11/30/2010

Estimates Unveiled

Part Four: Identify and contest flaws in estimates using the logical application of available facts.

By Bradley D. Sharp, BA, AIC, RGA

Preparing an estimate should be a search for the truth about the cost of repairing or rebuilding, not just an assertion that crumbles when real-world numbers and practices are brought to bear on the calculations. That philosophy has to accompany you and underpin your evaluation of each and every estimate you handle because, eventually, you will encounter an insured, representative or public adjuster who declares, "This is what my estimate says it will cost, so it is true"; or, to summarize using a variation on Descartes: "I think (it); therefore, I am (right)."

You can have concrete credibility supporting your negotiation position. Just make sure you have sound premises to begin your argument, your deductions are based upon sound observations, and your prices are checked against industry normative references by line item and by square-foot pricing analysis.

Go From What You Know
As Aristotle began philosophical reflection with concrete and practical sensory observation, begin your analysis with a thorough scope—big-picture pricing through to detailed line-item analysis. Know what a reasonable scope is, what reasonable line item prices should be, what is included in the line item, and what the total cost to build the structure should be when broken down into trade detail. Use an industry-accepted reference, such as R. S. Means, which is used for purposes of the "Carrier Estimate" or National Construction Estimator. (For a detailed explanation for using cost models, read Part Two of this series online).

You need to systematically isolate areas of difference to reconcile any pricing conflict. The process itself is theoretically simple but will require effort to identify and subsequently resolve any differences. Using a trade breakdown, look first for a duplication of demolition in the mitigation and construction estimates. There may be some additional demolition necessary, or even some cleanup of the finishes to receive new material, but check that you are not paying twice for the same work. Determine if the quantity of dumpsters is necessary for the amount of waste that would be generated from the end of demolition to the completion of the project.

Next, look at the totals on both estimates to determine the amount by which they are off. Look at the trade breakdown to find the areas that differ. Often, when it is a difference of trade rather than an allocation of supervision, overhead or profit, the line items will have to be evaluated to identify the particular value variance. This would be particularly true in the event you determined there was a duplication of demolition. You might then have to determine if there are removals also in the HVAC or electrical trades. Take the time to review the conclusions first; that will lead you to the details that require further inquiry. Any change in the trades will have a significant impact on the bottom line through changes in the general conditions, overhead and profit. (For a discussion on the resolution of the differences in general conditions, overhead, and profit, read Part Three of this series.)
Actual Estimate Case Study
We will again look at an estimate and begin the analysis using the estimate totals, trade items and general conditions, overhead and profit. Refer to Table 1, "Estimate Comparison," to review the comparison between the amounts from the carrier and the insured. For purposes of this discussion, the first line in the table is "Agreed Trade Items," which would contain the items both parties have agreed are close enough. We will look at HVAC, drywall and painting. The bottom lines tell us there is a difference of $202,650.53. Of course, the overhead and profit will vary with a change in the total of the trades. There are some remarkable differences in the three trades. We covered the detail of line items in Part One of this series. Using that model, let's review the estimate.


Estimates for HVAC ductwork are often done on a square-foot-of-floor basis, as is shown in the insured HVAC figures. The problem is that square-foot estimates are for the entire system, including the mechanical units, controls, piping, ductwork and other accessories. This loss required the replacement of ductwork consisting of unlined duct board and flexible branches to the diffusers for the distribution and duct board return air system. The square-foot estimate does not tell you what material is considered. To scope this part of the loss, it is more efficient to prepare this section separate from your room-by-room scope; although, more detail is required and an additional hour of measuring and photographing may be needed.
Review Table 2 for a scope of the ductwork reflecting the actual field conditions. From the scope, you can calculate that you need 800 square feet each for the supply and return rigid ducts and 500 linear feet of flexible duct. Now compare the carrier total with the insured total for the proposed cost of the ductwork. Note that the final square-foot price includes the subcontractor's overhead and profit, which is his cost of doing business. It is completely separate from the general contractor's overhead and profit, which is the last section of an estimate.


Drywall and painting are easily resolved as individual items for the trade. In this example, we have determined that half of the drywall requires replacement, with all of it to receive new paint. Calculation for this can be done by determining the linear feet of wall multiplied by the height. The point of departure is what comprises the unit price. [See page 5 for insured and carrier HVAC, drywall and painting estimates.] The insured estimate has $1.63/SF for the drywall. There is an additional charge for texturing the walls. In review of the line items, you determine the price to hang the drywall is sufficient to provide a finished and paintable surface. In evaluating the line item, you can easily determine where the difference or error is by looking at the price breakdown

Reviewing the pricing, you might resolve this difference by showing that the additional price for the texturing is a duplication and focus on resolving the $2,200 difference between the drywall prices. Consider if the difference might come from conditions that affect productivity because of height, access or staging materials.

Painting is another area requiring knowledge of the composition of a line-item price. Material options and their pricing and how application methods in the particular job circumstances might affect masking or covering needs all affect cost. Spend some time at your local paint store or home center looking at the range of paint qualities and what the recommended coverage is. The coverage rates will vary by the type of surface covered and the application method. We are often presented with a line item to seal the wall and then paint. Sealing is needed, perhaps, after smoke damage, but new drywall is properly primed with a PVA primer, which costs significantly less than a latex finish coat. A two-coat process would be entirely appropriate and yield an acceptable final product; whereas, the total amount in the trade line when sealing and/or three coats of paint are used inflates the price, excluding any other circumstances.
Review the comparison between the estimating approaches for the painting process as well as protecting other surfaces during the painting process.

Critically evaluating the unit prices includes consideration of methods. In this case, we are looking at painting a large area in a new-construction environment. Without knowing the application method, the price presented might be a cost to roll the walls, which is more time intensive and paint consumptive than a spray application. One must consider the project differences of a home that is furnished, which would require extensive masking and covering if spraying were to be employed, versus the requirements of applying the paint by roller in that environment.

A Reasoned and Appropriate Approach
Time is always a consideration, so use the most efficient identification of areas of difference through the trade breakdown. Always compare demolition in the construction estimate with what has already been done through mitigation efforts. The trade items show you where to look, but the differences are found in the line-item unit costs of differing materials and methods.

Sound observations, scope, material notes, photographs and cost guides will let you use the information shown therein to make a reasonable prediction of what the work will cost. Consider looking at it from an if-then perspective. If the scope is not right, then the prices won't reflect the proper method. If the quantities are wrong, then the estimate will also be wrong. Begin from a position of strong observations and facts to end with a strong negotiating position. And, as Aristotle did, derive your knowledge from what is accurately known.
Bradley D. Sharp, BA, AIC, RGA specializes in complex commercial property claims for GuideOne Insurance headquartered in Des Moines, Iowa. He can be reached at (515) 267-5127.


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

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