[In order to remain strong and viable into the next version of the restoration industry, contractors must change their mindsets and approach to the market. The RESTORATION2.0 Movement advocates changes to six main areas of contractors’ businesses. FNOL is one of them.]
Why do we put up with third-party administrators? These so-called “programs” were put in place for one reason (officially), but we all know what the real reason is.
The “official” reason is to “ensure a better customer experience.” Sure, so why is it that TPAs interact so little with the actual customers? Fact is, contractors and “vendors” deliver the customer experience, so THEY are the ones being managed.
TPAs enforce their program rules ONTO vendors and service providers. Their SLAs (service level agreements) were not designed to deliver better service. These contracts and rules were designed for a completely different goal: reduction of claims severity.
Someone please explain to me how reducing claims severity translates into a better customer experience. The metrics and surveys which point to a “better experience” through reduced cycle times, were designed with the answer in mind – before the question was asked.
I will admit that the less time customers have to actually interact with TPAs and claims departments, the happier they are. That doesn’t mean that reduced cycle time is the best tool to use in order to create satisfied customers.
No, claims departments and carriers have know the truth for a very long time; the shorter the cycle time, the smaller the claim. Small settlements DO NOT necessarily mean happier customers. But we contractors are still playing along with the charade. Why?
I believe the main reason restoration contractors (and body shops and doctors for that matter) still play around with TPAs, HMOs and the like, is because they either 1) don’t know how to get their own customers or 2) can’t see another way of doing business.
It’s all about F.N.O.L. : First Notice of Loss.
You see, service providers have been spoon-fed customers for so long, they’ve forgotten how things worked BEFORE managed repair programs.
Since the carriers, and then programs receive a large percentage of losses FIRST, they are perceived as the holders of the keys. Once contractors get used to having their jobs just appear every day/week, they get lazy and forget how to feed themselves.
Then, just when the contractor has hired staff and added capacity, the program turns off – or goes away completely. Now what?
The new battlefield of restoration is FNOL. He who gets the call first, gets to call the shots. If you caught the fish, would you continue to let someone else tell you how to gut and cook it?
The RESTORATION2.0 Movement is all about helping contractors become more self-sufficient, in order to survive and thrive into the coming next version of insurance repairs. Make no mistake, the future of our industry will look VERY different from today, and likely unrecognizable to some of the old guard.
When it comes down to it, you as a contractor are paying for every lead that comes in the door, no matter the source. First notice of loss will not come easily. Incumbant networks and carriers are actively fighting every day in order to maintain their positions as the “first call” from insured property owners.
They have been telling us contractors for years that without their “programs”, we would all starve. At the same time, they have built up huge organizations to “administer” the claims process. They get First Notice, then sell it to contractors with a markup. So, in a way, we are paying for the privilege of paying for leads… twice.
Now the smart among us understand that there is always an alternative. If you’re going to pay for leads, shouldn’t you understand the FULL costs of every option? Google Adwords is one of my favorite alternate lead sources.
Let’s break down an example of TPA “program” work versus Google Adwords.
Most “managed repair” program fees start at 5% of gross revenue. (We won’t talk about CodeBlue because their fees start at 20%). That means that for every dollar of sales, you give five cents to the TPA – pre-tax.
If your sales volume is $1mm, that means you are paying the TPA $50,000 a year ($4,166/mo) in exchange for these leads. On the surface, this doesn’t sound unreasonable. After all, a full-time sales person is going to cost AT LEAST that much before commissions and overhead expenses. But the up-front fee is only part of the story.
Managed Repair also means managed PRICING. Program contractors are forced to agree to the carrier-specific pricing schedule. In most cases, this means the off-the-shelf Xactimate pricelist for your region. Those of us who know (and teach Xactimate pricing courses), understand that the “standard” pricing from the monopoly-in-Orem makes zero consideration for contractor overhead or profit.
The prices from Xactimate are inclusive of contractors’ COSTS only. It is a very detailed and thorough pricing and estimating system, but it is up to the user (you, the contractor) to customize it to their specific business needs and goals. Xactimate will not tell you how much overhead your business has, nor what an appropriate profit margin for you is. How could they without price fixing?
Smart, proactive contractors understand this and revise their pricing accordingly. If the regional pricelist has zero profit or business overhead built in, then they must build it in. My clients are increasing their pricing by 20-36% depending on their individual needs. And no, there is no rule or law against this. It’s called being a contractor.
If we take our hypothetical $1mm annual revenue and add the Pricelist Penalty of 15% (a conservative guess of what you could be charging if you weren’t on the program), your revenue should have been $1,150,000. Or, put another way, you only made $850,000 compared to your non-managed peers who made a million. Oops, make that $800,000 after the TPA fee.
