As part of our special section on storms, the Remodeler?s Exchange hosts two professionals who have been involved in storm-related insurance and restoration work for many years. Professional Remodeler?s Tom Swartz talked with Dan Bawden and Stephen C. Gidley about how they prepare their businesses to handle storm-related projects, manage clients, and deal with insurance companies.
TOM SWARTZ: Hurricanes, tornadoes, and other storms can be devastating. As a remodeler, how do you prepare for these storms?
DAN BAWDEN: The first and second time I went through a storm, I wasn?t very well prepared and I?ve learned a great deal. The first experience I had was in June 2001 with Tropical Storm Allison and the second was Hurricane Ike in 2008, which really devastated a lot of the Gulf Coast area. As the flood waters rose and people?s roofs were blown off, there was wind-driven rain coming into the homes, trees falling on houses, and everything else that comes with a catastrophic weather event. We got phone calls from just about everyone we had ever done work for all at once.
In addition, we had people calling us as new clients to do emergency repair work.
We were ill prepared to take on all those people at once. We went into emergency mode to try and service as many of those people as we could. It was similar to a triage in a hospital emergency room when bunches of people come in at the same time. We sorted them into categories of desperation and need and tried to service the homes with the worst damage first. We had to bring in a lot of new demolition workers. Fortunately, we have a full-time demolition employee and he was able to bring in people that had similar skills just to tear out sheetrock and remove wet insulation and carpet. That?s all we did for weeks just to get people?s homes to dry out so their homes would not become mold farms.
This month featuring:
Dan Bawden, CAPS, CGP, CGR, GMB
President, Legal Eagle Contactors Co., Houston, Texas
Legal Eagle Contractors is a full-service design-build remodeling company founded in 1979. The firm bills between $1.5-$2 million per year. They currently have four full-time employees and partner with more than 40 subcontractors.
Stephen Gidley, GMB, CAPS, CGP, CGB, CGR, CPRC, CR
President & CEO, Stephen C. Gidley Inc., and Associated Building Contractors, Darien, Conn.
Stephen C. Gidley Inc. and Associated Building Contractors were both founded in 1968. The firms specialize in roofing, full-service remodeling, design remodeling, and painting. They have two full-time employees and partner with 20 to 30 subcontractors. Their business volume ranges between $2 -$3 million per year.
STEPHEN GIDLEY: One very different thing about my remodeling company is that we are also a roofing contractor, and I have the ability to do all kinds of roofing projects. As a result, we are up and running right after the trees hit the houses, limbs and branches come down, and roofs are torn off. When we hear storms are coming up from Florida, I purchase about $1,500 worth of tarps and a lot of rope. The roof is usually the first thing that needs to be repaired. The only time we?ve seen flooding was with Hurricane Sandy. We didn?t see flooding with Hurricane Irene in 2011, which was the other big hurricane recently.
We are always ready and we can handle twice the work that Hurricane Sandy dealt. We are expecting that to come in 2013. Meteorologists have predicted 16-to-17 tropical storm names already, and they are saying between four and six are going to track up the Eastern Seaboard and make landfall around New York. We believe that is about 50 percent true.
To prepare, we have a drill that involves cell phones and text messages that are exchanged all day when a storm approaches. Our subcontractors are prepared and ready to get into their trucks once the storm has passed.
SWARTZ: What?s the first thing your remodeling firm did following the storms?
GIDLEY: In almost every homeowner?s insurance policy there is a clause that makes it the homeowner?s responsibility to take immediate action to protect the house from further damage. Right after the storm ends, we come in and close the house down. We turn off the electrical service, disconnect the gas from the street, turn off the water, drain the entire plumbing system, and tarp the whole house. We responded to another home that was flooded, we closed it down and winterized it because it was the tail end of October. If there is a house where the roof is open and it?s getting saturated, water could get in the electrical lines and cause a house fire. Insurance companies and homeowners do not want to have that happen.
So, we close off the damaged homes and rope them off with caution tape so we have a stable structure that we can eventually assess with the insurance company?s help.
