Pricing Research Methodology

Pricing Research Methodology White Paper

Pricing Research Methodology Executive Summary Throughout its 20-year history, Xactware has pioneered a unique, scientific approach to providing building cost data for the insurance repair market. Insurance carrier clients using that data today are responsible for at least one out of every two property claims in the United States and Canada. This data is also used by more than 80% of insurance repair contractors and service providers who utilize computerized estimating systems. Simply put, Xactware s pricing data is used more often than all competitors data combined. This paper examines the history and makeup of Xactware s pricing research and methodology, automated and manual procedures, and provides detail on processes that have been put in place to ensure that this data continues to be the industry standard. History In the early 1980 s, James Loveland owned a successful reconstruction company. During those years he developed a computerized estimation program to help create bids and track pricing. Realizing the potential need in the insurance restoration market, he sold his construction company and started what became Xactware. Since the beginning, Xactware has researched pricing much the same way an independent contractor would by contacting materials providers, local contractors, and service providers in every major pricing area. Over the years, Xactware has refined this process to include three methods for updating prices: 1) Top Down method; 2) Bottom Up method; 3) Real-time feedback/pushback tracking. The result of all this work is that price lists are updated each month. Xactware publishes a full price list (not just a local inflation factor index ) for every major identified pricing area in the United States and Canada. Top Down The Top Down process starts with information gathered from live estimates (those actually used to settle claims) written by contractors, service providers, and adjusters using the Xactimate estimating system. This information is then combined with results from market surveys performed regularly with industry professionals who do not use Xactimate. Completed estimates are sent to Xactware by users selecting the feedback option within Xactimate or by completing assignments sent to them by insurance carriers via Xactware s assignment network. Thousands of estimates are returned to Xactware every day, which enables real-time analysis on the usability of pricing information. Every estimate sent through the Xactware s assignment network is automatically audited for pricing variances. Millions of estimates representing billions of dollars of actual, closed claims files have been audited and continue to be monitored by Xactware s pricing team. Market surveys are also performed with both general and sub-contractors on a regular basis by e- mail, phone, and fax. On average, Xactware acquires several million unit price data points each month using the real-time and survey processes from over 100,000 contractors, insurance carriers, and independent adjusters. Page 1

All unit price data is then further analyzed in preparation for each quarterly price list publication using a "cluster-analysis" process. This proprietary process was designed by Brigham Young University Ph.D. s and is monitored by Masters- and Doctorate-level statistician/econometricians. The premise of the cluster-analysis application is that a free market economy usually forces most contractors to charge prices that are reasonably close to the prices charged by their competitors. As a result, most data collected for any unit price will fall inside a cluster. The cluster-analysis program analyzes all data points, then selects a price from within the cluster. While the Bottom Up method (see below) provides necessary checks and balances to make the analysis fair and accurate, the clusteranalysis method is the primary driver of published prices. Because of this process, users can feel confident that when they view a price within an Xactimate database, actual work has been completed in their specific geographic area at or below that published price. Bottom Up In contrast to the Top Down approach of automated monitoring of completed assignments, the Bottom Up approach to unit pricing research consists of independently researching all costs associated with labor, material, equipment, etc. needed to perform each task in the price list. This research is performed regularly using a database of over 40,000 material and equipment suppliers and over 13,000 contractors across the United States and Canada who provide Xactware with pricing information on a regular basis. Prior to price list publishing, this information runs through the same cluster analysis algorithm used on unit prices. Components are then assembled into the individual line item unit prices found in Xactimate. Using the Bottom Up methodology provides a necessary check and balance to ensure that the installed unit price (derived using the Top Down method) does not fall below the cost of labor, equipment, and materials needed to perform the work. Market Conditions When the resulting price gathered using the Top Down method exceeds the sum of all costs gathered using the Bottom Up method, the difference is placed in a field called Market Conditions. Market conditions can be caused by a number of forces such as supply-and-demand issues in the local market, or by additional costs, which have been reported in the Top Down surveys, but not the Bottom Up surveys. Market Conditions provides a secondary level of checks and balances to ensure unit prices are not solely driven by labor and materials needed to complete the work. Page 2

