The remodeling industry has a growing problem on its hands that must be addressed immediately.
Although preferred contractors have been a standard of the insurance restoration business for years, preferred suppliers may be the wave of the future.
Although preferred contractors have been a standard of the insurance restoration business for years, preferred suppliers may be the wave of the future. In late May, Allstate Insurance Co. and The Home Depot announced an alliance in which insurance adjusters will refer homeowner-insurance policyholders to Home Depot for building materials and installation.
Although the alliance could save Allstate between $30 million and $50 million in annual claims costs, it is unclear if it will benefit or burden remodelers and their customers. For the remodeler, the alliance promises quick access to supplies and immediate payment. For the customer, the alliance allocates the world''s largest home improvement retailer to supply materials.
"We can assure consistency and quality because of our knowledge of the supplier," says Jim Dudas, Allstate spokesman. "It gives Allstate leverage with such a large contract. If there are any challenges, it is easy for us to go to Home Depot and resolve any problems."
The contract only applies to policyholders who live 30 miles or less from a Home Depot store. Those that choose not to use Home Depot as their supplier will pay the difference between their bill and what Home Depot would charge. If customers find less expensive suppliers, then Allstate will ask Home Depot to match the bill. Initially Home Depot will only be used for flooring replacement, the most common property damage claim. This year alone Home Depot stands to earn $40 million in added sales through the alliance, which is expected to migrate to other items in the future.
State Farm Insurance Co. is implementing its own Home Depot alliance, but their arrangement includes all Home Depot services. Jim Kowalski, vice president of Kowalski Construction in Phoenix, is a preferred contractor for State Farm. Kowalski says that the alliance will not drastically alter the way his company operates. "In Phoenix alone, there are 44 Home Depots, so they already get the lionshare of our business," Kowalski says. "Even without the discount that we receive through the State Farm alliance, we would have used them anyway. It makes me wonder how Home Depot can afford to generate a five-percent discount."
No longer purchasing supplies, the remodeler still must secure materials and handle paperwork. The discount ultimately benefits the insurance company because their payment to Home Depot is deducted from the remodeler''s estimate. For example, if a remodeler estimates a job to be $2,000 and the insurance company pays $1,900, then $1,900 is deducted from the remodeler''s estimate by the insurance company.
"Where''s the savings?" Kowalski wonders. "I''m not naive to assume that things are going to stay the same. In the future, I think material prices will be adjusted and decreased, so that the remodelers'' estimates decrease, too. Computers with estimator modules will automatically provide a lower estimate because it will adjust for the discount."
Although his company is Arizona''s largest construction company specializing in insurance restoration, Kowalski still worries that alliances diminish the control remodelers have over their operations. "We become the little fish, and State Farm becomes the big fish," he says. "I think insurance companies look to work with smaller companies so when the insurance company says ''Jump'' the contractor says ''How high?'' They want to tell them how to run their businesses."
Kowalski predicts that insurance companies will extend alliances to companies that provide rental equipment, temporary fencing, dumpsters, security for boarded-up job sites, and water extraction services. He also anticipates alliances with subcontractors, which he says will further diminish the power of remodelers.
"When an insurance company tells us we have to work with a specific subcontractor and a specific supplier, as a general contractor we become more of a project management firm or employer and less of a general contractor," Kowalski says. "This spells disaster."
Requiring remodelers to use specific subcontractors also stands to put them in a bind when handling their personnel. "If I have one plumber and one back-up plumber, and the insurance company introduces a third plumber they want me to use, then either I need to make him our No. 1 guy, or I am stuck with three plumbers, who won''t be seeing a lot of work," Kowalski says. "In this case, my company loses control."
Allstate will consider similar alliances with other home improvement retailers, and Home Depot intends to continue looking at arrangements with other insurance companies. In the end, Kowalski is secure that insurance companies, remodelers and customers will all capitalize in the long run. "The alliance is a significant piece of the puzzle," he says.
"Remodelers will become more competitive, and will therefore increase revenue, and costs will be adjusted so that customers pay less."