BAWDEN: I agree with Stephen after he mentioned previously about buying tarps and other materials in advance; this is a very smart idea. If you wait until three days before the weatherman says a hurricane is going to hit your area, people have already taken all the necessary materials off the shelf. You need to buy materials long before a storm hits. Another item you need are heavy-duty contractor garbage bags because when you do the initial demolition there is wet material you need to remove. Soggy carpet, insulation, and drywall are all a mess; these bags help make removal easier and are an essential part of a storm preparation kit.
Following a storm, our response takes place in two phases. One is the emergency remediation where you go out to secure and dry out the home. Turning off the mechanical systems is very important to make the home safe as Steve mentioned. After that, we start doing the estimate for repairs. Sometimes, if we are just overwhelmed, we will tell the owners to go ahead and get the insurance adjuster?s estimate so that I can have a copy of that in hand, look it over, find all the things that were missed, and create my own estimate that?s more complete. That serves the customer better in terms of the settlement. Our homeowners have not had a good experience with fair settlement offers made by the major insurance companies, and neither have we. There was so much activity going on the insurance companies were trying to settle for pennies on the dollar. It often took the homeowner months of wrangling with three, four, sometimes five adjusters to get someone that would meet with us as the local contractor and negotiate a fair settlement. We had a lot of trouble with the insurance companies. People were very frustrated. A whole new legal industry popped up here in the Gulf Coast area because of storm claims. The insurance companies were making such unreasonable settlement offers that it generated lawsuits. People just got really mad at their insurance companies and decided to get a fair settlement by bringing lawyers into the mix. This always makes repairs take longer, so it was a very difficult struggle.
SWARTZ: Do you mostly deal with the client or the insurance company in regard to the damage estimates? Do you give a detailed, individual estimate on all insurance repairs, and how does that work?
BAWDEN: We deal with the owner. We will give them a fair estimate, and it may be different from the insurance company?s estimate in scope and price in terms of what a fair and accurate price is for the area. Then we offer to help them to negotiate with their insurance company. If there is a big discrepancy between the insurance bid and our bid, we will meet with the adjuster and add some items to the scope so the insurance company will increase its offer.
After our first storm experience, we started charging clients to do storm estimates because often times we were doing two separate estimates. One was a super-detailed line item for insurance company negotiation purposes. The other estimate included what the client really wanted to do?people always want to do remodeling projects that the insurance company isn?t going to cover. We developed Flood Insurance Bid forms that include all the rooms you could possibly have work done and everything you could possibly do in that room to repair water or wind damage. There are line items for everything so it?s a very easy template to produce. You basically just check the boxes that are relevant for each room, assigned line item prices, add the 10/10 percent overhead/profit that insurance companies like to see?which is a myth of course but that?s what they like to see? so at least you are presenting it in a format similar to the insurance company?s format.
I am not sure if Steve uses Xactimate or one of the insurance company?s estimating programs, but I do not. I want my estimates to be different on purpose because it?s hard to argue repair costs with the insurance companies when you use their estimating programs
GIDLEY: Insurance companies were not all created equal. There are the A++ insurance companies such as Chubb Insurance Co., and there are the A insurance companies such as Chartis/AIG, which has Masterpiece Insurance Policy that is very similar to Chubb?s. If we get a Chubb claim, our guard goes down. Chubb will often pay out more than our claim just to be sure it gets done to the complete satisfaction of all parties. I had one Chubb adjuster say, ?Mr. Gidley, your estimate is $95,000, I am going to give $105,000 to the owner because you don?t know what issues you?re going to run into during the project.?
We had another Chubb claim of $200,000 paid in full. When you get to the fifth or sixth adjuster with the other insurance companies, the owner has already sent a letter to the commissioner of insurance and eventually the insurance company will do a final settlement on a number they believe is fair. Over the course of construction, you discover things and that claim amount will change. You have to keep communicating with the adjusters to get that fair price. It is important that you have a contractor that can identify all the problems and offer a fair assessment to all the repairs.
