Restoration Practices and Pricing
October 2, 2009
While revising “Flood Damage Restoration, Part 1” recently, I paused at the chapter on pricing. I’ve written and published articles on this subject before, but it’s one that’s as important now as ever, and bears revisiting.
The disillusionment restoration contractors experience arises from the fact that they may not be rewarded adequately for the time and energy they expend. Too often, however, this frustrating situation is of their own making, because they fail to charge for all their services and, due to inadequate itemization, they are unable to justify their charges in the eyes of those who were not on the scene when water was “five feet high and risin’.”
The purpose here is not to try and establish prices for the industry, but to put forth a few very important considerations in establishing a company’s pricing policies.
At this point a few general comments on the nature of disasters and disaster restoration work are appropriate, so please continue to indulge me a moment longer.
The disaster restoration service business is a peculiar one. We are dedicated to helping people in the midst of traumatic circumstances, but we’re still profit-making members of a free enterprise system.
People bless our arrival with manpower and specialized equipment and chemicals. They describe in glowing terms how wonderful we are while they’re standing in several inches of water and watching us go to work. However, when everything is high and dry, and life is back to normal, we occasionally see a metamorphosis that rivals a “Dr. Jekyll/Mr. Hyde” transformation. Suddenly, their savior becomes a “price-gouging, plumbing-truck chaser,” or similarly flattering terms.
Fortunately, the majority of our customers are logical thinking souls who understand the nature of business, pricing, and reasonable profit. They make our continued efforts worthwhile.
This is why most of our business is conducted through insurance companies that have similar overhead and administrative expenses. Expecting an average homeowner to evaluate unit pricing for restoration services, or even worse, a total bill, is as unrealistic as asking me why the cost of the average Super Bowl ticket has risen 317 percent in the last 10 years.
Prices for restoration services are based on the availability of a quantity of vehicles, manpower and equipment. They are based on expertise, not just for physically handling work but in knowing what is necessary and what is not.
They also are based on knowing how to organize work for expeditious processing, to keep the scope and cost of a loss from escalating dramatically, along with potentially serious health effects.
Pricing in the restoration industry, as in most other industries, usually is based on units that relate to the amount of work done. The greater the quantity of “units” in one location, generally, the lower the unit price. Profit is a function of how efficiently those units are processed.
The real question then, is whether or not basic unit prices in our pricing guides are fair and reasonable. Total bills are nothing more than the totals of various unit prices.
Thus, if a restorer and an insurance representative can agree on unit pricing, by way of a pricing guide, there will be nothing for either of you to worry about as far as the total of a given claim is concerned.
Most important, agreement on a basic pricing guide allows an insurance representative to send a restorer out in the middle of the night, knowing that fair and reasonable unit prices will be charged for loss mitigation services.
In an effort to simplify pricing, some firms charge for water damage restoration services on an hourly, rather than unit pricing basis. While admittedly simple, hourly pricing has several drawbacks.
First, it ignores several fundamental principles, specifically the principle that the better trained and equipped restorers are, the faster and more productive they will be. Hourly pricing simply penalizes employees for being efficient, and it penalizes business owners for investing in state-of-the-art training and equipment.
Conversely, poorly trained restorers who take longer due to inefficient, low-capacity equipment, are rewarded for working harder and longer on each job.
Hourly pricing ignores the fundamental fact that, the better trained and equipped restorers are, the faster and more efficient they will be.
For example, suppose that you charge $100 per hour for IICRC-certified technicians equipped with state-of-the-art equipment and supplies. I, on the other hand, charge $80 per hour but have no certifications and have to run to a hardware store to rent an extraction unit each time I get a job. Superficially, it would seem that a customer should hire me to do the work, since I’m $20-per-hour cheaper.
The rest of the story is that you, with superior training and efficient equipment, can complete a job in three hours for a total of $300. I, being less trained and with less efficient equipment, require five hours to accomplish the work for a total of $400.
My lower hourly price just cost a customer more money, and, in all probability, I have left things considerably wetter and with more opportunity for microorganism growth and associated health hazards.
Where’s the logic in that?
Second, consider that, realistically, a well trained and certified crew, backed by $100,000 in extraction and drying equipment, should be able to produce in excess of $120 per hour. What do you suppose a consumer who complains vocally about a plumber charging $60 per hour will think about a restoration technician charging over $120 per hour? Even adjusters who understand business have a hard time with that one.
