2018 Patricia L. Harman Golden Quill Award: Ben Justesen
This year, nine articles were eligible for consideration of the Patricia L. Harman Golden Quill Award, and RIA thanks each of you who submitted articles during the past year.
The judges comprised past winners and industry experts from around the globe. The award recognizes the feature article contributed to C&R during 2017, which scored the highest based on:
- The degree of usefulness of the information,
- The composition and clarity; and
- The style or personality conveyed by the author.
This year’s winning article appeared in the November/December issue of C&R and explained how restoration professionals can positively influence the pricing lists in their markets to reflect realistic numbers in their estimates. The author clearly provided practical information that can have a positive impact on all RIA members and allow contractors to “determine their own destiny.”
By Ben Justesen
Many have the notion that the insurance companies have absolute power over the estimating programs that exist in our industry. It is true that the industry’s dominant estimating programs1 are indeed the property of an entity owned and directed by insurance carriers2. I was skeptical of my ability to influence the software’s product and rates, and while I do not know how everything works exactly, what I know now is that the insurance companies are not as much to blame as I initially thought.
I came back to work for my father's restoration company about 16 years ago and attended my first Xactimate class in Orem, Utah. I was excited to be an estimator; I have always favored technology, math and working directly with the customers. The class was very informative and taught me the basics of how to use the software. As I confidently prepared my estimates, I would spend an extraordinary amount of time searching through all the existing line items. Needless to say, while my process was slow, I felt like I was improving, since I was increasing in my knowledge.
I remember believing that the rates reported within the estimating programs produced a premium revenue for the services we perform in restoration activities. Allow me to explain. I innocently and naively perceived revenue that produced more than the 20 percent markup of the "Overhead & Profit" to be “bonus revenue.” As a result, the only way we could generate revenue necessary to remain a viable business was to pre-negotiate deep sub-contractor discounts for services and product, while our service sheets were comprehensively composed with each service line item indicated. After much-needed discussions with my father and others in the industry, I learned that a 20 percent markup on a contractor’s charges fails to pay both the bills and produce profit necessary to remain a viable business.
The first time this became apparent to me was when our company participated in a critical peer review process with approximately 10 other companies. To this day, I am grateful to Larry Taylor of Taylored Restoration, who took the time to teach me how to make a budget and prices derived from retail labor rates with hard and soft costs, labor efficiencies, burdens and material components. The real costs of business became apparent when we were able to objectively review the business models of our peers. This is also when I realized that some of our prices were profitable and some were not.
Yet, the estimating program allegedly reports industry average prices. It clearly needed to be updated to reflect our necessary rates.
Feedback could be given in two ways:
- Factor up and upload my estimates.
- Patiently await a call from the software company to do a survey.
Factoring and uploading the estimate did not seem to have any effect in changing their reported average rates. Additionally, I only ever remember receiving a single survey call from the software company on the subject of only dumpster rates. I have never received another survey.
My cynicism and disappointment increased, as it appeared that my carefully calculated business rates would not be considered in establishing average rates. Then I discovered a pricing feedback tool in the software program called “XactAnalysis®3.” While there was little guidance in how to use the module, the retail labor rate tool proved to be fairly simple whereby I could report my company’s hourly rate for each trade. How should your company’s hourly rates be established?
Obviously, your hourly hard costs paid to your employees should be the starting point.
Next, add the employee’s payroll taxes that the employer must contribute.
The next steps are a little more difficult, as they describe the burden incurred by employers in keeping an employee on payroll. Things like: medical and dental benefits, phone, vacation, uniforms and tool allowance, among many other things. Then there needs to be enough to cover labor overhead expenses, and, finally, make a profit.
It is important to note that the average rates reported within these software programs do not include labor overhead and profit — and the contractor should add these to their charges as suggested by the software developers.4
“Job-Personnel Overhead represents the non-wage related expenses incurred by a General Contractor that are associated to having their own employees perform the work, or the total G&A expenses incurred by a professional Sub-Contractor when using their services. Examples: Vehicle costs, uniforms, mobile phones, depreciation on hand-tools owned by the company, etc. Job-Personnel Overhead also includes the portion of General and Administrative expenses and profit that correlate to employees performing billable tasks, and that are not included in the General Contractor O&P mark-up.
The building cost data published by [the software program] is not designed to be inclusive of sales tax, General O&P, or Job-Related O&P within the unit prices. These can be specified and added at print time after all line items have been listed.”