But wait, we’re not done. There’s also the Program Penalty to consider; aka “We don’t pay for that” rules and guidelines.
How many things can you name off the top of your head that the non-licensed-adjusters at the TPAs say they “don’t pay for” or are “included in your overhead”? I’ll take a quick stab at it:
Mask and Prep for paint
Emergency Service Calls
Mileage or Travel Time
Equipment monitoring and decontamination
Daily progressive cleanup
Professional services like testing, engineering and estimating
Anything above “standard quality” materials
O&P on “one trade” projects
Any drying beyond three days
And on, and on…
What do you believe these things add up to as a percentage of revenue? Can we agree that it is AT LEAST 5%? That’s another $50,000 drag on your top-line revenue.
Finally, there’s the Admin Tax for performing managed repair work. This is the added staff and time needed to administer the program and adhere to the SLAs (service level agreements) and maintain KPI dashboards. Many of you will recognize the POMS scores from programs like Contractor Connection.
The majority of companies I’ve worked for and consulted with have hired at least one full-time person to their administrative staff in order to remain compliant with the various TPA programs they were on. Often I see a dedicated division of people whose sole responsibility is to maintain the button-pushing and paper-processing involved in operating in the managed repair environment.
Let’s pick a fairly conservative Admin Tax rate of 3%. That adds another $30,000 in burden to your business to remain compliant in the TPA environment.
For those of you playing at home, we’re now at a total operations cost of $280,000 (15% Pricing Penalty + 5% TPA fee + 5% Program Penalty + 3% Admin Tax) for the simple pleasure of servicing the managed repair program. All those “steady claims files” are starting to look a little pricey, aren’t they?
So what’s the alternative? There are many that I cover in my RESTORATION2.0 course, but today we’re talking about Google Adwords.
As you can imagine, if it were easy or cheap then everyone would be doing it. But it IS effective. There are national franchise restorers who spend six-and-seven figures monthly on the Google Adwords platform. That doesn’t mean that YOU have to spend $50,000 a month in order to replace the current TPA lead stream you enjoy.
Let’s use a round number of $5,000/mo for your Adwords budget. I know this is higher than the $4,166/mo TPA fee, but I need some round numbers. Keep in mind that we are trying to replace actual revenue of $720,000 – our revenue after fees and burden in a managed repair environment.
While no two ad campaigns are alike or 100% predictable, we can expect a $5k spend to generate about 35 leads per month. If you close 60% of those leads (and really, who couldn’t?) that is a NET of 21 jobs per month.
The average water claim of $3,500 means you could expect revenues on closed jobs of $73,500 per month for an annual revenue of $882,000. Subtract the $60,000 in advertising and you’re at $822,000. That’s a full $102K MORE than your expected post-TPA revenue of $720k.
And that is all before you land that big $250k rebuild or $65k dry-down.
And that’s really it. No program rules, no referral fees; just you fishing for your own work – then eating what you catch.
What happens when a catastrophe hits your area? Turn off your ad campaign. You won’t be forced to take on more work than you can handle. Rest assured: there will NEVER be enough restoration contractors to handle the crap when it hits the fan.
Need more volume? Turn up your ad spend. Period.
This business doesn’t have to be as complicated as we’ve made it out to be. We can simplify our businesses AND make for profit. It’s just the R2.0 way.
If you would like to learn more, and join the movement yourself, check out one of our upcoming courses:
I was recently asked to speak at a regional claims conference. Two days later, I was uninvited.
The reason? I’m have an adjuster’s license.
At first I wasn’t really bothered by it. I’m a busy guy. I wasn’t overly excited about paying for a plane ticket, hotel room and other travel expenses involved in attending a conference in another state. I anticipated out of pocket costs exceeding $2,000.
I also have a business to run. I’m incredibly busy writing Xactimate estimates for contractors across the country. Taking two days away from producing sheets was guaranteed to reduce the ROI of speaking at the event into the negative. I’m not an in-demand speaker (yet). Folks don’t pay me to go anywhere.
It’s been a couple weeks now. I should be over it. But I’m not. I’m still bothered. Maybe telling this story will help me let it go.
I wasn’t uninvited to the conference simply because I have an adjuster’s license. The real reason is that I have experience adjusting claims for HOMEOWNERS. That’s right; I’ve done some public adjusting. And because I have been a public adjuster, my opinion (and presence) was not welcome at a claims conference.
It sounds more ridiculous and short-sighted after I type it.
Public Adjusters Not Welcome
That’s about the jist of it. I can’t help but feel a kind of discrimination. No, I’m not a minority. I’m a white male, born in the United States. Yet my opinions and presence is not welcome because of who I am.
