7.2 Line-Item Estimating, Unit Cost Pricing, and Depreciation Application

Construction Estimating Principles in Property Adjustment

Property insurance adjusting relies on technical construction estimating to convert observed physical damage into a precise monetary claim. In adjusting practice, two competing estimating methodologies exist: Lump-Sum Bids and Line-Item Unit-Cost Estimating.

Why Lump-Sum Bids Fail in Insurance Claims

Property owners frequently obtain general contractor bids stating a single composite price (e.g., "Repair fire damage to kitchen and living room: $85,000"). Insurance carriers universally reject lump-sum bids because:

1. They provide zero transparency into material quantities, labor hours, or unit prices.
2. Insurers cannot verify whether the bid includes non-covered items, elective architectural upgrades, or pre-existing condition repairs.
3. They cannot be audited against policy coverage limits, code upgrade endorsements, or deductible applications.

The Line-Item Unit-Cost Standard

The insurance industry mandates line-item unit-cost estimating. Under this methodology, every building assembly is broken down into discrete components measured in standardized units of measure. Each line item accounts for three direct cost components:

• Direct Material Cost: Wholesale/retail cost of raw materials, fasteners, adhesives, and delivery charges.
• Direct Labor Cost: Wages of skilled tradespersons plus labor burden (employer payroll taxes, FICA, FUTA, SUTA, workers' compensation insurance, general liability insurance, and fringe benefits).
• Equipment Cost: Machinery rental, mobilization, fuel, depreciation, and operating maintenance (e.g., scaffolding, hydraulic lifts, negative air machines, HEPA dehumidifiers).

┌────────────────────────────────────────────────────────────────────────┐
│                     STANDARD UNITS OF MEASURE                          │
├────────────────────────────────────────────────────────────────────────┤
│  SF   (Square Foot)   → Drywall, paint, flooring, siding, insulation   │
│  SY   (Square Yard)   → Carpet, carpet pad (9 SF = 1 SY)               │
│  LF   (Linear Foot)   → Baseboards, crown molding, gutters, pipe runs  │
│  SQ   (Square)        → Roofing, house wrap (100 SF = 1 Square)        │
│  EA   (Each)          → Light fixtures, doors, windows, sinks, outlets │
│  BF   (Board Foot)    → Framing lumber (1 in × 12 in × 12 in = 144 in³)│
│  CF   (Cubic Foot)    → Concrete foundations, soil removal             │
│  HR   (Hour)          → Specialized forensic labor, emergency cleaning │
└────────────────────────────────────────────────────────────────────────┘

---

Estimating Software Systems and Localized Price Databases

Most property claims in North America are estimated using specialized estimating software systems, primarily Xactimate (developed by Verisk) and Symbility (a CoreLogic product). Understanding the internal mechanics of these software platforms is essential for public adjusters.

Local Price Databases and Monthly Market Pricing

These platforms do not use static national average prices. Instead, they publish monthly and quarterly localized price databases mapped to specific postal zip codes and metropolitan areas (e.g., separate databases for Chicago Metro, Rockford, Peoria, Springfield, and Southern Illinois). Pricing research teams monitor:

• Local material retail and distributor surveys;
• Prevailing union and open-shop trade labor rates;
• Municipal sales tax rates applied to building materials;
• Fuel cost indices and landfill tipping/dump fees.

Catastrophe Demand Surge Pricing

Following severe catastrophic events (such as a tornado or major hail storm), localized demand for materials and skilled labor spikes dramatically. This economic phenomenon—known as demand surge—causes market prices to rise sharply above standard price database rates. Public adjusters must monitor whether carrier adjusters are improperly applying pre-catastrophe price lists that fail to reflect actual post-disaster market realities.

---

Line-Item Activity Codes and Structural Anatomy

In line-item estimating, every entry combines a category code (the trade, such as DRY for drywall, CLN for cleaning, or PNT for painting), a selector code (the specific item), and an activity code (the operation).

Material Waste Factors

Raw building materials must be cut, shaped, and fitted, generating scrap waste. Estimators apply standardized percentage waste factors to gross measurements:

• Asphalt Shingle Roofing: 10% on simple gable roofs; 15% to 20% on complex hip, valley, and dormered roofs.
• Carpet & Vinyl Sheet: 10% to 15% to account for room roll widths and pattern matches.
• Drywall & Siding: 5% to 10% for corner trimming and window cutouts.

---

Contractor General Overhead and Profit (GCOP / "10 and 10")

A central battleground in property estimating is the application of General Contractor Overhead and Profit (GCOP), commonly known in the construction and insurance industries as "10 and 10" (10% overhead and 10% profit added to direct construction costs).

Definitions of Overhead and Profit

• General Overhead (10%): The operating costs incurred by a general contractor to maintain their business, which cannot be billed directly to a specific job (e.g., brick-and-mortar office rent, utilities, executive salaries, office staff, licensing fees, software licenses, legal and accounting fees, and general corporate liability insurance).
• Contractor Profit (10%): The fair entrepreneurial return earned by the general contractor for managing project risk, capital investment, and coordination.

