it or you are, shutting off the water is in the best interests of all parties.
Again, the scope and the value precede the price. A reasonable cost for this emergency service is subject to some interpretation but would primarily mean that it is consistent with that service provider's normal costs in similar situations. It would not mean that another plumber told a caller over the phone that their price is 20% less or some national pricing average showed a cost of 30% less.
In an emergency situation, getting three bids creates less value for all parties and makes the issue worse by allowing more water, by the minute, to impact the structure.
Are 3 Bids Recommended for Insurance Claims?
The question insurance has to answer, by reviewing your policy language with you, is whether the source was specifically excluded by your policy or whether there are specific exclusions for your scenario. As a general rule of thumb, damages that are “sudden and accidental” should be covered. It is recommended to hire a qualified local contractor who can assist you to document the source and extent of damages. Having an independent source provide thorough and accurate information to you as the homeowner and present that information to your insurance company is a value to all parties.
If an insurance representative advises that you should acquire three bids, it would be appropriate to ask them why. If the contractor you are working with is qualified, has been thorough, and presents a plan that makes sense to you, it only serves to delay the process by getting two additional, potentially competing bids. Xactimate is an estimating software that serves as a common language between insurance companies and experienced restoration contractors but it serves as a benchmark, not an authority, for presenting the scope and cost of a project.
In a restoration situation, getting three bids creates less value for the homeowner by delaying the response and returning the property to pre-loss conditions.
Are 3 Estimates Helpful For Insurance Claims?
Why would an insurance company want three estimates? Is it to create an average cost or to provide them the option to settle for the lowest price? Whether insurance is involved in a renovation project or not, price is not the only factor and often should be the least important one. The lowest, middle or even the most expensive price has no bearing on the best value. As a homeowner, you should be asking who is best qualified to assist me with my needs?
If the damages are extensive, you are going to be working with this contractor for several months, so it is important to hire the professionals that you are most comfortable and confident in. The right price is what a willing buyer agrees to pay a willing seller. The focus should be on developing a clearly agreed-upon scope of work and from that establishing a legitimate and reasonable cost for goods and services. Everyone knows the cheapest isn’t always the best, but the most expensive or the middle of the three has no bearing on value either. Price and value are not synonymous when selecting the right service provider.
In a repairs situation, getting three bids creates less value for the homeowner by delaying the process of returning the property to pre-loss conditions.
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:
It is possible, as an entrepreneur, a business owner, a manager, or an aspiring professional to do the wrong thing for the right reasons. Your intentions do not nullify the potential consequences of your decisions. Therefore, as a means of helping you shorten your DANG learning curve, we have solicited the aid of our good friend Ed Cross, The Restoration Lawyer, to clarify the role of industry standards in your service contracts.
Imagine I am a well-intentioned water damage restoration contractor. I think it would be a good idea to cite the Institute of Inspection Cleaning and Restoration Certification (IICRC) S500 Standard for Professional Water Damage Restoration in my proposals and contracts. With his many years of litigation experience, how would Uncle Ed advise me to navigate this concept?
Restoration Contractor (RC): Hey Ed, I just want people to know that I'm serious about what I do. So I've been talking to them a lot about how we train and follow the IICRC standards.
Ed Cross (Uncle Ed): Comply with the standard of care.
RC: That's why I thought thanks for confirming that. I'm thinking about putting it in our proposals and in our contracts.
Uncle Ed: Don't put that in your contract!
RC: But I want people to know that we're serious and that we do it right.
Uncle Ed: Comply with the standard of care, but do not write into your contract, that you're going to perform the work according to IICRC standards.
RC: Are you sure?
Uncle Ed: it's not going to help you sell any jobs. It's going to marry you to these thick documents that are hundreds of pages long. All the plaintiff's attorney has to do is point to one sentence in there that you didn't strictly comply with and they’ll be able to shout about a breach of contract.
RC: That doesn't sound good.
Uncle Ed: You don't need that kind of headache.
If you want to know more about The Restoration Lawyer and his involvement in the industry, watch our prior interview with Ed Cross or read the article in Restoration and Remediation (R&R) Magazine titled A History of Collaboration; A Future of Advocacy.
If this information has been helpful, please subscribe to The DYOJO Podcast and consider purchasing one of the books from our Be Intentional series. edit.
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