Open for Inspection Methodology Xactware understands that job size and complexity have a dramatic affect on the costs associated with performing the work. It is important to note that when publishing a database that uses installed unit prices, the prices must be based upon an assumption for job size and complexity. Xactware s goal is to target the most common job scenario. However, understanding that prices can vary from job to job, Xactware has made every effort to ensure that all details associated with published prices are Open for Inspection. After selecting a price list item within an estimate, all users can drill down to view (and edit if they have sufficient security) detail within the price in Xactimate. This is done by clicking on the Unit Price button from the Line Item Entry pad. This button displays a window that allows the user to modify the unit price directly, or drill down even further to the line item assembly by clicking the Information [i] button next to the unit price. Page 3

This takes the user to the line item assembly detail, which displays all pertinent detail about the item price, allowing the user to view the information gathered using both the Top Down and Bottom Up approaches. Information contained in the Assembly Table is a result of research and analysis performed using the Bottom Up approach. The middle section of this window is also reserved to show the item definition (which includes detailed information on the components of the item), the quality of the item, and, if applicable, the manufacturer or model reference number. The controls at the top of the item definition section allow the user to view assumptions for: supporting events base service charges The unit price is the result of Top Down research and analysis. Page 4

Independent Verification Requests On occasion, Xactware receives notice from a customer that a published price may need further review. When this occurs, the Xactware Pricing Team begins a process called an Independent Verification Request and Response. The requests can be submitted to Xactware via phone, e-mail (pricing@xactware.com), or through a custom form created for a large customer. In order for the request to be expeditiously handled, Xactware asks for as much information as possible regarding the line item in question. Requested data includes: customer submitting the request city in question line item in question price that the customer feels is correct contact information for contractors, sub-contractors, suppliers, etc. who can verify the price submitted Once received, the Pricing Team analyzes the submitted price and makes contact with those companies and individuals listed to determine if the figure constitutes a true difference or a random difference in price. Essentially, the question becomes does the submitted price fall outside or inside the cluster of prices that have already been analyzed for this price list item? If the price constitutes a true difference (falls outside the cluster of existing data), Xactware performs a random sample survey on contractors and service providers in the area. Those who are included in the survey are selected from a list of all known contractors and service providers in the area, and they are extracted using a formula that provides a true random sample subject to a 95% confidence rating. Once the results of the survey have been gathered, data is run through the cluster analysis algorithm and the resulting price is then updated on the Xactimate price list. Regardless of the whether a price is changed or not, the results are always communicated back to the individual(s) who submitted the original Independent Verification Request. The Xactware Pricing Team The Xactware Pricing Team is comprised of a number of individuals with experience in the construction and restoration industries, monitored by an Econometrician who holds a Ph.D. in Economics from Harvard University (an Econometrician is someone with a Ph.D. in economics with a Masters degree in statistics). While each team member has a background in one or more of the construction trades, together they have over 300 years of combined construction experience. Their specific experiences range from framing and finish carpentry, to drywall, painting, siding, roofing, HVAC, and more. Several are also licensed general contractors. A brief summary of the members of the Pricing Team is as follows: 5 licensed general contractors 2 RIA Certified Restoration Technicians 3 IICRC Certified Journeyman Fire & Smoke Restorer 2 IICRC Certified Journeyman Water Restorers 9 IICRC Certified Water Damage Restoration Technicians 3 IICRC Certified Fire & Smoke Damage Restoration Technicians 3 IICRC Certified Odor Control Technicians 1 Mold & Sewage Remediation Technician 3 IICRC Certified Upholstery Cleaning Technicians 3 IICRC Certified Carpet Cleaning Technicians 2 IICRC Certified Carpet Repair and Reinstallation Technicians Page 5