Almost every insurance company, if you give them a very detailed estimate that involves 10-to-15 pages of detailed, itemized, and categorical estimates, you will see the results. I don?t use Xactimate, which gives you a fictitious number that probably works in some areas. We usually have estimates that are four times what Xactimate offers. Even if the insurance company makes a 20-percent adjustment, they are still three times too low. It is essential to have a broad knowledge of every item in the house. I inspect them individually and I take photographs. I also leave an exhaustive paper trail of everything, give it to the owner, and deal directly with the owner. I will not deal with the insurance company, and the insurance company does not pay me, the owner pays me. We want to avoid an insurance company that makes the bank where the owner has their mortgage be responsible for releasing the funds. We can?t be involved with a bank trying to act as an insurance company and have them release the check.
SWARTZ: How do you make sure the customer deals directly with the insurance company?
GIDLEY: Well, there are different scenarios for each case. We had a repeat client that fought with the bank on every check; however, the owner also funded the project. If we don?t know the party, and they have a mortgage contingency where the insurance company has made a check out to dual parties, we have the homeowner sign on the dotted line that they are 100 percent responsible for payment to me. Therefore, if their money is delayed from the bank there is no cause to delay receipt of our money. If they sign that document, they are not going to renege on that agreement.
We had another scenario with People?s Savings & Loan in Connecticut. We just finished a $260,000 complete restoration, and the bank gave the client the first $140,000 from Traveler?s Insurance because they knew me; I do my banking with them. The client was then able to disperse funds as necessary. I told the client I need $85,000 to start the job, and he gave me a check, then another $30,000, then another $20,000 and because he already had the money within a day or two of asking for it, I received the money.
I am very careful not to leave anything to imagination, such as: ?We thought you would work with the insurance company, we thought you would get the money.? We need to get paid on time or we are going to get behind schedule.
SWARTZ: How do you complete a project without having to deal with the mortgage company or the insurance company?
BAWDEN: We require that our contract be with the owner so the financial obligation flows between the owner and our company directly regardless of what the other parties are doing. They often cannot start on the bulk of the repairs if they do not have the cash. Some of my customers are middle-class folks and they do not have the means to do $30,000-to-$40,000 worth of repairs if there is water damage. Many people have to wait and go through the insurance process. They end up using the insurance company contractors, which are often brought in from other states because the local contractors are quickly overwhelmed. We can lose existing customers because we just cannot finance the project for them. It?s frustrating and heartbreaking for us to do that. We end up telling some clients we can only work with people who have their own resources because we are a small shop and need to be paid for our work as we perform it. We cannot depend on the insurance companies. We try to work with them the best we can, as well as the mortgage companies, but it is difficult when you have three parties signing each check.
SWARTZ: How do you make a profit given the strict insurance pricing guidelines that are in place?
BAWDEN: The estimate form that I mentioned earlier allows me to base my prices on the prices that my tried-and-true subs are going to charge me. I know what my painter is going to charge to repair the sheetrock and paint a bedroom. I have control over those numbers when I put in my estimate. I basically put in what I would normally charge, maybe a bit below, and then add the 10/10 at the bottom. This is packaged and bundled a little differently than the unit-cost approach the Xactimate insurance programs do because I don?t want to go head-to-head with the insurance companies to argue whether painting is worth 31 cents a foot or not?that?s not they way most of us estimate in the remodeling industry.
We know from experience what our subcontractors are going to charge for a given set of tasks in the real world. I package it a little differently and use that difference to negotiate with the insurance company. They may say, ?It looks like you are really high on your painting number??we usually are because insurance company numbers for this are ridiculously low. To fix this for the client, we find other items of repair that we can add to the scope so they can put that in their program and generate a higher settlement number for the customer. You have to help them play their own game.
GIDLEY: Dan mentioned something very important earlier: 10/10 is a myth. Contractors doing Dan?s volume of $1.5 million need to have a 50-to-60 percent markup, which is about 33-percent margin. I am a student of past competitor remodeling contractor bankruptcies and failures. They failed to get a 50 percent or more markup, which is obviously not 10/10 percent. They also failed to collect quickly and pay their suppliers immediately.
