Illusion or Collusion?
Restoration contractors are entrepreneurs who are attracted to our field by the notion that they can help people, work hard, make some money and be in control of their business. The idea of being in control is a cherished value for self-made business people. In a capitalist system, you offer your services at a fair price and customers either choose you or go to competitors they perceive as being better, cheaper or more to their liking. On a level playing field, we find our niche, promote our expertise and thrive or survive based on our ability to connect with property owners and insurers.
Sounds ideal, doesn’t it?
I’m concerned, however, that this entrepreneurial notion is becoming an illusion because of some market activities that hint at collusion. We want to be paid a fair price for quality work, but controls beyond the fair market are seemingly working against us.
In earlier columns I’ve written about forces of consolidation that are pressuring our businesses because of competition from giants such as Crawford Contractor Connection – the “big box” operation of the insurance restoration industry. Such companies are forming alliances with major insurers in a trend that could shut off our fair shot at many restoration jobs.
My latest concern is about another industry giant: Verisk Analytics Inc. – a multi-national company specializing in risk management. Verisk has recently announced the formation of an Underwriting Solutions division. In its news release, Verisk said the new division is designed to “respond to customers’ desire for greater support of their underwriting processes and to develop the next generation underwriting platform and solutions set.” The division is affiliated with ISO (Insurance Services Office) and Xactware Solutions, Inc. – maker of the Xactimate estimating software accepted by most insurers. Entities that used to be independent resources are forming liaisons with insurers to help them manage their risks.
Restoration contractors normally don’t pay much attention to mergers and acquisitions. We focus on the next job or how to make a profit on current jobs. What got my attention was the fact that Xactimate is lowering the unit costs of specified repairs. These estimates are used to justify what an insurance company will pay to cover a loss.
How can unit costs be going down when the cost of almost everything the restoration contractor uses is rising?
We’ve seen prices climb at the gas pump. The cost of most building materials is also up according to a recent analysis by the Associated General Contractors of America. Consider these price changes for the 12 months between December of 2010 and 2011: concrete products (+1%), asphalt shingles (+5.8%), insulation materials (+5.4%). Gypsum products are down 1.5% and labor costs are relatively flat. Yet I must ask why estimating software used by so many insurers has lowered the unit prices for our work given the fact that our costs are rising.
Is this just my illusion or is it collusion?
The issue of unrealistic estimates that deprive restoration contractors of a fair price is of great concern to the National Institute of Restoration. I encourage other contractor associations to take notice. Our industry is about helping make things right for people who have experienced disasters. It’s never been about the cheapest, fastest cut-rate method for restoring damaged property. Our relationship with property owners is personal and our reputation is on the line with each job. Unless we pay attention to these changes and decide how to respond, many of us will lose our businesses and all of us will lose some of the intangible qualities that drew us to the field in the first place.
If you have ideas on ways to prepare or respond to this threat to our industry, let’s talk.