So let me see if I understand this correctly. Some time ago, property insurance carriers began insulating themselves from unscrupulous, litigation-prone, transaction-driven contractors by “partnering” with contractors they could trust. They formed departments responsible for locating and vetting contractors of various trades, and in exchange for feeding claims to these contractors, the contractors would abide by the carrier’s service level agreement – including mostly reasonable estimating guidelines. In concept it makes sense. The estimating guidelines typically resulted in lower invoices, but the contractor was receiving these claims with no business development expense. The carriers, for those claims they could steer towards the program, were recognizing reasonable invoices and reduced litigation – seems like a clear win-win, right? Most importantly, these relationships didn’t include any network referral fees. So, what happened? Why are these type programs mostly a thing of the past?
Primarily what happened, in my opinion, was the insertion of Third-Party Administrators (TPAs) / Contractor Networks – into the picture. I’ve written previously about TPAs, and from a business perspective, I still applaud the concept because it’s brilliant. Provide the carriers a huge savings by eliminating the administrative costs of a vendor management department, administrate the claims and track performance of the network vendors, and in many cases it doesn’t cost the carriers a dime… where do I sign up? It didn’t take long for the TPA concept to take hold, and we are seeing more pop up all the time, each vying for the carrier’s love. The competition amongst TPAs must be brutal. Each is trying to differentiate themselves, and many carriers are spreading out the love amongst several TPAs. Most TPAs charge contractors a flat rate Network Referral Fee (NRF) per claim, some add on administrative fees on top of NRFs – and one TPA has a model for water damage claims that is so egregious it makes it nearly impossible to turn a profit.
Now let’s introduce the vendors who develop and market a variety of programs to “assist” contractors in documenting drying conditions and generally “manage” their water damage mitigation products. Marketed to contractors as a great management tool that will magically maximize compliance (with the ANSI IICRC S500 I presume) and standardize the mitigation process. Marketed to carriers and TPAs as a tool to ensure contractors comply with the S500. So, kudos to these firms as well – from a business standpoint. As TPAs compete for market share, what better way to get these programs implemented then to convince them implementation of one of these programs will set them apart; a much more viable model than trying to sell directly to contractors.
The 2021 restoration industry benchmark survey indicated little change in the percentage of contractors performing work as part of the networks, but it appears the percentage of program work most are performing continues to decline. Why is that you ask? Again, just my semi-educated opinion – it’s The Squeeze.
What is The Squeeze? It is the constant, ever increasing overhead, restrictive estimating guidelines, and specific carrier-mandated reductions that have made performing program work less attractive/profitable. The additional overhead includes a significant amount of claim administration (things the TPAs require so they can gather statistics to evaluate compliance – most of which I am all but convinced the carriers could not care less about), NRFs and mandated software initial setup/monthly fees, application and annual membership fees, mandated attendance at annual conferences – the list goes on. Restrictive estimating guidelines include such things as forbidding use of after-hours line items, regardless of the time the work was performed, no emergency service call fee during hours, indicating you cannot charge for a respirator because it is a “tool of the trade” – I could write an entire article on some of the ludicrous restrictions I have witnessed over the years. My absolute favorite carrier-mandated reduction is a 10% discount of drying equipment costs – seriously? (You know who you are and shame on you).
Let’s reflect on the origin of this program work concept – (carriers) insulating themselves from unscrupulous, litigation-prone, transaction-driven contractors by “partnering” with contractors they could trust. What this has morphed in to is the constant squeeze on the very contractors they sought after to help save them money. Networks where they have lost sight that without contractors – there is no network, and without a network, the carriers are right back to square one. I see it coming. All of these fees and additional burden will continue to push away contractors because they simply cannot find a way to make this work profitable.
I’ll end with a quick example:
Water damage mitigation job for TPA-X / Carrier-Y
Invoice amount – based on carrier estimating guidelines = $2,000 (70% of which was equipment rental)
Less 6% NRF = $120
Assignment fee = $9.95
Carrier – 10% mandated discount on equipment = $140
Amount due to contractor: $1,730.05 (86.5% of original invoice, or 13.5% burden. If you’re a franchise – tack on another 7%-8% royalty)
Same job through word of mouth via exceptional performance = $2,000 gross – costs
It’s up to each individual contractor to make their own business decision regarding participation (and to what extent) with these programs. If they are to remain viable – the Squeeze must lessen significantly. Penalizing, financially, those intended to save carriers money is not a healthy model, and the decline in the amount of program work contractors are willing to perform should be an eye opener to the Squeezers.
Until next month,
Nasty 7 out.