For example, if a business wanted to have a 10 percent net profit while covering a 30 percent overhead, then it would have to make a 40 percent margin on top of covering the aforementioned costs. There is "overhead and profit," which is a 20 percent markup, which translates to a 16.67 percent margin. One also needs to consider that there is no markup on materials besides the "overhead and profit." So the Labor Overhead needs to be a blend of what is needed on top of both the labor and material costs. Both the profit and the budget can be determined this way. Once you determine your base wage and your final retail labor rate for each trade, then you can submit those as feedback. This feedback tool seems to work slowly but it eventually worked. Disappointingly, I have observed less influence on reported prices in the last 5-7 years as the pricing seemed to have gone stagnant. Like many other restoration professionals, I concluded that insurance companies must have too much influence on these reported average prices and I can't do anything about it.
An alarming increase in Third Party Administrators emerged lately, with almost all of them requiring that the estimates / scopes of work be uploaded through XactAnalysis®. The feedback that comes from all these estimates is giving the false impression that the price is fine where it is. Before I implemented the strategy of producing my own price lists and uploading estimates/scopes of work that utilized it, I was only uploading generated through "program" work. So, when this year's Property Report came out, I saw the results of the where the estimates come from that are uploaded to XactAnalysis®. From the Xactware’s 2016 Property Report:
"Staff adjusters submitted 63.1 percent of estimates processed by XactAnalysis® in 2016. Independent adjusters uploaded 25.9 percent, contractors uploaded 5 percent, mitigation providers uploaded 5.4 percent, and specialty providers uploaded 0.6 percent."5
Through some recent networking, I discovered more restoration contractors that are making their own price lists. I tried to figure out how they were able to do so given the pressure from adjusters telling contractors not to deviate from the software’s reported average prices. It made me think back to the original feedback tool where the contractor can factor their prices up and upload them to the software’s database. I wonder if the reason it did not work is because it was just an arbitrary percentage. If an actual pricelist is made with true data and are uploaded, these may have a true effect on the pricing. I was motivated to try it out and see what would happen in Xactanalysis®.
- Under the Price List tab, duplicate your most current pricelist and rename it (just like duplicating an estimate).
- Open this new price list and on the left hand side of the window, find Labor under the Components.
- The Labor Codes will now appear. Select one of the Labor Codes and find Worker’s Wage on the middle right hand side of the window. Change if needed to your market’s wage. Labor Burden will change automatically as a percentage. Change Labor Overhead to represent what you would need to make (this does not include “overhead and profit”).
- Repeat on all Labor Codes.
- Utilize this pricelist on all estimates for that month.
- “Complete” your estimates once they are finished. Only “Complete” estimates can be uploaded as Feedback.
- Go to the Xactimate® tab from the Control Center and then click on “Tools”. Then click on “Feedback.” This will then prompt you to click on “Yes” or “No” to collect feedback data and send. Click “Yes.”
- Once it is complete, click on “Done.” That is it!
To track what is happening with a price list that is made from Xactware®:
- Go into XactAnalysis® and under the Reports tab, click Industry Trends Report.
- Then go to the first drop down menu and select Retail Labor.
- Ater that, click on the "+" icon next to United States and then find the city for the price list.
- Now all the trades appear. I prefer to see the last five years and select this at the top of the page.
- Then select the trade to see the labor rate and where it has been the last five years on the chart. There is a tab for the change by percentage and a tab to see the change by dollar amount.
My efforts produced encouraging results! I saw that my labor had not changed for nearly all of the labor rates for the last five years, but after two months of making my own price lists and uploading those estimates, I saw changes of between $0.50 to $15.00 an hour more! It seems my contributions have influenced change!
A word of caution:
When you have completed your own carefully calculated rates used in the software programs, you will likely have some claims representative debate your rates. Of course, you have the full freedom to entertain, or reject, these discussions. If you should choose to modify your charges for the work performed, DO NOT change your line item rates! Your rates are important feedback to the software program’s calculation of average prices.
Rather, if you choose to extend a price discount, add a single line item with the credit issued in the settlement of the file (a “negative dollar amount”). Do NOT change the hourly or line item rate, as the reduced rate counts toward the reported average prices.
Some contractors may be surprised to learn how easy it can be to influence significant changes in the average market prices found within an estimating program. At only 5 percent of the estimates uploaded coming from contractors, it appears we have only ourselves to blame if the prices continue to be stagnant. My hope by writing this is to help the industry of contractors know how to determine their own destiny and take responsibility.
References:
1https://www.xactware.com/en-us/company/about/#
3http://www.verisk.com/insurance/products/benchmark/xactanalysis-xactimate.html
Ben Justesen has worked in the restoration industry for 20 years. He is a Xactimate Affiliate trainer, and president of Enlightened Restoration Solutions and Just Right Cleaning & Construction. He has served the industry on the RIA membership committees and was also president of his local Homebuilders Chapter.
This feature story was originally published in the November/December 2017 issue of C&R magazine.