In the early 2000s in Southern California, several freelance estimators (persons with a general contractor’s license, but who do not operate a construction company), began offering services to general contractors and to public adjusters. What “services”? Preparing significantly inflated repair estimates for use in negotiating insurance claim settlements. The freelance estimator would market the estimate to certain contractors and to public adjusters seeking a bid that would allow them to get as much money as possible from the claim.
The freelance estimator would explain to the contractor or public adjuster that even if some of the inflated or unnecessary items in the estimate were negotiated down or denied, the contractor was still saving on the cost of an estimator (all while claiming 10% or more General Overhead). The benefit to the public adjuster was he or she did not have to prepare his or her own estimate, and they could rely on the freelance estimator to be at the inspection and to defend the estimate.
This process was designed to defraud insurance companies out of more money than a claim is worth. It was done by increasing labor and materials costs, adding more labor hours than are needed to complete the work, as well as using cleaning line-items (for every possible item) versus paying for actual cleaning hours, which is how cleaning jobs are actually paid. Another method commonly used was adding unnecessary or duplicative line-items.
In this article, I will focus only on the last scam, “adding unnecessary or duplicative line-items.” More specifically, I will discuss adding a separate line-item for a project manager or residential “supervision.” This line-item for supervision or a project manager was in addition to any General Overhead for operating costs already included in the estimate.
There is a reason why adding a separate supervision line-item to cover the same supervision or project manager requiring to operate a business has been successful for nearly twenty years. I was even convinced by some of these freelance estimators in the early and mid-2000s, at least until I worked for several general contractors and before I became a Certified Construction Project Manager. That is when I realized the freelance estimators responsible for the supervision scam were lying to everyone who was not familiar with the operational costs of a general contracting business. Therefore, something was needed to help adjusters and insurers recognize the deception.
The reason separate line-item supervision for the same responsibilities required to operate a business is at times convincing is because of a “White Paper” issued as early as 2003 by Xactware, Inc. Back in the 1990s the insurance industry, unlike the construction industry apart from insurance claims, began relying in large part on estimating software including a program by Xactware called “Xactimate.” While Xactimate is a good estimating system if used properly, many dishonest contractors and public adjusters seeking to take advantage of insurance companies also use Xactimate to inflate insurance claims.
For example, many dishonest companies who use Xactimate will pay cleaning workers a low-wage hourly labor cost. Yet, when it comes to submitting their Xactimate estimate to adjusters and to insurance companies, these same companies will take advantage of the Xactimate line-item cleaning costs for every single item in the affected area. Taken together, this often produces triple or even quadruple or more the actual cleaning cost. I will write more about this specific type of fraud in future article, and in a related video.
Another way Xactimate has been abused, as I have explained already in part, is by using line-item supervision where it should not be used. This specific type of fraud stems in large part from an Xactware White Paper titled “Overhead and profit.” This paper has been around since at least 2003, reprinted again in 2011, and most recently in 2020. All three versions of this Xactware paper read the same in the section called, “Job-Related Overhead.” The relevant section of this White Paper reads as follows on page 2:
·
Job-Related
Overhead are expenses that can be attributed
to a project,
but cannot be attributed to a
specific task and include any and all
necessary expenses to complete the
project other than direct materials
and labor. Examples (including but not limited
to): Project managers,
onsite portable offices and restroom
facilities, temporary power and
fencing, security if needed, etc.
Including Job-Related Overhead
expenses in an Xactimate estimate–Job
Related Overhead expenses should be
added as separate line items to
the Xactimate estimate.
Read in isolation from the rest of this paper, and apart from a knowledge of what general contractors are required to provide as part of the company’s operating costs (General Overhead), you can see why this section of the paper may be convincing. It states, “Project managers,” which are equated with supervision in the Xactimate line-item (LAB SUPERR), “should be added as separate line items to the Xactimate estimate.”
