Have you ever lost a million dollars for a lack of water damage mitigation moisture readings?
On The DYOJO Podcast Episode 92 & 93 we have been discussing a Texas contractor who is suing a local school district for underpayment of services rendered during Winter Storm Uri in 2021. The contractor valued their water damage dehumidification services at over $1.2 million dollars, the school district and their insurance company made an initial payment of less than $200,000. The customer stated that more would be paid if additional drying documentation was provided by the contractor.
According to statements given to a local news station, the contractor says that this water damage mitigation daily documentation doesn't exist.
The video below briefly introduces a commentary that friend of The DYOJO Podcast, Josh "IAQ Josh" Winton produced reviewing the essential elements of daily moisture mapping and documentation for a water damage event.
Additional resources on this and related topics:
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When a contractor sends an invoice, is there an obligation for the receiver to pay it? The real answer is, it depends. In this article, we will review two scenarios, one personal and another from a case that is currently in litigation. After reviewing both incidents, contractors should have a better understanding of some of the self-inflicted ways that their claims for proper payment of services rendered can be harmed. This content will also serve as a simple training resource to help your team members shorten their learning curve for understanding three critical questions for getting paid as a contractor.
Three questions that will help contractors get paid
Often our ability to get paid suffers from self-inflicted harm. Unfortunately, I had to learn this the hard way following a surprise freeze event that hit our local market in Eugene, Oregon. We were hired by a property manager (some contractors already know where this is going), they even signed our work authorization (potential nail in the coffin number two), we performed the work, they signed our certificate of completion, and were happy with our work. Case closed, right?
What painful lesson did I have to learn? The property manager was not the owner of the property, nor were they authorized to sign contractual obligations on behalf of the owner, nor would they pay our invoice unless the owner agreed to release the funds to them or us directly. While it takes two to tango, the contractor has the most to lose so the contractor is responsible to protect themselves and their money. In this scenario, we failed to answer parts two (fully) and three (at all) of a critical sequence of questions for getting paid.
In my role as an estimator, there were some office politics and internal dynamics that made this situation more tenuous than it should have been. During the literal flood of freeze claims, I was covering the account of another project manager on our team. I was dispatching our team members based on third-hand verbal commitments. Several senior members in our office, including the general manager, my peer, and myself believed that since this was a large account in town, we could overlook certain processes. While it would have been good for our office to gain traction with their book of business our failure to complete the critical sequence of questions for getting paid made the process difficult.
Stop ignoring red flags as a contractor
If this scenario sounds familiar, perhaps you have been listening to a story we have been sharing on The DYOJO Podcast about an Arlington Texas contractor. Robert Jordan Construction (RJC) claims they have not been paid for services rendered at Sam Houston High School following water damage from Winter Storm Uri in 2021. RJC believed they had answered question one but the customer, Arlington Independent School District (AISD), disagrees. The court documents ask critical questions that many contractors, including myself, must answer, such as, “Do a series of emails constitute a contract or agreement?”
As we cover in the podcast, RJC performed a walk-through, stated a verbal scope of work, and proceeded with what they thought was authorization from the appropriate parties. RJC followed up with a (briefly) written proposal, the school district responded with requests for further information. Listen to these rebuttals from AISD and ask your team whether these should serve as warnings to review your processes and tighten up your contracts.
With regards to Question One, RJC proposed a scope of work and stated a price based upon a pricing structure, square footage pricing for water damage response and/or dehumidification. AISD states that the quantities, documentation, and pricing are inconsistent with the cost of work that they believe is appropriate. As for Question Two, it is documented that AISD appealed for more information as soon as they received the proposal from RJC as well as after they received the final invoice.
Question Three should have been cause for teh contractor to take their foot off the gas as early into the process RJC was notified that no amount over $50,000 can be authorized without approval by the AISD board. RJC was notified of the date on which this issue would be brought before the board. The board did vote, “To authorize Superintendent or his designee to negotiate a contract - in contract with RJ Construction for emergency services and equipment necessary to perform moisture mitigation of district facilities not to exceed $1,245,600.00.” By this point of further payment ambiguity, the work had been completed.
Learning from your mistakes as a contractor
As with my personal scenario, one could see RJC believing they are acting in good faith and trusting people on the other end to “do the right thing.” Yet, the red flags popped up early and appear to have been overlooked by the contractor. A few additional lessons many have had to learn, especially when working with governmental agencies, is to always assume that a third party will be called in to review the work. One of the many pieces we are still trying to put together in the podcast research is just how much documentation RJC did or did not provide the district. AISD appears to have asked for additional documentation early and in a much more directed manner after they consulted with their insurance carrier.
I shared some of my story on Episode 93 of The DYOJO Podcast as we continue to dig into the available information from the RJC vs. AISD case. If any of this resonates with you or your team, we would love to hear from you. Tune in on Thursdays and contact The DYOJO.
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.
What is one item that most property restoration owners and managers will agree is an issue in their business? Within the Top 5 pain points for restoration contractors will be some aspect of documentation.
The Key To Getting Paid
Anyone who has been working with water and fire damage mitigation or renovation for more than six months knows that documentation is the key to getting paid in this industry. Owners and managers regularly express that the pain of poor documentation is consistent, if not unbearable, in their businesses.
In Episode 86 of The DYOJO Podcast, we discuss a great place to START, the beginning. We will discuss what we should STOP doing so that we can gain ground, through simple steps, on our vision and goals.
Additional Resources from The DYOJO
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:
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