To be clear, simply being licensed as a “General Adjuster” in the state of Oregon doesn’t necessarily make me a “Public Adjuster.” There is no differentiation between PAs and IAs in my state. I could just have easily said I was an Independent Adjuster without being dishonest. I’m sure that if I worked for Mclarens or Crawford there wouldn’t have been any problems. (Actually, my employer might have payed for my trip)
Instead, I explained my role(s) in the industry as best I could. I write Xactimate estimates for contractors and homeowners. I charge an hourly fee for my services and my clients are happy to pay it. I also provide large loss consulting for other claims companies and construction consultants. And yes, I’ve tried to adjust losses – mostly unsuccessfully. (if you want to hear those stories, send me an email)
I discussed possible topics for “my” speaking engagement with the nice young lady who was eager to fill the breakout sessions for the upcoming conference. I told her more about what I do every day and we worked out a rough outline for my talk.
I told her how I routinely write estimates which are DOUBLE what the insurance carrier’s initial offers. There aren’t any black hat tactics or secret tricks; just looking at a loss from a different perspective.
That Sounds Great
Why thanks! I think so too. I would think that adjusters and carriers would be interested to learn what the “other side” of the claims process looks and feels like. No one likes to see their reserves blown out of the water.
Who wouldn’t want to better understand the claims process and how it affects their work? Well, it turns out that a couple hundred “claims professionals” don’t care to learn about what I know. Or, more accurately, my anticipated message was deemed too risky to share with an audience of claims adjusters and underwriters.
Pity. I think I would’ve been awesome.
Risk and Innovation
Innovation is risky. That’s the jist of the book The Innovator’s Delima (Clayton Christensen). The larger and more established a company, or industry, the lower it’s tolerance for risk is. The very nature of large structures is risk aversion and a high degree of outcome control.
New ideas, or anything not previously vetted by upper management, are dangerous to the status quo. It is highly likely that presenting a topic which shown some light on systemic problems within the industry would be met with either a high level of resistance or completely ignored. Neither of which is a useful way to expend energy.
That’s the real problem though. We have an entire industry living in a state of willful ignorance. Outside opinions (and public adjusters) are actively avoided and ignored. Meanwhile TPAs, claims “consultants” and lawyers are bilking carriers by promising to lower “claims severity” and reduce claims costs.
The reality is that they’ve all found a way onto the gravy train by vilifying the very folks who do all the heavy lifting: contractors and insureds. Think about it. What incentive does an SIU lawyer have to find that there was no wrong doing? Zero. That would be bad for billable hours.
I have seen firsthand what happens when lawyers and the SIU department get into a case that has a slight chance of fraud. Months and hundreds of thousands of dollars later, we all end up in court. And who wins in court? Lawyers.
How much could be saved by taking a more favorable view of your clients? No SIU salaries, no lawyer fees. Heck, no PAs because the insured actually feels like they are being treated fairly! Wow, that’s a thought.
Personally, I would love to live in a world where my services weren’t needed. I can find something else to fill my time for sure.
Innovation from Outside
Change is coming whether we all want to acknowledge it or not. Keeping a little adjuster like me away from the microphone won’t make a lick of difference.
Companies like Lemonade and Zenefits are already going full steam ahead into the market. Believe me, they’ve got zero romantic notions about keeping claims personnel employed into the future. Or agents, or any of us for that matter.
“Forget Everything You Know About Insurance,” is says on Lemonade’s home page. Yep, that about sums it up. What’s the scariest thing people can tell their government? “We don’t need you.” That’s what their customers are telling their current insurance companies.
And that’s it. I’m glad I finally got that out. I do feel better.
For all ya’ll still reading, thanks for coming along for the ride.
For those who are afraid of outside opinions, good luck. I’ll be over hear riding the wave called “the future.”
The opening statement is your first best opportunity to introduce your client to the claims process. Properly written, an opening statement sets the tone of the rest of the claim.
Why do so many folks overlook the importance of opening statements? I believe it’s because a lot of people don’t understand what an Xactimate estimate really is. They think it’s just another step in the process of doing work as a restoration contractor.
They treat it as a flexible, fuzzy document that somehow gets them the money they need to do the work they really came here to do. This lack of seriousness when it comes to Xactimate estimates is why some of you are not experiencing the success that you could.
Xactimate Equals Revenue
As I’ve mentioned before, the Xactimate estimates you write are EQUAL to your company’s revenue. Think about it; have you ever settled a claim for less than the Xactimate estimate? If the entire revenue of your company is dependent upon the estimates your write, shouldn’t those estimates be taken very seriously?
