Wishin’: Impossible? Making estimating software really work for vendor programs
December 15, 2011 Comments Off on Wishin’: Impossible? Making estimating software really work for vendor programs
It has been over a decade since the introduction of estimating software into property claims management systems yet discomfort, distrust, and disagreement between contractors and insurers on how to use these programs are still rampant.
A major reason for this regrettable state of affairs is the unwillingness of the software users to take responsibility for the many issues they have created. Instead, both insurers and contractors point to the software providers for solutions.
Let’s make a couple of things clear at the outset: There are several software programs available that do a commendable job of facilitating standard job estimates, provide a means of collecting and manipulating data, and allow some standardisation of costs. Each program does these things to varying degrees but all are relatively simple, robust and add value in terms of their user cost. Let’s also make it clear that a significant ratio of users (possibly a majority) operate these programs without any complaint whatsoever.
Let’s also lay out a few caveats: First, this article is about the issues around using software for standard property mitigation and restoration jobs. This means the 80% or more of property repair jobs that involve residential or small commercial premises, that may include some degree of water damage, and that usually take less than 2 weeks to complete (excluding scoping, paperwork, estimate approval, payment, and so on).
Secondly, let’s assume that the ‘old way’ of estimating and costing is truly dead. In other words, it is no longer feasible or desirable to have every contractor scope and estimate typical jobs according to their own standards of performance and cost.
Thirdly, this article refers to insurer:contractor relationships governed by the terms of a preferred supplier program. Thus, it is assumed that services have been sourced through a selection process, that performance is monitored by agreed indicators, and that price is regulated by a standardized mechanism.
With that said, let’s examine some common issues and offer solutions:
Preferred supplier programs take one of two approaches to costing property claims. They either follow a performance-based method or adopt a cost-based system.
A commonly used performance-based method of job pricing is the square foot (or cubic capacity) pricing protocol. A pre-agreed, all-inclusive cost per unit of measure is applied to losses falling under an agreed description and it’s up to the contractor to get the job done for that cost. Thus, job cycle times take precedence over job quality.
An example of a cost-based system is time & materials costing that has been in use for many years and is still commonly used for larger losses. This method is the backbone of estimating programs. In this system, job cost is paramount while job quality is determined by audit or complaint-tracking.
A few insurers use both approaches. They apply square foot pricing to water mitigation and standard estimating program costing to all other property losses.
Current costing issues
Performance-based systems: A serious gap in these systems is defining what falls within the pricing matrix and what doesn’t. Vendor agreements are never detailed enough to cover every contingency. Often, a great deal of time is lost while the adjuster and contractor negotiate small variations. Also, the emphasis is always on hitting the minimum requirement to get the job done. Contractors quickly realise that they’re paid for competence, not excellence, and perform accordingly.
The real benefit of performance-based systems is that they enable insurers to set up claim reserves rapidly, run through standard claims with little resistance, and close files and pay suppliers relatively quickly.
These systems, for the most part, favour the insurer. That’s because the emphasis is on pre-agreed units of scale. Balancing time, labour, and productivity are the contractor’s problem and little technical knowledge is required to run these models.
Cost-based systems: Much of what passes for vendor management in Canada is built on cost-based systems. These systems are notoriously difficult to manage. The core problem is that determining a fair price is a very subjective exercise. Factors such as technical knowledge, years of experience, and skill level create significant differences in hourly rates. Then there’s the contractor’s skill at running a lean business – they may be excellent restorers but mediocre cost managers. There’s a significant overhead variance between the most cost efficient contractors and the least and there’s a tendency for insurers to seek contractors with the lowest apparent overhead. Little effort is made to determine who offers best quality.
Add additional variables such as the choice of replacement materials as well as type, quantity, and duration of equipment deployed and you end up with a flexible price mix for every job.
Cost-based systems, for the most part, favour the contractor. That’s because the sheer volume of trade types and material SKUs and productivity factors make it virtually impossible for adjusters to stay on top of the final costs. Contractors who do this for a living have a great knowledge advantage. The disparity in capabilities creates an unstable theatre of operation. The result is a push-pull system: contractors compute prices that support their individual operational costs and insurers claw back components that they deem non-standard or higher-priced than average.
It’s an extremely subjective environment and this is where estimating software seeks to offer objective solutions.
As stated above, performance-based and cost-based systems handle job costs relatively consistently (though not necessarily accurately). However, both conventions have a huge weakness – although they can influence cost and/or time, they cannot promote quality. Therefore, from a policyholder’s perspective, the single most important factor in damage resolution – quality – is beyond the reach of all current preferred supplier programs. At best, via audit or reinspection or complaint resolution, they offer a means of looping back and fixing whatever went wrong.
The role of estimating software
Having established some of the weaknesses inherent in current costing systems, let’s investigate the role of estimating software.
All estimating programs contain a degree of data and performance management capability. However, there’s little evidence that the information currently available offers significant value to insurers or contractors. Most contractors that track their performance do so via other means. Most insurers that use the performance data obtained from estimating programs are operating in a fog. They have themselves to blame. Pumping garbage in at one end of the data pipeline means the same will emerge at the other end. The software is fine; the data that users have loaded isn’t.
