Estimates Unveiled

A credible estimate is critical in determining the proper amount to pay on a claim. If you start with a bad estimate, the indemnity and expense of the claim can be higher than necessary.

Protect a Valuable Asset
Claims adjusters can lose their credibility from the start of the claim negotiation process with a thoughtlessly prepared estimate. Conversely, erosion of credibility also may be suffered if opposing experts’ reports demonstrate a more thorough understanding of the platform and assumptions used.

We all have heard the saying “garbage in, garbage out” and the same holds true for estimates. Not many years ago, handwritten estimates detailed the amount of material with factors applied for different types of labor. This was a subjective way of writing estimates. With the advent of computer estimates, careful inventory, diagram, and measurements provide estimate input which results in a more objective and accurate end product. Pricing within the programs is researched and supplied by experts who gather and verify such data. They essentially have made writing an estimate less labor intensive. But beware; it also can mean faster but less accurate estimates.

Understanding the Process
The purpose of the estimating platforms, such as Marshall Swift Boeck, Xactimate, Simsol and others, is to provide a means to enter necessary elements of the repair process and derive a quantification of the value of the work. Successful end products depend on organized methods and approaches to inventorying the repair process necessary to return the structure to a pre-loss condition.

These companies employ expert researchers who survey contractors and suppliers across the country to determine current market conditions. Through their research, a body of information about the costs of each line item is assembled and verified so that within the estimating engine accurate pricing is available across the country. This does not relieve the adjuster from knowing if there are particular localized materials or labor price fluctuations.

The first and most important step to writing a good estimate is to properly and thoroughly identify the necessary scope of loss. This is not to be confused with the estimate, but is simply an itemization of what needs to be repaired. Some items require little sophistication to identify, such as drywall, paint, or carpet. Knowledge of repair methodology, technology in the mitigation industry, and construction materials is what separates a logical and defendable scope from one that is illogical and indefensible. Spend some time either in trade magazines, including engineering and construction disciplines, or on the Internet looking at products and methods available on the market. Other sources of information are material wholesalers and service providers. Also, make sure the quality level of the components being inventoried is known. It may be necessary, for example, to have carpet sent to a lab to determine the weight, weave, composition and other details so you can use an accurate material price in your estimate. If a unique item needs to be priced, additional research or assistance may be necessary.

Negotiation can be more effective if one process at a time is addressed. When addressing a construction process, negotiating an agreed scope of loss can be accomplished more easily without the pricing attached. This can be done by a joint inspection to review the scope of loss in a text format. Once the scope is agreed upon, apply pricing to the scope. When entering the pricing, look for duplications. For example, when an adjoining wall is involved, it is unnecessary to calculate the linear footage of that wall in both rooms. Doing so doubles the cost of framing the adjoining wall.

Understanding Line Items
Each of the scope lines becomes a line item in the estimate. It is imperative to understand what is included in the work process of the line item selected. If the particular unit processes are dissimilar, the pricing should be different. If there is a significant difference between your estimate and the one you are reviewing, and they are both on a computer platform, request an estimate printed with line item descriptions. If you are deadlocked over pricing and both parties want to come to a resolution, be methodical when approaching the other party to identify the points of disagreement. If scope has been agreed upon and the disagreement is over price, line-by-line review of the estimate can be helpful.

Understanding what is included in the line item price is the first step in deconstructing the source of disagreement through line item detail. Of course, this assumes the price or details were not being edited for dodgy reasons. There should be an explanation for any pricing modifications. Part of the editing process involves placing the process in the proper trade category. This typically is found with items like mask and tape. If this isn’t included in the line item process, a selection between drywall or plaster work vs. painting should be made so a trade breakdown of the estimate includes the price in that trade segment.

An example of the effect line item descriptions have on the scope of loss is drywall replacement. Some estimating platforms provide line items that include sufficient steps to provide a wall ready-to-paint from the selection of only one line item. Some, like a total component system, allow for an accurate estimate for varying degrees of installation, but several line items must be selected in order to accurately depict all the steps necessary to bring a replacement wall to a pre-loss condition. If the estimating engine provides one line item that provides a finished wall, the line item description may look like the following:

If the estimating platform is a total component database, the necessary line item descriptions would look like the following:

There are many circumstances where material prices fluctuate between database updates. Although the databases often are updated on a quarterly basis, some significant price changes may occur in the interim. Shingle prices often inflate after a large-scale hail storm or hurricane. Copper prices and steel prices have increased steadily, however scrap copper prices have fallen recently. The steel price increases are due to rising demand and energy prices. Estimating platforms have editing windows that allow for such price fluctuations. You can edit the material or labor price in the line item. To reflect this change, or override, a notation should be made in the line notes. If you are challenged because of a perceived inadequacy of your estimate, you can show verification of your price. If you find your estimate was based on inadequate costs, the line can be edited to reflect the price fluctuation and you can recalculate your estimate.

Figure 1 demonstrates decreasing the productivity rate or hours per unit by 30% because of a loss in productivity. If work must be performed at a height greater than the 8-10’ wall height assumed, it will take more hours per unit. If there is an increase in the price of material, that can be adjusted in this function. If scaffolding is necessary, an additional line item for it should be added.

Where there is increased difficulty in performing the work, think through the conditions for each trade. If the walls and ceilings must be replaced, then the demolition, replacement, masking, finishing and lighting fixtures would need productivity rates evaluated. An accurate estimate considers all factors necessary to complete the job. Notations on the estimate indicate the things accounted for, and the estimate may not be challenged. If price is challenged, the assumptions should be apparent for proper resolution of any estimate discrepancies. Variations in labor rates come from union or non-union labor rates or a lack of skilled workers. Most programs allow you to select closed shop (union) or open shop (non-union), thus factoring in this labor rate variation. It is necessary to understand the labor conditions in the area and job you are estimating.

Comparing Estimates From Different Platforms
Not every item necessary to estimate a building may be available in a computer estimating program. Be familiar with some of the printed construction cost guides including RS Means, National Construction Estimator, etcetera. These resources include many items and have volumes specific to electrical, mechanical, excavation, and interior finishes among others. There are square foot estimates for items such as electrical or mechanical systems within these guides. Square foot costs in some computer estimating programs may not be as accurate because of a lack of specificity. The printed guides tend to give more accurate square foot pricing through variables in quality and building type.

If the estimate presented is divergent from your own, a line-by-line or trade breakdown may identify the areas of disagreement. If you have not received a trade breakdown in an estimate prepared on one of the computer estimating platforms, request one. If the estimate is from a general contractor, a breakdown by trade should be available. Computer estimates based on the same scope and assumptions of difficulty should not have a significant difference. A difference of plus or minus 10% is not unusual.

Be a Valuable Asset
With these basics in mind, understanding and use of computer estimating platforms is limited only by curiosity and willingness to explore the programs. Make careful notes and photographs to refer to during the development of the estimate. When assumptions or changes are made to the unit pricing of the estimate, know why they are made. If the estimate presented has line items or entire trade categories that are significantly different than what you have estimated, you now have the tools—with some additional research of your own—to know where to find the difference. Carefully prepare the scope of damage to produce an estimate that is precise and detailed, not garbage. It can be difficult to defend or negotiate from a garbage estimate. If there is a disagreement over the cost of the work, let the other party be guilty of providing garbage. Protect your credibility with detailed and carefully documented work. When your work is challenged, you can enter negotiations with confidence and a sound understanding of the scope of the project you are discussing.

Bradley D. Sharp, BA, AIC specializes in complex and litigated commercial property claims for GuideOne Insurance headquartered in Des Moines, IA.