I teach my clients that the Xactimate estimate is an official claim document. It is used as a legal document in a contract negotiation between two parties: the insurance company and your client. Once your estimate is accepted by your client, the insured, the insurance company must consider it as part of the claim file. Any changes must be made with the utmost seriousness and detailed accountability.
That’s why most adjusters and TPA’s ask you NOT to show your estimate to your client. Until your client accepts it, the carrier can beat you up all they want. It’s just an opinion at that point. They don’t have to take the estimate, or you, seriously yet.
That also happens to be the reason I tell my consulting and coaching clients to send their estimates directly to their client – the homeowner or business owner who has suffered the loss. Once that happens, the adjuster is forced to take a much more serious tack with you in regards to your estimate of damages.
Now that you’ve got a deeper appreciation for what the Xactimate estimate is, a settlement tool, let’s give you a tool to super-charge it with a powerful Opening Statement.
The Ultimate Opening Statement I use covers a lot of bases. It allows the project manager/estimator to begin having some helpful conversations with their client. It also addresses some common trouble spots. This allows you to deepen your client relationship and avoid tricky situations which may arise later in the claims process.
I’ll give you a brief overview of the main sections.
The Price is Right
Right up front you’ll notice something that I believe most folks are shy about: the PRICE.
I don’t like to make people search through the estimate to know what the bottom line is. Isn’t that what most people want to know first anyway? Why do we hide it behind forty pages of mumbo-jumbo that the client won’t understand anyway?
Give it to them. Then you can start the conversation about how you’re going to earn it. Keep in mind, this is THEIR claim and THEIR money.
CODE, OPEN items and Scope Changes
The first three sections lay the groundwork for the concept that this estimate will change. It’s important for your client to know that this is a work in progress. There is a long road ahead and they will need your help to navigate it. See what I did there?
Insureds don’t know how to talk to their adjuster about these things. They need the help of a professional.
This also opens the door for you to start doing some fortune telling. What are the “OPEN” items? When will they be added? Will you talk to the adjuster about them? All good questions for you to answer right up front.
Overhead and Profit: The Three Trades Myth
This is a biggie. Carriers are beating the O&P horse to death these days. And if you find yourself on any TPA programs I’m afraid you’re gonna have to lose this section all together. Don’t complain to me, you’re the one that agreed to their “rules.”
Adjusters and carriers have become very adept at throwing up objections to General Contractors getting Overhead and Profit. This section is your answer: we’re charging it, so deal.
In case you didn’t realize it, the property damage repair industry is still the wild west in many regards. There are no federal or state guidelines regarding with a contractor can or cannot charge a markup on their work. The reason insurance companies are so eager to tell you “we don’t pay that” is because it’s an easy 20% to shave if the contractor happens to be uneducated on the process.
The fact is that I, along with hundreds of estimators across the country, have been writing one-trade estimates for contractors for years which include a 10% overhead and 10% profit calculation. All you have to do is stand your ground. And bill your client.
Change Orders and Credits
I used to hate it when clients would start “cherry picking” my estimates. “I’ll do my own cleaning,” and “I can paint that room,” are the most frustrating. What would happen, before I implemented this section into my opening statements, is that clients would take all the high-margin trades out of my estimate in an effort to either save money or get upgrades.
And they always seemed to do it AFTER we’d started the job.
So let’s get all that nonsense out of the way right up front. Your client needs to understand that your time as an estimator has costs involved. They need to realize that the value you bring as a company goes beyond the $1.25 a foot you’ve got for paint. There are certain sunk costs associated with contracting their job.
Talking about this first usually sets the proper understanding.
This section also lays the rules by which you agree to play. There’s nothing wrong with changes, they just need to be in writing.
The next three sections set the expectations you have for your client to follow.
Matching is a huge issue, and the contractor usually gets stuck in the middle. This is your way out.
When your client says, “This new flooring doesn’t match the existing,” you can remind them of this section. Any problem they have with matching can then be addressed with the adjuster WITHOUT you in the middle.
I do this all the time with drywall texture. Why do adjusters believe that a perfect texture match is possible 100% of the time? The reality is that there are few drywallers that can match a knock-down patch without floating out the entire continuous area.
I always tell the client that we’ll do our best to patch the affected area. If the adjuster is digging in, I say that we can’t guarantee a match, but we’ll try. (This is usually best done in writing, sent to BOTH the adjuster and the client.) When the patch doesn’t come out perfect, I let the client chew on the adjuster, not me.
The warranty section is one that you’ll probably want to talk to your owner about. I believe it’s important to set up front, but different companies have different warranty periods.
That’s it folks. If you want to super-charge your Xactimate estimates, get your hands on this opening statement today.
And if you need some instructions on how to create your own opening statement, I’ve got you covered there as well.