However, this is not what the Xactware paper is saying, nor is it what should be done when you consider the normal job supervisor or project manager responsibilities required for all construction project in California. Consider the following line-item and note from a real, recent general building contractor’s estimate using Xactimate, with a line-item for supervision based on the above-quoted Xactware “Overhead and profit” paper:
Here there is a reference in the first paragraph under the supervision line-item to “Xactimate’s O&P white pages.” This is a direct, though oddly worded, reference to the previously quoted Xactware White Paper “Overhead and profit.” It is cited here to justify including a separate line-item for supervision or a project manager, even claiming, “Supervision is not covered in Xactimate’s O&P.” The claim here is that the Xactware White Paper justifies a separate line-item for residential supervision or project management in addition to the General Overhead and Profit (“O&P) typically listed as a percentage at the end of the Xactimate estimate.
I will address this estimate’s citation and use of the “Cal. Admin. Code tit. 16 § 823(a)” in this article, but first we need to resolve what the Xactware “Overhead and profit” paper is talking about. To further set up what is at issue, consider one more recent estimate, this one from a Southern California public adjuster who also cites and relies on both the Xactware paper and the same “Cal. Admin. Code tit. § 16 823(a)” cited in the first quote from a general contractor’s estimate:
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Note the similarity in the citation between the earlier note from a contractor estimate and this citation from a public adjuster’s estimate. Both reference the Xactware White Paper and the “Cal. Admin. Code tit. 16, 823(a),” and both contain the oddly worded language “white pages” versus “White Paper.” There is also an error in the citation of the “Cal. Admi. Code,” as I will show.
For now, focus on the use of the Xactware White Paper as justification for the supervision / project manager line-item in these two estimates. Consider what is stated in the same Xactware “Overhead and profit” paper in the section immediately preceding “Job-Related Overhead,” quoted earlier, on page 2 (with my underlining added):
General Overhead are expenses incurred by a General Contractor, that cannot be attributed to individual projects, and include any and all expenses necessary for the General Contractor to operate their business.
Here is a clear description of work considered “General Overhead,” namely, “expenses … that cannot be attributed to individual projects.” This is in direct contrast to how the same Xactware paper defined “Job-Related Overhead” (quoted earlier), that is, as “expenses that can be attributed to a project.
Before further discussing this important difference, notice how the same Xactware paper further defines “General Overhead” as including “all expenses necessary for the General Contractor to operate their business.” This brings us to the “Cal. Admin. Code,” cited earlier in both the general contractor and public adjuster Xactimate line-item notes, as justification for line-item supervision or project management in addition to General Overhead.
After reading the first
quoted Xactimate note for supervision from the general contractor’s estimate
quoted earlier, after it refers to the “CSLB” (Contractor’s State License
Board) the contractor’s line-item note then cites the “Cal. Admin. Code tit. 16 § 823(a)” as authority (all
quotation marks are original to the contractor’s note):
Cal. Admin. Code tit. 16, 823(a). “Direct supervision and control” “includes anyone or any combination of the following activities: supervising construction, managing construction activities by making technical and administrative decisions, by checking job for proper workmanship, or direct supervision on construction job sites.
When referring to the “Cal. Admin. Code” (California Administrative Code), which is the California Code of Regulations, Title 16, 823(a), this general contractor puts in quotes, “Direct supervision and control.” However, the quoted material is from sub-section 823(b), not sub-section (a).
It is revealing that both the above-quoted general contractor and the public adjuster notes to this same line-item for supervision include this same citation error, as do these additional, also recent quotes from another general contractors and a different public adjuster, both from different Southern California property claims:
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And:
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Obviously, there is a network of general contractors and public adjusters sharing information they hope will increase their profits and fees through inflated estimates wrongly claiming line-item supervision. This is clear not only from their shared use of the same incorrect understanding of the Xactware paper and the California Code of Regulations. It is clear also from the fact they contain the exact same citation error from section 823(a), rather than citing section 823(b), as well as from the same oddly worded language “white pages” instead of the more correct “White Paper.
Now we will consider the difference between section 823(a) and section 823(b). Does sub-section 823(b) of the California Code of Regulations, Title 16, support the quoted general contractors’ and public adjusters’ notes for line-item supervision? Here is the complete quotation of both section 823(a) and (b) with my italics bolding and underlining used to offset the most relevant parts:
823. Definitions: Bona Fide Employee;
Direct Supervision and Control.
