Steve Patrick is a guru for those estimating property insurance losses. He made a suggestion on Level The Playing Field, for a construction book, Markup & Profit: A Contractor’s Guide, Revisited. His suggestion caught my eye since Merlin Law Group keeps this work in our reference library. This book is an excellent reference which contractors, property loss estimators, and property loss adjusters can use to help when considering reasonable construction pricing.
Without proper pricing, many contractors will be tempted to skimp on skilled labor, quality materials or the time of labor to properly do the job. Yet, many insurance companies seem a lot more concerned about paying as little as possible rather than providing a sufficient amount of time or money to do a quality restoration.
From what we see in the field where insurance company and independent adjusters are evaluating the amount of the loss, insurers provide little time for their own adjusters to do a quality adjustment job. From what little they pay their front-line adjusters, insurance companies are being run by bean counters rather than servicing the product they sell. No wonder there is a war going on between restoration contractors and the insurance industry.
Another book which I purchased this Spring—and strongly suggest all owners of small roofing and construction companies should thoroughly read—is Profit First For Contractors. The book notes that the insurance industry’s insistence on 20% overhead and profit is a ridiculous standard and explains why from a purely economic analysis:
What are some of the commonly accepted industry standards that will drive your business into the ground?
A contractor is not supposed to charge more than 20% for overhead and profit.
Wrong. A 20% markup yields a 16.7% margin. If you have expenses of 20%, then you are making a-3.3% net profit, otherwise known as going out of business. Some healthy construction businesses could have expenses as high as 23% of total revenue. And in order to thrive, most construction businesses should be earning a 10% net profit. That’s a 33% margin (23% plus 10%). A markup of 50% produces a 33% margin. Imagine telling customers your markup is 50%. They would have a conniption.
If we the lawyers are studying these construction reference materials, I would suggest that it is probably a lot more important for roofers and contractors to do the same.
I have discussed the pricing issues in Restoration Contractors Providing Great Quality Workmanship Are Policyholder Friends But Many Insurance Companies Refuse To Pay For Quality. One problem is the suspect pricing which Xacitmate is using. Contractors, estimators, and public adjusters should be double-checking the pricing Xactimate is using against local and reasonable pricing. I would suggest those involved with property loss estimating also consider Getting the Xactimate Construction Price Right!
Thought For The Day
Finance is not merely about making money. It’s about achieving our deep goals and protecting the fruits of our labor. It’s about stewardship and, therefore, about achieving the good society.
—Robert J. Shiller