Understanding the costs for soft contents billing

Contents billing is a notoriously difficult task. It can be a minefield for restoration specialists looking to provide their clients value for restoration while ensuring that they cover their own costs and make a reasonable profit. But it is also a headache for carriers and adjusters who must audit bills to ensure they are paying equitable settlements for the insureds while protecting the carrier’s bottom line.

Since every loss site is unique, is it possible to approach a contents bill in a consistent, fair and pragmatic manner, free from anxiety and uncertainty? More importantly, since there are so many variables at play, is there a standardized and manageable formula to enable you to determine whether a bill is reasonable or whether it is “too hot or too cold?” The answer is “yes”, but first, it pays to consider the nature of the problem.

The three myths of restoration

The first myth is that homeowners prefer replacement over restoration. Our homes are full of everyday objects, which may have less intrinsic value but more sentimental value or emotional attachment. People spend a great deal of time and effort choosing their clothing and furnishings and, over time, there will be many items they do not want to replace such as an outfit worn on a special occasion, or a gift from a loved one. The sentimental value of these items continues to increase, even when the actual value decreases. Homeowners like to buy new things but to “add to”, not to replace.

Another myth is that following a catastrophe, insurers have to replace everything since many items are beyond cleaning and restoration. As advances in technology improve what can be safely cleaned and restored, more and more items that may have previously been designated as non-salvage can now be safely restored.

Related: Choosing to restore, replace or cash out contents after a loss

Finally, it is a myth that the issue is as simple as the cost of cleaning versus the cost of replacement. It is easy to fall into the trap of focusing too narrowly on a single item and asking, “Should this item have been cleaned if it would have cost the same or less to replace it?” Yes, it is a question, but is it the question?

Focusing on line items in isolation is like viewing a single frame of a movie — you get one snapshot, but you don’t get the whole story. In this way, a line item does not even begin to tell the story of the bill. To accurately appraise a bill, you have to see the bigger picture and take a broader view. You have to see the trees … and the forest.

Take the ‘TEMP’ of your soft content’s bills

Any bill can be audited. While there are highs, lows and outliers, what you are looking for is consistency. Given my role as quality assurance manager for the ECONA Network, we have seen much success in teaching this billing method to our members to assess their billing.

This model of assessment breaks the bill down into four main categories. While each category is important, it is the total, how they combine, that gives you the most accurate temperature of a bill.

‘T’ is for the “total” number of items, divided by the total cost of the bill, giving you the average cost per restored item. Once you know the figure for the average replacement cost for a total pack-out, $45-$50 for most areas, you can compare it with the restoration cost. The contrast between those two figures will indicate whether or not a bill might be too high or too low. If the restoration cost is significantly over 25% of the replacement costs, you will have to take a closer look at the figures. Either there is something amiss, or the figures are being pushed up by other factors. What are the other factors? They might be in the E, M, and P!

‘E’ is for “extra charges” (or up-charges). Depending on demographics, there may be more upcharges from one job to the next; however, looking only at the number of upcharges can be misleading. A more accurate measurement is the percentage of upcharges, which should vary less from demographic to demographic. Upcharges should be a smaller percentage of the total number of items (around 5%), and limited to materials that are fragile or require special treatment. For example, suedes, leathers, furs or a blouse, which is silk rather than cotton, has pleats, ruffles or decorative buttons. To some degree, this is a judgment call, and most upcharges can be quite subjective.

‘M’ is for “manpower” (or “womanpower”). The billing practices and the platform used for calculating labor costs can have a marked impact on the final figures. If the labor charges seem disproportionate in comparison to the scale of the job, you might have to investigate further. Labor charges should make up approximately 10% of the total bill. Certain loss site conditions may affect the number of hours at the loss site, so look for an average over several pack-outs to see where you stand.

‘P’ is for wash/dry/fold “poundage” — the weight of the “folded” soft contents of the pack-out, and the total amount billed. Again, this figure will be affected by various factors (such as the size of the family and age of the children), but you should expect wash/dry/fold charges to make up about 25% of the total bill. If the poundage forms a disproportionate percentage of the bill, it could mean a number of items should have been designated as line item charges, or the total weight of the wash/dry/fold items is inaccurate.

Once you have the figures for each of the four areas you can take the temperature of the bill; start with an average temperature of 70.

For example, you might find your average line item cost is 28% replacement costs (almost 3% over the benchmark figure of 25%), this would push the temperature up to 73. Still very comfortable. Then you factor in the upcharges and find that they are 7% higher than our 5% benchmark. The temperature has risen to 80%. A little warm but perhaps still within your comfort zone. However, when you also add labor costs that were 10% above average, your bill has a final temperature of 90 degrees! Unless you can identify unusual factors, which would explain this variance, you can reasonably conclude that the bill is definitely on the “hot” side.

The key point to bear in mind is that any bill can be higher in one or two areas, often times lower in one or two areas, but even out across the board. Always look for trends or patterns and identify areas of concern.

The bottom line: if your bills are consistently too “cold”, you’ve lost revenue; if your bills are consistently too “hot”, you can lose market share.

You may also want to use this formula for full pack-outs, not for smaller jobs or partial pack-outs. You will also want to look at several pack-outs over time to get a” healthy” average temp of your billing.

Taking the temperature of the bill can give you a better picture of how reasonable your billing practices are benefiting homeowners, adjusters, carriers and your bottom line!

Russell Jacobs is the quality assurance manager for ECONA Network, North America’s largest full contents restoration network with over 276 certified service locations. A third-generation dry cleaner who grew up in the family business in Memphis, Jacobs has 25 years of experience in contents restoration. Contact him at russ.jacobs@econanetwork.com.

Related:

Using technology to inventory contents after a disaster