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

  • Kyle Larson

    33% gross margin, for the vast majority of contractors, is a break even number at best. Your 23% does not include sales commissions that generally run 10% or greater. The real bottom line to secure any sort of net profit starts at 40% gross or something close to a 66% mark up on actual costs.

    You suggest checking Xactimate pricing against actual incurred costs which is a great idea and something I do everyday. Heck I even modify Xactimate pricing so that the included costs are factual. The problem is that the insurers will not deviate form Xactimate published pricing regardless of the fact that we document that it is incorrect at its core, the actual incurred costs.

    Xactimate does a fairly decent job of getting material costs right, where it fails is in its labor costs, and since every penny of profit in Xactimate is built into the hourly retail labor rates, when the labor rates are wrong, the corresponding profit calculation is off as well.

    The insurers reluctance to modify Xactimate published pricing is in spite of the fact that Xactimate tells all of its users, over & over again:
    Xactimate therefore, provides users the full capacity to create and /or modify any costs as needed to match the conditions of the specific job or their company”
    Unfortunately insurers believe that these instructions do not apply to them.

    • Chip Merlin

      I agree! But I suggest you read the book because he is talking gross expenses
      versus gross revenue.

      In a post ( I have written:

      “The truth is that everybody in the insurance and restoration industry knows that general contractors generally need at least a thirty-eight to forty-two percent profit margin to break even. Restoration contractor associations teach this at their seminars. Even Belfor and ServoPro, dominant insurance industry stalwarts, estimate margins much higher than twenty percent when bidding jobs, even though their Xactimate estimates show something completely different.”