Estimating: An Art or a Science?

Outside of our industry, the layperson sees an estimate as a price quote in advance for a good or service. The basic definition of estimating as it relates to our industry is “a means of translating associated costs to performing a task into a universally accepted language that is both quantifiable and justifiable.” The reality is that much of what we call estimating is not really estimating as much as it is reporting on work already performed, which is sometimes called “forensic estimating.” Nevertheless, the term has taken hold and all breakdowns for work — whether performed or proposed — is called an estimate. The history of estimating in the insurance restoration industry has come a long way over the last 50 years, for better and for worse. I had the benefit of learning from the patriarch of my organization who had been doing restoration work since the 1950s and saw much of the evolution of this practice to what it is today.

Long gone are the days of a restorer and an adjuster sitting down and settling claims on the back of a cocktail napkin. Those were the days when an adjuster had some autonomy and flexibility to settle claims fairly and equitably on their own without the layers of oversight and second guessing that exists now. Those were also the days when a restorer was seen as a trusted ally who saved the insurance company money by mitigating damage and restoring items that otherwise might need to be replaced. Without getting into the course of events that lead from then to now (perhaps another article) suffice it to say the need to estimate in a universally accepted fashion became the norm.

There are three methods of pricing in damage repair, and all have their place, and all have limitations to them. They are: Lump Sum, Time and Materials, and Unit cost.

Lump Sum

This is putting a bulk number down for a task that is meant to encompass everything that goes into producing that task. This is the least favorite method of estimating for insurance carriers, as it does not provide justification for pricing, but ultimately it still has its place in the world of estimating. Even the most detailed estimate will likely have a lump sum price thrown in for some task that either cannot be found in the database they are working off of, or is too small and simple to warrant a detailed breakdown. The contrast to that is the one line lump sum estimate that adjusters hate to see, like “Build New House …$249,000.01”

Time and Materials

This is basing all of the work off of a labor, materials and equipment rate schedule. This is ultimately the most universal method of estimating, and has both its pros and cons. Some carriers, typically commercial carriers and their stable of consultants, prefer this fashion, provided they can “clerk” the work to ensure the resources are being used efficiently. This is not the preferred method of estimating for the majority of the residential carriers, presumably because they fear that a provider will “milk” a job and work more slowly to get more hours out of it, particularly on the smaller residential projects where the oversight of “clerking” the job may not be practical.. This qualm brings us to the most commonly used estimating platform in our industry.

Unit Cost Estimating

This is the practice of taking the average amount of time it takes to complete a task plus the necessary materials and breaking it down into units that can be measured consistently (e.g., by the square foot, the linear foot, unit price). The idea behind unit cost was to put tasks in a universally comparable unit of measure. It was meant to give people accountability for what they were doing and to format the charges in a language that could be understood by many. I can recall the stories of the early competitors in the restoration market advertising to clean walls for a penny a square foot. While that made them sound like a good value up front, it was in the add-ons that produced their necessary profit.

The practice of estimating has changed dramatically over the last 25 years. Years ago, computers were not a common thing on every desk in the office. The estimating software giant was still in DOS version, and yet estimates were presented in unit cost format. Dimensions of a room were hand-written, listed all finishes and fixtures, and inventoried all contents. From there, pricing guides were used to calculate the cost to perform all tasks in the room, which was then typed out on a simple word processor.

Back in those days, things were written out longhand, and explanation and modifiers were used to describe the level of difficulty involved in a certain task and justifiably charge for it. 

One of the problems with relying on a database for pricing is the commoditization of the task. It sees the cleaning of a chair as just that — the cleaning of a chair. It may calculate the labor and materials that go into that task, but fails to consider other factors such as risk, value, site conditions, etc. It is hard to consider charging the same price per linear foot to clean a plain cotton sofa in a suburban home versus a custom white silk upholstered sofa in a luxury high-rise penthouse. The current estimating software databases do contain some modifiers to account for these factors, but they are in themselves limiting. Some in the industry can recall being trained on the lost art of describing finer high-end or antique items with the purpose of justifying the price to clean it. For example, an “Antique ornately carved mahogany dresser with four drawers, two doors, a marble top, brass ormolu and drawer pulls.”

The description helped make the reader understand not only the value and risk, but also the amount of labor that would be needed and multiple finishes requiring different processes.