However, there are other data contained within these estimating programs: pricelists. These data are different because they are managed by the software supplier. Great care is taken with their composition. Objective research is carried out on regional prices, sound data manipulation techniques are applied to outliers, and periodic updates are conducted. Let’s be completely unambiguous about these pricelists: They are 100% accurate. The science and methodology applied are largely beyond criticism.
Trade wages are the main component of these pricelists; however, some programs also include materials. In some cases, wages and materials and equipment are combined with a productivity factor to produce a unit cost (usually expressed per hour of labour to complete a task). Several other factors may be added to further customise the price to reflect localised total costs.
Creating job estimates is quite easy once a scope has been agreed. Each job component is listed by the estimator in the electronic estimate using pre-loaded options and the software adds the fully loaded price. Most software will allow some price adjustment if required.
The result is a good indicator of what restoration contractors charge in the area. And that’s the problem.
Estimating software issues
First, there are no issues with the way most estimating software presents estimates. Detailed tasks, components, equipment, materials, measurements, quantities, qualities, trades, and uplifts are all listed, summarised, and tabulated by the software. Some offer drawings, as well. There’s almost universal endorsement of the way jobs are recorded and presented. There’s also the promise of really useful data derived from all the estimates recorded.
The trouble starts far from the contents of the estimating software programs. It starts in the minds of the users. It’s a perception thing. Here’s how it all starts to unravel:
Insurers: Insurers don’t have the skill, inclination, or resources to check the validity of every single cost component within the software as it applies to their preferred vendors. Indeed, why should they? They pay for the software and assume it will meet all their pricing needs. However, as we stated earlier, all vendors do not carry the same cost structures. Owned networks, franchises, associations, affiliations, member groups, local firms, regional vendors, and national vendors all make up the restoration industry in Canada. Some market heavily to acquire new business; others don’t. Some train their staff frequently; others already have fully-trained employees. Some have invested in in-house capability; others operate as true GCs and sub out virtually 100%. Some pay fees for referrals, others get their business direct, the list of variations goes on and on. The software developers are very, very clear on one thing: Their calculated costs are indicators, not absolute. They do not claim to offer the ‘right’ price. They offer the researched price that was available at a particular point in time in a specified area for a varied group of contractors (all the types described earlier in this paragraph). Users are encouraged to amend these prices to reflect their particular circumstances. In fact, doing so will improve the quality of data that is fed back to the software developers and ultimately help everyone. Most insurers forbid any tinkering with the standard prices. As a result, some categories of contractors prosper (you know who you are!), others suffer the pain of a thousand cuts every day – or get extremely creative with estimating. So, the core issue here is that insurers fail to match their preferred vendor list to appropriate price amendments.
Contractors: Contractors are caught between a rock and a hard place. Most (in Canada) want the security of a vendor program knowing they’ll traverse more hoops than a circus lion on opening night in return.
Most contractors have a very clear understanding of their costs but struggle to (a) explain these to adjusters and, (b) embed these in their estimates in a plausible way.
All contractors defer to estimating software when it spews out a higher unit cost than they actually incur and complain when it doesn’t. No blame here, though, as they’re usually bound by the terms of a vendor agreement that stipulates they must follow a given price list no matter what.
There is, of course, a type of contractor that sails through these programs with little or no compromise. They’re the lucky few that have an operational cost load roughly equal to that contained in their local estimating program pricelist. However, this is pure serendipity and has nothing to do with intelligent selection.
In summary, there’s nothing wrong with the software pricelists and there’s everything wrong with the way these pricelists are used.
There are two primary issues for contractors and insurers
- Managing quality in a vendor program that relies on estimating software for data
- Amending estimating software prices to match the actual costs of specific vendors
There are a few solutions available. First, insurance companies have to understand that there’s more to vendor programs than scope-creep, price-control and reinspections. ‘Quality’ is at the forefront of every customer-facing statement and yet is almost never managed proactively. In fact, most insurers haven’t really defined it properly. Quality is about these things:
- Appropriate scope
- Speed of completion
- Once and done
All of these factors are measurable. All of these can be analysed and improved over time. None of these is easy to embed. For example, ‘speed of completion’ is not merely a matter of having the contractor work flat out until the job is complete. Many delays occur because adjusters fall behind on approvals and communication. In fact, it is an established fact that first estimates are usually approved very quickly but inexplicable delays set in when an adjuster has to approve a revised estimate. Many contractors can track these delays but hesitate to inform insurers for fear of alienating adjusters.
Similarly, ‘value’ is not just a matter of price. Instead, it should be an indicator of what the contractor had to do to get the job done properly – and this may mean at a higher cost than contained in the estimating software.
Quality should be seen from the perspective of the policyholder, not the insurer.
Secondly, (there’s no easy way to put this) there’s a certain type of restoration contractor out there who either has to change or leave vendor programs and operate in the direct market. It is senseless to get into vendor programs unless one is prepared to play by the rules set by the program owner. Insurers run businesses and they have the size and clout to do so on their terms. What they fail to do is optimise their influence. It is futile for the contractor to worry about this.
The most complex step (difficult only because it is virtually unknown), is for insurers to get to grips with true overhead and for contractors to help them do this. Standard pricelists from estimating software just aren’t accurate enough for every type of contractor operation. Slapping on the customary 10% + 10% (or not) isn’t a solution.
Insurers have to strategise about what type of contractor they want and understand the effect on pricing as they make their selection from the various types available. This is neither unrealistic nor difficult. It is merely different from what has transpired over the last decade.