Limiting Expensive Contractor Costs
In another article soon to be published, the question was posed why All Restoration firms are receiving the same broad negative image that force Franchisees of their Franchise Companies (who derive added Royalty revenue regardless of operator profit) to accept badly sold heavily discounted program work when they can’t operate on 3,5,8 and 10 percent discounted programs without having to “fatten the estimate” just to be able to work under them. Or all Contractors for that matter, who pay the 3, 4, 5 or more percent that TPA’s collect to act as Police. In fact, with honest contractors, many cannot make a living under some heavily discounted programs unless they are willing to acquiesce to some ‘less than honorable’ billing practices. And for survival, many have. With honest profits in good years limited to 7-10 percent before discounts, only the smallest of discounts by honest folks can be agreed to for a quality local firm to survive. While many are not profitable or taking losses some dishonorable ones flourish.
However, the concern I express to you, the local Insurance Community, is that there are large multi-million dollar operators expanding across the Country who should bear the brunt of your scrutiny while the small local one or two office companies wage a reputation battle about Affordability and Quality. The difference is in what you don’t see rather then what you do. You don’t get more you just pay more.
In the original article one of the major ways of spotting fraud in inflated estimates and unwarranted price increases is some companies use of line item pricing modifications that have become prevalent (they say) to offset those ‘discount’ policies and to fatten the bottom line of big city markets and expanding offices who are currently encroaching into smaller markets. They expand while earning poor reputations behind them with overbilling, overscoping and the use of modified (increased) pricing programs that most Adjusters in those markets have figured out and reigned in. Many large firms are not on Contractor programs because of their overbilling practices. Operating for years with a “Catch me if you can” mentality. Consequently, many have resorted to as much as 70%! of their revenue being derived from ‘Fire Chasing’. They argue they “have to” because “others do it” while they are the ones who start and perfect the practice. Yet if they are good enough, fair in billing and competent in their service, then over time, they would have earned the trust of the local Insurance community and been welcomed onto the repair program(s). If, like many of the now encroaching companies in Wisconsin from Chicago, Minneapolis and Milwaukee, they haven’t been asked to join the Carriers program(s) after several years in business, it is likely because they have earned a reputation for their overscoping and price increasing practices while not delivering better service.
That is the point of this warning to the Industry. 1. To spot deceitful Contractors, use the tools available to you. From Xactimate (or others) to have your estimates uploaded in an ESX format to you not faxed or emailed in PDF. That way, any changes they’ve made will show as green or red flags to show where and how often they are increasing ‘standardized’ price lists. With some minor exceptions, outside pricing programs are generally fair and subscribing Contractors are invited to submit pricing changes to Xactimate when they feel the area price list is too low. However, 2. Don’t assume the zip code shown is accurate for the price list they are using. Price programs use regional area pricing. Verify the price list they are using is accurate for the area of the loss. 3. The large multi-million dollar operators also use their own line item price increases to inflate their profits increasing small line item amounts per foot like painting, by pennies. Yet on big projects, this is contrary to what should happen where the prices should go down not up following the law of large numbers on volume work. Overall, this can sometimes result in loss dollar increases of 20% or more over local vendor costs. 4. Overscoping can be reviewed and typically dealt with by experienced local Field Adjusting Staff or IA’s with eyes on the job to limit it. 5. ‘Substitution’. 6. Mechanical Contractor ‘prompt pay’. And the list goes on of improper practices.
Lack of work in Home Building, Relatives out of work with some Construction background, Spin-off companies from established firms, untrained Carpenters out of work and the list goes on, have made it a fiercely competitive market. Many other unqualified improperly insured (or worse un- or underinsured) companies operate just outside of it as Remodelers, Home Builders and so on. It is a growing trend where a few companies make it in the wrong ways and the rest try to make an honest living fighting the perception and the improper practices the newest or biggest bring in with them.
There is a push afoot to “Buy American”! Amen. When it comes to Restoration services, buy Local! from guys who, for years, have earned your trust through hard work and integrity. Use Firms who have earned their place on your program(s) and who don’t participate in deceptive billing practices that make suspects of the whole Industry even as only a few identifiable Companies do it. Proper checks and balances will stop the price gouging before they drive up growing claims costs in your markets. With your thorough review, and support of the honest firms, the affordable quality ones will deliver for you.
The author spent 12 years in Claims up to an AVP of Claims position before jumping to the “dark side” as a Restoration Contractor for 13 years. We are here to help and happy to come speak with your staff (at no charge) to explain in detail other ways of monitoring contractor costs in your service areas.
Matt Everett, Principal
EA - Everett Associates LLC
Consultants in Large Loss and Property Damage
Phone: (920) 843-1270