Historically, when pricing out an item or service, we described the processes that went into cleaning the item. The current estimating platforms focus on the result “clean,” but the process to make something clean can be as simple as a “wipe-down” or as complicated as “vacuum, sponge, shampoo by hand, extract and deodorize” or “dismantle, clean, polish and assemble.” These descriptions helped justify the price by explaining the level of complexity and number of steps that went into the process.

One of the drawbacks to the unit cost estimating platform is the need to use some labor hours to account for things above and beyond the standard unit price. Mixing labor hours with unit cost is thought to be a no-no since it can be argued that there is the risk of “double dipping.” But few would argue that the cost of doing a flood-cut in a suburban house, where you can carry the piece of drywall out to the dumpster located in the driveway, would be equivalent to doing the same flood-cut in an apartment in a metropolitan city. All the debris needs to be bagged and sealed, the public areas need to be protected, and the debris then needs to be carried out through a service elevator and down to the street and carted away using a rubbish removal service. Not quite the same process.

Some carriers will allow for upcharges, such as “Metropolitan Conditions,” which is a catch-all for accounting for the additional labor, travel and expense of working in congested cities, but other carriers do not. The estimating software giant assumes all work is based on a three-bedroom ranch home in a suburban neighborhood. This is because it exemplifies the most typical structure across the United States.

An underlying issue that exists is in the differing overheads that exist between companies competing in the same market. A small, home-based restoration firm that can accept commoditized prices to handle your basic flood cleanup will not have the same overhead as an established restoration firm capable of handling major commercial or industrial projects. They will also not have the training or expertize of a larger organization. The unfortunate fact is that the large companies rely on residential work to fill in the gaps between larger projects. Therefore, you may have two companies performing a similar project with far different cost structures.

The insurance-company side has come a long way as well. Rather than the multitude of carriers that used to exist, consolidation has brought down the number of carriers in the market dramatically. The adjuster of old days had a rewarding career bringing claims to fair resolution, relying on relationships built from working with vendors who were trusted partners and often acted as their “eyes and ears” on a claim. The new breed, conversely, is highly monitored and strictly limited in their authority. Insurance companies have re-inspection teams that are set up to second guess the adjuster’s work and question everything. A whole industry has evolved on the evaluation of restoration company bills. These third-party companies’ sole purpose/mission is to save the insurance company money by reducing restoration company’s bills. Additionally, carriers have a wide variety of differing estimating guidelines by which they want vendors to abide, and any deviation from what the standard estimating platform calls for requires detailed explanation, and even then may not be allowable.

Both an Art and a Science

So how is estimating both a science and an art? On the side of “science,” there are fancy algorithms that calculates a line item price per square foot for drywall, accounting for labor, materials, tools, insurance, etc.; and the estimating platform you are using may be adequate for most things, provided you are very detailed in capturing every line item that you are legitimately performing. Doing the legwork and putting together project budgets and timelines to make sure the job comes in profitable is another scientific aspect to estimating. And, being able to toggle between several different methods of estimating and differing estimating guidelines of different clients is a science, too. 

The “art” of estimating comes down to the details and the description of the operation. My mentor used to tell me about the 80/20 rule: Eighty percent of everything is just like everything else, but the 20 percent that makes this project unique, and how you represent and justify them, is an art form. When preparing an estimate, be it for a repair project or for an emergency service that was already completed, I try to view the report as if I were an adjuster. I look at the total dollar value of the estimate and ask myself, “Did I make a strong enough argument here that this job is worth this much?” This is a challenge, because while we know all that went in to completing the project to the satisfaction of all parties, we sometimes fail in the communication of all of those small things that add up, and that makes the difference between profit and loss.

Adding the details of how you saved the insurance company money by limiting lost time or saving something thought to be a total loss adds value to your services and makes the price more palatable. Competent and conscientious restoration professionals carefully produce estimates designed to make a fair and decent profit on our hard work and efforts. There is nothing more satisfying than concluding a project where the challenges were met and overcome, you made the insured happy, and the adjuster paid your bill penny for penny because it was completely justified based on the terms of the policy and the needs of the insured.

Jeffrey Gross, CR, is the executive vice president of operations for Maxons Restorations, Inc., a premier restoration firm in New York City, where Jeffrey has worked for the past 25 years.