And let’s not forget the undercurrent of suspicion that questions whether an hourly priced job could have been done faster, or whether restorers may have extended their time on a claim to build the job ticket.
Yes, I know you’re honest and you wouldn’t do that, but does every customer and insurance representative have that same level of confidence in your company and its personnel?
Some services, such as driving to and from remote job sites, disassembling and reassembling furniture, packing, demolition, debris hauling and dishwashing, may be most reasonably charged out on an hourly basis. However, for maximum productivity and efficiency, most restoration firms adopt unit pricing.
Today, many insurance companies are investigating other ways to simplify pricing of disaster restoration services. They attempt to draw on their experience with pricing methods that have worked in other industries.
I certainly can’t blame them for that; we’re all for eliminating as much complexity from our lives and jobs as possible. Often, these companies turn to the auto repair industry as an example on how flat-rate pricing can work.
Since I’ve already cited an example on how hourly pricing can be misconstrued, taken advantage of, or be lacking in incentive, let’s look at a flat-rate or time-and-materials (T&M) method.
Realizing the possibility of being overly simplistic, flat-rate pricing in the auto repair industry is based on the fact that the auto industry annually turns out hundreds of thousands of cars with the same standard components. Indeed, within the Ford, Toyota, Honda or GM lines, many components may be the same on different brands within their product line.
For example, suppose I have an alternator that goes bad on my Chevrolet. That alternator may be the same one that’s used on several cars manufactured by GM. Further, it is attached to a car by four bolts of a standard size and it’s always located in the same place on a given make and model. How soiled an alternator is when it needs replacement is of little consequence.
Research within the automotive repair industry indicates that a replacement alternator is priced within a specific range. It takes a specific number of minutes to disconnect and unbolt the old alternator, and to re-bolt and reconnect the new one in a shop with no customers looking over the mechanic’s shoulder. Simple!
It gets a little more complicated with a wrecked car, but since that car is always brought to a shop where it is repaired and repainted with specialized tools in a controlled environment, variables are considerably reduced. Moreover, if repair of a component is not possible, replacement alternatives and prices are fairly specific.
Realizing that my simplistic view of another industry’s problems will get me into trouble very quickly, let’s move back into the restoration industry.
Consider a water-damaged structure. Components seldom can be brought to me in a controlled “workshop” environment where you have specially constructed work stations designed for efficiently handling these components with specialized tools on a production-line basis.
You have to drive variable distances for each claim through variable weather and traffic conditions to a non-standard structure, and establish communication and rapport with a wide variety of property owners and occupants who often are highly emotional due to the nature of their disaster.
You have to restore multiple items with widely variable values, to which customers may have a personal or emotional attachment (do insureds ever get attached to fenders?). Since you are working in a customer’s home or business, your efforts are under constant scrutiny with many interruptions to resolve questions and concerns.
And that’s not to mention the sporadic nature of water damage. Restoration contractors are expected to have a facility, vehicles, equipment, training, personnel and availability, regardless of the number of claims they are called into during different seasons of a year.
How is that accurately accounted for in any pricing system?
The same can be said of square footage or even cubic footage pricing. While square-foot averages can be developed for Category 1, 2 and 3 water claims, still there is a matter of the class of water loss (1-4), makeup of materials that are wet (e.g., porosity; durability, natural or synthetic components, age, condition), required demolition (sometimes delayed while waiting for HAZMAT testing or other approval), occupancy issues, and other conditions discussed above.
The opportunity for abuse of such a system by either unscrupulous contractors or insurance adjusters is simply too great. And a customer ultimately will be the loser when pricing compromises dictate procedures, rather than the other way around.
I could talk about labor costs and major components of restoration work that are subject to regional variables. I could discuss the conservative approach to pricing that most restorers take, which results in overall increases when insurance companies step in.
I could talk about an “artistic” aspect of restoration work when accomplished by well-trained, conscientious and experienced restoration technicians. But no one wants to hear about all those complications, which they neither appreciate nor understand.
As with hourly pricing, we return to the question of incentive, a reward for investment and productivity. Admittedly, it’s a complicated issue, and each individual restoration contractor must decide how to approach it. For restoration firms to abdicate responsibility for pricing decisions, and to look to insurance companies for these decisions, is hardly a solution.