Pricing, Estimates, & the Bottom Line
Over the past 15 years, the landscape of the estimating world has gone through many changes in the property restoration industry. Some experienced drastic change, going from handwritten estimates on a legal pad, to having to learn complicated estimating software. For others, the change may have been less serious, switching from already digital spreadsheets to industry-specific software. The major change for these contractors working in the property restoration industry was the demand to adhere to the software’s pricing structure, whether it was Simsol, MSB-incorporated-into-Symbility, or Xactimate. For both groups, it seems pricing has been the greatest change that has affected not only how they write estimates, but the bottom line of profit in their business.
As most contractors in the restoration industry know, Xactimate is the dominant estimating software in the restoration industry. According to Xactware’s “About” page, 22 of the top 25 property insurance companies in the U.S. and all of the top 10 Canadian insurers use Xactware property insurance claims tools. Due to Xactimate’s dominance of the market, many restoration contractors also use the software as their estimating platform. These contractors are either part of a managed repair program that requires Xactimate use or the contractor is trying to be on an even playing field with the adjuster in discussing the scope of property damage.
There is growing contention in the industry that the pricing structure and estimating features in Xactimate favor the insurers and are adjuster-centric, leaving contractors’ concerns and needs by the wayside. There is also the argument that since Xactware is now owned by Verisk, which is a data analytics and risk assessment firm in the insurance industry, they favor the insurer’s needs over the contractor’s.
Again, the issue of most concern is pricing. There are many in the restoration industry who hold the opinion that Xactimate’s pricing structure is under market value and is devaluing the industry due to its use by many of the major insurers.
Creating Price Lists
Let’s take a short tour through how Xactware (which produces Xactimate) researches and creates price lists. I believe there is light at the end of the tunnel, if one understands how Xactware arrives at its pricing using their methodology.
According to the white paper that Xactware produces, which can be downloaded from the online version of this article on www.randrmagonline.com, their Pricing Data Services team follows a bottom-up and top-down approach that is meant to represent market pricing in real-time.
The bottom-up approach involves the Pricing Data Services department surveying random contractors in the restoration industry around the country. These contractors must be licensed and have an office location to qualify to be surveyed. The pricing department will survey material and labor rates, as well as equipment required to perform repairs. They also survey suppliers for material and equipment costs to gain market value.
Xactware states that they review around 20,000 contractors, suppliers, and service providers each month, striving to maintain real-world market value dictated by the industry. They arrive at the bottom-up price algorithm by combining these surveys for a certain area with the top-down data.
The top-down part of the pricing data comes from closed projects originated inside Xactimate and XactAnalysis. Whenever a price for a line item for labor, material, or equipment is changed by the user in Xactimate, a red flag is raised inside that project. This flag shows that there are pricing variations and allows the pricing department to allow for changes to the line item’s pricing. Xactware states that there are more than 400,000 of these estimates, projects, and feedback returned to them each day. That’s a lot of data for the pricing department to work with!
The actual process of creating the price lists is quite complex. According to Xactware’s Pricing Research Methodology white paper, this is their statement on how exactly they arrive at a price according to their algorithms and methodology:
“Within a free market economy, prices can vary significantly among providers for the same product or service. However, competition tends to force most providers to charge prices that are reasonably similar to others who are providing the same product or service in their market. With this understanding, Xactware employs a proprietary cluster analysis algorithm designed by doctorate-level professors with wide experience in the fields of economics and statistical analysis. The cluster analysis algorithm analyzes all submissions, identifies the cluster(s) into which prices are grouped to minimize the impact of outliers, and selects a representative price from the largest cluster. This process is run independently on all information received.”
Your Influence Matters
What does all of the information mean to you, the contractor? It means Xactware is not the big bad wolf they are portrayed to be, in most cases, and are striving to provide real-world pricing for a designated area by utilizing data that is constantly updated by many channels.
You can help influence this pricing by starting to mark your estimates as “Complete” in Xactimate. Every time you make a price change to a line item then mark the estimate as “Complete,” you are submitting data that is included in the top-down pricing methodology.
You may also contact the pricing department with a price discrepancy that you see on a daily basis. For example, you see that the line item for painting deck railing does not seem to include enough labor to paint railing, balustrade, bottom rail, etc. You may email email@example.com to give them your labor rate for this type of work and help with the bottom-up pricing methodology. The pricing department will typically get back with you within 24 hours with a decision on how they are going to use your data to help with that line item’s labor pricing.
You may also call the Pricing department at 800-424-9228 Option 5 to discuss pricing data and discrepancies with Xactware directly. They are open for feedback and welcome contractors to call and give them notice that pricing is low for a certain area.
As you can see, there are options for contractors to be proactive about the pricing that is used in this industry. You can be the change that the industry needs by informing Xactware of the pricing disparities and variations. The contractor can be in the driver’s seat, if we all start to give the feedback through Xactware’s channels.