Audit Proof Large Losses: What Triggers Third Party Audits
Nothing in the damage restoration industry is equal. Restoration companies differ, insurance adjusters differ and third party auditors differ; rarely is anyone on the same page. Dissimilar philosophies regarding recovery methods, project documentation and a lack of experience in all areas of the industry have created a time of uncertainty and division like never before in restoration.
Restorer vs. Adjuster
Many on the insurance side of the industry believe all restoration companies are out “milk” the project for everything they can get. On restorer side of the equation, the adjuster is just out to “screw” everybody. Unfortunately, I have seen both of these beliefs in action and generally they are fed by a lack of restoration experience and greed.
Some adjusters lack restoration knowledge and some contractors operate on an “it is what it is” invoicing system, producing a Time and Materials invoice without providing the proper documentation needed to support the work performed. Following and understanding industry best practices is essential for contractors who want to get paid for their fair and honest services. Experienced adjusters and auditors can quickly spot inconsistencies in billing practices by simply applying industry standard pricing based on decades of facts related to previously filed invoices. Because of all of the information floating around the industry via past invoicing, metrics have been developed and are applied to project invoices in order to make sure the costs are in line. Unfortunately, all auditors and adjusters don’t apply this information in a systematic way, as some, not all, just want the contractor to automatically lower their invoice by 40%.
Let me be clear, not all auditors are invoice bullies but they are out there. I have seen both contractor misconduct by presenting invoices that are way “out of whack” and also witness to auditors randomly pulling numbers out of the thin air to justify a percentage cut. Generally speaking, when “bully” tactics are not employed by the insurance representative, it is usually the “out of whack” invoice that gets the attention of the adjuster and triggers the audit process in the first place. So, we are back to all things restoration being unequal and it is likely to stay that way for the unforeseen future.
What has caused this separate and unequal industry and what continues to fuel it today? Mainly, a lack of industry wide experience on all levels of the restoration world from the adjuster, auditor and restorer is the cause and unfortunately this lack of experience is the only spot of equilibrium in the industry. It has become a little bit of the wild, wild, west shoot first and sort out everything out after the dust clears mentality.
Two Types of Large Loss Audits
- Third party auditors perform “Clerk of the Works” services and negotiate pricing, determine the scope of work and monitor the day to day performance by collecting daily documentation of the work performed. “Clerk” services tend to be used on large projects with multiple contractors performing multiple Scopes of Work. “Clerk Audits” are easy for the contractor to manage as long as egos can be set aside and the necessary daily documentation is provided. Clerks represent the insurance company and are there to track the cost of the entire project including all vendors and service providers involved with the project. Communication and transparency is the key to successfully managing a project where a Clerk has been deployed.
- “Desk/File reviews” are implemented after the job has been completed and the invoice has been submitted for payment by the contractor. Generally, the trigger for a desk/file review will “trip” because of price issues whereas the overall cost of the project is not in line with the work performed, as compared to similar completed projects. “Desk reviews” are a costly experience for those who don’t avoid the audit trigger traps while managing large commercial damage projects as most desk reviews result in an average of a 40% reduction of the total invoice amount.
Not every large loss invoice is subject to review and not every invoice submitted by the restoration contractor is “too high”, however, once the triggers have been tripped due to high cost of services, inadequate documentation and poor performance an audit is inevitable.
Audit Trigger #1
The contractor's scope of work or, lack thereof, is the first audit trigger. Any experienced insurance professional can tell immediately if the restorer “has a clue” about what they are doing on the project. Without a clear SOW, there cannot be a clear of understanding of what needs to be done and likewise a clear vision of what the services should cost.
The contractor can never confuse Time and Materials with “it is what it is” job costing as a budget number should be applied to all T and M contracts. Notice I said budget number and not NTE or Not to Exceed; these are totally different subjects with the budget number simply demonstrating to everyone involved that the contractor has a handle on the project costs. This Information also provides the adjuster with a budget number for the project file. Not to Exceed contracts are a whole other topic to be discussed on another day.
In order to eliminate the need for an auditor and to avoid the auditing process, the contractor must have the essential Scope of Work and budget number to demonstrate they are in control of the project. An out of control project equals an audit trigger, likewise an in-control project keeps everyone in check. With a solid SOW/work plan, budget number and critical path plan, the contractor should know at all times how the project is progressing. With these plans in place, it is important for the contractor to perform the work according to industry best practices.
Audit Trigger #2
If industry standards for estimating, pricing and performance are not followed, the next audit trigger that will be tripped is in the area of labor cost and allocations. How many workers vs. how many supervisors in combination with labor rate classifications, who is getting paid to do what for how much and does it make sense? If it doesn’t make sense, it will trigger an audit and labor rates will be adjusted to represent the actual work performed and the accurate cost for those performing the work.
Example: If everyone on the project is billed as a supervisor or restoration tech and the work performed is sweeping the floor with no general labor charges, the audit trigger will trip because it doesn’t make sense that CS and RT’s would be needed to sweep a floor.
Audit Trigger #3
The next trigger for adjusters and auditors is equipment usage and pricing, too much equipment for too long with no moisture content readings to justify the beginning and end of the drying process. “if you didn’t document it, it didn’t happen and getting paid will be difficult.
Critical Loss Audit Triggers
Communicate, Communicate, Communicate. Bad news doesn’t get better with time…no SURPRISES for the customer. Daily communication/updates with all parties involved is paramount.
- Overall cost too high, the trigger is a crazy invoice. 3rd party auditors are called in to review the job file when the cost is too high. Remember, thousands of restoration projects have been completed just like yours and cost overages are easy to spot with simple math… always ask, how much per sft.? Quick check, if you are over $10.00 per sft. on a standard restoration project, you will probably get audited because of high cost of services.
- Labor: The first place the auditor will start is the supervisor to laborer ratio, labor assignments and labor allocations. Quick check, Standard labor ratio: 10:1 (1 supervisor per 10 workers)
- Equipment: The second place the auditor will look is equipment sizing and allocation. How much equipment was needed for how long at what price?
- Production rates: Did the restorer follow the SOW and Critical Path?
- Document, Document, Document. Once again, if you didn’t document it, it didn’t happen…PERIOD. How do you get paid for something that didn’t happen? You don’t…NO EXCUSES