The adjusters also know that 10/10 is a myth. If you are dealing with a Chubb, Chartis, Fireman?s Fund, Travelers, or CNA, they know that it?s a myth as well so you play that game. For example, if you pay $65 an hour for a carpenter or $50 an hour for a painter, you make a profit by paying the painter $25 an hour so you have a 100 percent markup. You pay the carpenter $35 an hour so you have a 100 percent markup. It?s important to run the numbers on the hours. If there are 100 billable hours for a carpenter at $65 hour, that line item is going to be $6,500 but in there is $3,000 in profit. You don?t tell the insurance company you have that in there, they know it?s in there but they will allow it as long as the numbers are commensurate with your ability to support that it?s going to take the subcontractor that long to complete the job.
Imbedded in each line item of the cost breakdown is a substantial amount of money. Perhaps, 30-to-40 percent so that when you add the 10/10, you?re getting to the 50-to-60-percent number.
BAWDEN: The average overhead for a remodeling company, most of which are small entrepreneurial shops, is between 20-to-25 percent. Obviously, the remodeler has to add more than 20 percent just to break even before he or she makes anything at the end of the day. Ten percent overhead and 10-percent profit? Neither works in the real world.
GIDLEY: The State of Connecticut Department of Consumer Protection prints a handbook for the homeowner. It says in writing that it?s widely accepted that contractors will go out of business if they charge less than 60-percent markup. It is recommended to Connecticut homeowners that they don?t hire a contractor charging 10/10.
SWARTZ: How are your existing customers affected following a storm?
BAWDEN: There are two scenarios. One, if they are a client in the middle of a project with me and they are affected by the storm, we take care of their storm damage right away. With other clients in the middle of ongoing work that are not affected by the storm, we have to call them and say, ?We are sorry but we have to push the pause button on your project because of the emergency workload we are having to take on.? I?ve never had anyone say, ?No way, come finish my house right now!??even if other families need emergency repairs.
SWARTZ: What advice would you have to remodelers to prepare their business for the next storm?
BAWDEN: 1. Buy those basic materials and tools we discussed earlier and have them on hand. How much? It?s hard to say, I am not in the roofing business. Steven?s approach is to be ?shingle? minded about storms and he is ready.
2. Talk to somebody in your local remodelers council or find someone through NAHBR that does mostly insurance work to find out how to work with the insurance companies. I?ve learned a lot of valuable lessons and tips by talking to people who do nothing but insurance work. They have it all figured out.
3. Give your clients a hurricane preparedness handout that includes information about having a certain amount of food on hand, a gallon of water per person per day, that sort of thing. Add contractor-related tips for safe generator use, tips on when you can remain in the home versus evacuating, and other tips that include practical advice from a contractor to the homeowner on what to do following a storm. If the remodeler gives that type of information, he becomes the expert.
GIDLEY: First, don?t shy away from insurance work. The work that comes from tornadoes, floods, and hurricanes is ready-made, overnight profit for your business if handled correctly?it?s instantly a profit center. It keeps everyone busy and you will land the remodeling work after the emergency work is completed. I would also suggest to remodelers to get your name out there in a wide arena and let people know you are available for storm-related work. We use Go Daddy as a host for our website but we use Yodle as our webmaster. We called up Yodle and said to them, ?Put a banner ad across our website that says we handle storm damage work and repair.? We spend a thousand dollars a month for a couple months so the SEO can be utilized to get our name out there. If someone goes on the web and searches ?hurricane damage repair,? Gidley and the ABC website is going to come up along with all of our credentials. The user sees our hurricane damage repair ad at the top of the homepage. They are going to click on the ad and fill out an information card for an estimate that comes right to me on my iPhone. You have to do something to market your storm-related business, and that is possible on your website because the search engines are going to look for the name of the hurricane or storm and the word ?repair.? You link those two and the marketing is done. It?s costly but you will get a return on your investment.
The other thing I would say is watch out for FEMA. They will drag a project out a year or two. I already have one client with an appeal. The client paid us $245,000 while FEMA paid them $63,000. You get 25-to-45 percent on the dollar.
All you have to do is listen to the TV broadcasts and you about FEMA. You have to be careful with FEMA. The AAA insurance companies, you don?t have to worry too much about.
My advice is to add insurance restoration work to your bottom line, it?s a ready-made profit center. Be prepared for a storm, get your tarps, get your subs on board for the work, and communicate regularly with the subs leading up and following the storm. PR