Illinois Standards for Applying GCOP

No Illinois statute or Department rule sets a trade-count test for GCOP. The question is whether a general contractor would reasonably be needed to repair the loss. Insurers and adjusters commonly use these industry guidelines:

1. The repair requires the coordination of three or more distinct construction trades (e.g., roofing, drywall, electrical, and plumbing);
2. The project involves complex structural, engineering, or life-safety repairs;
3. The scope requires extensive sequencing, permitting, and municipal code inspections over an extended construction schedule.

Direct Reconstruction Costs (Materials + Labor + Equipment)     $100,000.00
Plus General Overhead (10%)                                    + $10,000.00
Subtotal                                                        $110,000.00
Plus General Contractor Profit (10% on Subtotal)               + $11,000.00
────────────────────────────────────────────────────────────────────────────
Total Replacement Cost Value (RCV) with GCOP                    $121,000.00

GCOP in Actual Cash Value Payments

Some insurers withhold GCOP from the initial ACV payment until the insured actually hires a general contractor. Because Illinois defines residential ACV as replacement cost at the time of loss less depreciation (50 Ill. Adm. Code 919.80(d)(8)(A)), there is a strong argument that when a general contractor would reasonably be needed, GCOP belongs in the replacement cost from which depreciation is subtracted. Courts in different jurisdictions have reached different results, and policy wording matters, so document why a general contractor is reasonably required.

---

Depreciation Application: Observed Condition vs Chronological Age

Depreciation represents the loss in economic value of an asset over time resulting from physical deterioration, obsolescence, and exposure. Calculating depreciation determines the Actual Cash Value (ACV) payment:

$\text{ACV} = \text{Replacement Cost Value (RCV)} - \text{Depreciation}$

Two Competing Approaches to Depreciation

1. Chronological / Straight-Line Table Method (Insurer Preference): $\text{Depreciation \%} = \frac{\text{Actual Age of Item}}{\text{Theoretical Useful Life Expectancy}}$ Flaw: Treats physical assets as theoretical math problems. For example, assuming a 30-year asphalt roof is 15 years old, a carrier adjuster automatically applies 50% depreciation, ignoring whether the roof was in pristine condition, shaded from UV light, and well-maintained.

2. Actual Observed Physical Condition (Public Adjuster Advocacy): Depreciation is calculated based on the asset's effective age and observable physical maintenance. An item that has been meticulously maintained, cleaned, and protected exhibits far less physical deterioration than its chronological age suggests. Public adjusters argue for effective age reductions to protect policyholder equity.

Recoverable vs Non-Recoverable Depreciation

• Recoverable Depreciation: Under replacement cost policies, the difference between RCV and ACV is initially withheld by the carrier. Once the policyholder completes the repairs and submits contractor invoices proving incurred expenses, the withheld depreciation is paid out (up to the actual incurred amount or the RCV cap).
• Non-Recoverable Depreciation: Depreciation applied to property insured strictly on an ACV basis, personal property subject to specific limitations, or items where the policyholder elects not to replace or repair the damaged property.

---

The Labor Depreciation Debate: Illinois Law (Sproull v. State Farm)

One of the most consequential legal issues in property adjusting is whether an insurance company may depreciate the cost of labor when determining Actual Cash Value.

The Legal Controversy

When replacing a damaged roof, the total cost comprises materials (shingles, felt, nails) and labor (tear-off and installation). Insurers historically depreciated both materials and labor, arguing that the "entire finished product" depreciates. Policyholders argued that labor is an intangible service that does not rust, rot, decay, or wear out over time.

The Landmark Illinois Supreme Court Precedent

In Sproull v. State Farm Fire & Casualty Co., 2021 IL 126446, the Illinois Supreme Court addressed this issue under Illinois law. The court answered a certified question about a homeowners policy that did not define ACV, read together with the Illinois rule that ACV is replacement cost less depreciation (50 Ill. Adm. Code 919.80(d)(8)(A)). Finding the term ambiguous, the court construed it in the insured's favor: the insurer may not depreciate labor costs in calculating ACV.

Practical Application for Public Adjusters

The Sproull decision significantly increases ACV cash flows to Illinois policyholders:

• If a roof replacement costs $20,000 ($10,000 materials + $10,000 labor) and the roof is 50% physically depreciated:
  • Improper Carrier Calculation (Depreciating Labor): Deducts 50% from both materials ($5,000) and labor ($5,000) = Total Depreciation $10,000. ACV payment = $10,000.
  • Proper Illinois Calculation under Sproull: Deducts 50% from materials only ($5,000) and $0 from labor = Total Depreciation $5,000. ACV payment = $15,000.

---

Preparing the Proof of Loss and Statement of Loss

The culmination of the estimating process is the preparation of the formal claim accounting documents submitted to the insurer:

• Statement of Loss: An itemized accounting summary breaking down RCV, material depreciation, non-recoverable depreciation, ACV, applicable deductibles, policy sub-limit caps, prior advance payments, and net claim amounts due across each coverage division (Coverage A, B, C, and D).
• Sworn Statement in Proof of Loss: A formal, notarized legal document required under policy conditions (typically due within 60 days of the insurer's written request). It establishes the policyholder's sworn declaration regarding the time and origin of the loss, the insurable interest of the claimant, title encumbrances, all other insurance contracts covering the property, and the net cash amount claimed.