Estimating: Is it an art or a science?
There are multiple options for determining the cost of estimating property damage repairs for a loss.
The quick answer is it’s both. Outside of the insurance and damage repair industry, the layperson sees an estimate as a price quote in advance for a good or service. The basic definition of estimating as it relates to our industry is a means of translating associated costs to performing a task into a universally accepted language that is both quantifiable and justifiable.
The reality is that much of what we call estimating is not really estimating as much as it is reporting on work already performed, which is sometimes called “forensic estimating.” Nevertheless, the term has taken hold, and all breakdowns for work, whether performed or proposed, are estimates. This may also have something to do with the fact that we utilize estimating software to generate them.
There are three methods of pricing in property damage repair; all have their place, and all have limitations to them. They are lump-sum, time & materials, and unit cost.
Lump-sum
This is putting a bulk number down for a task that is meant to encompass everything that goes into producing that task. This is the least favorite method of estimating for insurance carriers as it does not provide justification for how the price was arrived at for that task, but ultimately, it still has its place in the world of estimating. Even the most detailed estimate will likely have a lump-sum price thrown in for some task that either cannot be found in the database they are working off of or is too small and simple to warrant a detailed breakdown. The contrast to that is the one-line lump-sum estimate that claims adjusters hate to see, like “Build New House …$249,000.01.”
Time & materials
This is basing all of the work off of labor, materials and equipment rate schedule. This is ultimately the most universal method of estimating, and has both its pros and its cons. Some carriers — typically commercial carriers and their consultants — prefer this fashion provided they can “clerk” the work to make sure the resources reported are accurate and are being used efficiently. This is not the preferred method of estimating for the majority of the residential carriers that are out there, presumably because on smaller residential losses where the oversight of “clerking” the job may not be practical, it is feared a provider will “milk” the job and work slower to get more hours out of it. Which brings us to the most commonly used estimating platform in our industry.
Unit cost estimating
This is the practice of taking the average amount of time that it takes to complete a task plus the necessary materials and breaking it down to units that can be measured consistently (i.e., by the square foot, the linear foot, unit price). The idea behind unit cost was to put tasks in a universally comparable unit of measure. It was meant to give people accountability for what they were doing and to format the charges in a language that could be understood by many. The limitations to unit cost estimating are that they are meant to give you an average; this means that the price works in the most average scenario. There will be many times when a unit cost price will miss things that cannot be figured in, and other times when the unit cost price can be too high because of economies of scale.
One of the problems with relying on a database for pricing is the commoditization of the task. It sees the cleaning of a chair as just that, the cleaning of a chair. It may calculate the labor and materials that go into that task but fails to consider other factors such as risk, value, site conditions, etc. It is hard to consider charging the same price per linear foot to clean a plain cotton sofa in a suburban home versus a custom, white silk, upholstered sofa in a luxury high-rise penthouse. The current estimating software databases do contain some modifiers to account for these factors, but they are in themselves limiting.
One of the drawbacks to the unit cost estimating platform is the need to use some labor hours to account for things above and beyond the standard unit price. Mixing labor hours with unit cost is thought to be a no-no since it can be argued that there is the risk of overlap. But few would argue that the cost of doing a certain task in a suburban house would equal doing the same task in a high-rise apartment in a metropolitan city. Public areas need to be protected, access to and from the worksite is vastly different, traffic and parking are other factors that are different, work hours are more restricted, and that is just the tip of the iceberg; workers in a metropolitan area demand a higher rate since their cost of living is higher. The task may be identical, but the cost to accomplish the task can be vastly different.
Some carriers will allow for upcharges such as “Metropolitan Conditions,” which is a catch-all for accounting for the additional labor, travel and expense of working in congested cities but others do not. The estimating software giant assumes all work is based on a three-bedroom ranch home in a suburban neighborhood. This is because it exemplifies the most typical structure across the United States.
An underlying issue that exists is in the differing overheads that occur between companies competing in the same market. A small, home-based remodel firm that can accept commoditized prices to handle your basic residential project will not have the same overhead as an established firm capable of handling major commercial or industrial projects. They will also not have the training or expertise of a larger organization. The unfortunate fact is that large companies rely on residential work to fill in the gaps between larger projects. Therefore, you may have two companies performing an identical project with far differing cost structures.
Consolidation has brought down the number of carriers in many markets dramatically. And the lack of training creates a challenge for many new claims professionals; there are fewer and fewer claims professionals who have ever swung a hammer or learned proper estimating and they rely on computer programs to evaluate and pay claims without any training or hands-on experience.
Both an art and a science
So how is estimating both a science and art? On the side of science: There are fancy algorithms that calculate a line item price per square foot for drywall replacement accounting for labor, materials, tools, insurance and more, and the estimating platform you are using may be adequate for most things provided you are very detailed in capturing every line item that you are legitimately performing. Doing the legwork and putting together project budgets and timelines to make sure the job comes in profitable is another scientific aspect to estimating. And being able to toggle between several different methods of estimating in order to properly and fairly quantify the value of the service is a science, too.
The art of estimating comes down to the details and the description of the operations required to fulfill a task. Anyone can input line items for the tasks into an estimate. But to properly and fairly account for the variances of the project and describe them well enough to justify the costs above and beyond the line items and algorithms is an art form. Not all people can do it. That’s why so many claims professionals get a good chuckle about the single line item price to build a house ꟷ they have seen it all too many times.
In reality, there is and will always be a natural tension between estimating a project that you will perform versus estimating on behalf of an insurance carrier who is responsible to pay for the service; you would never have one without the other. But to truly be effective at settling property claims, regardless of which side you are on, requires the skill of being able to explain the variances between the algorithms and real-life and fairly evaluate them to put together a reasonable argument that is defensible with facts.
Jeffrey Gross, CR, (jgross@maxons.com) is the executive vice president of operations for Maxons Restorations, Inc., a premier restoration firm in New York City, where he has worked for the past 25 years.
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