I recently wrote two articles about iTEL Total Price and a TrueLine pricing procedure that appears to use Xactimate as a ceiling and then apply fixed discounts below it. 1 Those articles raised questions about whether new pricing systems are measuring the reasonable cost of restoring a particular property or simply creating a more efficient way to reduce claim payments.

An article published fourteen years ago shows that the underlying problem is hardly new. The technology has changed. The pressure has become more systematic. The old arguments about contractor overhead and profit, however, are still very much alive.

The August 2012 issue of Cleaning & Restoration magazine published an article by Tracy Bachtell titled, “Pitfalls of the Current System Create Mistrust Between Restorers and Insurers.” One section carried a memorable heading: “Overhead and Profit: The Folly of 10 and 10.”

Bachtell was not a policyholder attorney taking shots at the insurance industry from the cheap seats. At the time, he was senior vice president of business development at Paul Davis Restoration and responsible for its Large Loss, Commercial Loss, and Catastrophe divisions. He had joined Paul Davis in 2003 after more than twenty-five years in the insurance industry. He held the CPCU and Associate in Claims designations and previously served as a property claims director at Kemper. He understood the economics and pressures on both sides of the claim.

His background makes his discussion important for all claims professionals to consider today.  Bachtell explained that the familiar ten percent overhead and ten percent profit convention did not arise from a serious economic study establishing what modern restoration contractors actually need. It grew from early unit-cost estimating practices, when contractors often operated from their homes, drove a single pickup truck, carried far less insurance, and faced fewer regulatory and administrative expenses. A convenient estimating convention gradually hardened into a claims protocol and then began masquerading as a market fact.

The math was never magical. A twenty percent markup produces a gross margin of only 16.7 percent. If ten percent overhead and ten percent profit are compounded, the total markup is twenty-one percent, and the resulting margin is approximately 17.4 percent. That margin must absorb the contractor’s actual general overhead before any real net profit exists. Rent, office staff, estimating systems, vehicles, licensing, insurance, training, accounting, safety compliance, and the cost of carrying receivables do not disappear because an insurer prefers round numbers.

Verisk’s own paper concerning overhead and profit says that general overhead and profit are not included in its published unit prices. Verisk also says the final amounts, and where they should appear in an estimate, are left to the estimator based on the job conditions and the service provider performing it. Xactimate does not proclaim that 10 and 10 is always correct. Insurance claims departments and estimating protocols too often do that for it.

This does not mean every contractor is entitled to charge whatever it wishes. Transparency runs both ways. Contractors should be able to explain their scope, labor rates, material costs, overhead, supervision, procurement responsibilities, and required margin. Hidden markups, inflated scope, and manipulated invoices undermine legitimate pricing just as surely as arbitrary insurer deductions do. Bachtell expressly criticized those contractor practices, which makes his warning about insurer practices more credible rather than less.

It is also important to separate three questions that are often blended together. Is general contractor overhead and profit covered for the particular loss? When must it be paid under the policy and applicable state law? What amount reasonably reflects the market and the work required? A three-trade slogan and a 10-and-10 habit cannot replace analysis of the policy, the project, and the actual marketplace.

The new pricing systems I have recently raised in my blogs make this old debate more urgent. A contractor can now be squeezed from both directions. First, a fulfillment or pricing program reduces the underlying Xactimate material price through a formula or preferred purchasing arrangement. Then the customary overhead and profit percentages are applied to that reduced base as though the percentages independently guarantee sufficient compensation. Lower the base, and the same percentage produces fewer dollars.

At the same time, the contractor may lose control over suppliers and the compensation historically associated with procurement while remaining responsible for delivery coordination, shortages, returns, compatibility, scheduling, workmanship, and warranties. A bundle of shingles delivered to a driveway is still not a completed roof, no matter how impressive the software dashboard may look.

Volume purchasing and technology can benefit policyholders. If an insurer-associated program supplies genuinely comparable materials at a lower price, delivers them when needed, honors warranties, pays for mistakes, and compensates the contractor fairly for the remaining work and risk, the savings may be legitimate. The program should then be able to demonstrate those results transparently and operate just as reliably when the correct price is higher rather than lower.

But a fixed discount does not become a market price merely because it is embedded in Xactimate. Theoretical availability does not establish that a reputable contractor can complete and warrant the restoration for the resulting estimate. And an insurer does not put the policyholder first by shifting the shortfall to the contractor until the contractor refuses the work and the policyholder is left to pay the difference.

The Restoration Industry Association (RIA) now teaches that standardized price lists are reference points, not compulsory prices, and that labor rates, overhead, and profit should be customized. The RIA recognizes that the correct price depends on the location, accessibility, conditions, contractor, and particular project. That is a far more honest approach than treating a historical rule of thumb as economic scripture.

Bachtell concluded the 2012 article by warning that the friction created by opaque and unfair practices increases the overall cost of processing claims. Fourteen years later, we have more data, more estimating platforms, more third-party administrators, more automated reviews, and more supply-chain programs. It is far from clear that we have more transparency.

My article, Xactimate Wasn’t Low Enough: The Internal Claims Manual for Paying Even Less, asked why an accepted estimating platform is apparently reliable enough to establish the maximum price but never reliable enough to require a higher payment. The overhead and profit question deserves to be added to that investigation. If the material base is systematically reduced, contractor procurement is stripped away, adjuster discretion is limited, and 10 and 10 remains the ceiling, who is expected to absorb the difference?

The answer cannot always be the restoration contractor. Eventually, responsible contractors refuse the work, quality suffers, disputes multiply, or the policyholder pays a shortfall for coverage that was supposed to fund a proper restoration.

The 10-and-10 myth has not disappeared. The insurance industry is simply modifying a new code, stretching it. I suggest everyone in the property insurance claims business consider the following from Bachtell’s article:

Unfair business practices can be rationalized, but they cannot be forgotten. Both the insurers and the restoration industry have made the bed that both must sleep in. The real downside is that this friction only adds cost to the overall claim processing expense, which would be unnecessary if more transparent processes were used. Maybe someday, we will truly put the policyholder first and work together to make sure we can both survive and prosper in this industry.

An Important and Repeated Thought for the Day

“Unfair business practices can be rationalized, but they cannot be forgotten….  Maybe someday, we will truly put the policyholder first and work together to make sure we can both survive and prosper in this industry.” 
—Tracy Bachtell

1 Xactimate Wasn’t Low Enough: The Internal Claims Manual for Paying Even Less, and Who Is ITEL Total Price Really Good For?