(a) For purposes of Section 7068 of the [Business
and Professions] Code, "bona fide employee" of
the applicant means an employee who is permanently employed by
the applicant and is actively engaged in the operation of the applicant's
contracting business for at least 32 hours or 80% of the total hours per week
such business is in operation, whichever is less.
(b) For purposes of Section 7068.1 of the Code, "direct supervision and
control" includes any one or any combination of the following
activities:
supervising construction, managing construction activities by
making
technical and administrative decisions, checking jobs for proper
workmanship, or direct supervision on construction job sites.
Both part (a) and (b) of this section deal directly with “Section 7068” and “Section 7068.1” of the Business and Professions Code (“BPC”). Both part (a) and (b) also involve “an employee who is permanently employed,” an employee actively involved in the “operation of the applicant’s contracting business for at least 32 hours or 80% of the total hours per week such business is in operation.”
Sections (a) and (b) are entirely about a “bona fide employee” involved in a contracting business’ “operation” and the “direct supervision and control” of the company’s “business.” This includes the “total hours per week” the employee works in the “operation” of the “business.” All of this is a part of General Overhead as defined earlier from the Xactware paper under General Overhead, not as Job-Related Overhead.
California Code of Regulations, Title 16, sections (a) and (b) have nothing to do with a specific or individual job or project. Rather, they speak to the operation of the contracting business and about regular “activities” that must be done on every job or project. These regular “activities” involve “supervising construction,” “managing construction,” “making technical and administrative decisions,” “checking jobs for proper workmanship,” and “direct supervision on construction job sites.” These “activities” are the ‘tasks’ specifically excluded in the Xactware “Overhead and profit” paper in the section about Job-Related Overhead.
Notice, too, the permanent or “bona fide employee” of the applicant seeking a general contractor’s license is linked to BPC Sections 7068 and 7068.1. Here is Section 7068, in relevant part, with my underlining added only to key parts, and to which Cal. Admin. / Code of Regulations Title 19, section 823(a) directly refers in the above quotation:
BUSINESS AND
PROFESSIONS CODE - BPC
DIVISION 3. PROFESSIONS AND VOCATIONS
GENERALLY
CHAPTER
9. Contractors
ARTICLE 5. Licensing
7068.
(a) The board shall
require an applicant to show the degree of knowledge and experience in the classification
applied for, and the general knowledge of the building, safety,
health, and lien laws of the state and of the administrative principles of the
contracting business that the board deems necessary for the safety and
protection of the public.
. . .
(d) The board shall, in addition, require an applicant who qualifies by means of a responsible managing employee under either paragraph (1) or (2) of subdivision (b) to show his or her general knowledge of the building, safety, health, and lien laws of the state and of the administrative principles of the contracting business as the board deems necessary for the safety and protection of the public.
Section 7068 of the BPC makes it plain we are dealing with an applicant for a license who must personally, or by permanently employing a responsible managing employee, understand “the general knowledge of the building, safety, health, and lien laws of the state and of the administrative principles of the contracting business that the board deems necessary for the safety and protection of the public.
Clearly, the Code of Regulations, Title 16, section 823(a), in its reference to BPC section 7068, is discussing the ongoing operation of the “contracting business,” not a individual project. Now consider BCP Section 7068.1, again in relevant part, referenced in the Code of Regulations (“Cal. Admin. Code”), Title 16, section 823(b) which describes, “Direct supervision and control,” and the “activities” this supervision involves as a part of the business’ ongoing operations (with my emphasis added):
BUSINESS AND
PROFESSIONS CODE - BPC
DIVISION 3. PROFESSIONS AND VOCATIONS
GENERALLY
CHAPTER 9. Contractors
ARTICLE 5. Licensing
7068.1.
(a) The person qualifying
on behalf of an individual or firm under paragraph (1), (2), (3), or (4) of
subdivision (b) of Section 7068 shall be responsible for exercising that direct supervision and
control of his or her employer’s or principal’s construction operations to
secure compliance with this chapter and the rules and regulations of the board.
. . .
(d) The board shall
require every applicant or licensee qualifying by the appearance of a
qualifying individual to submit detailed information on the qualifying
individual’s duties and responsibilities
for supervision and control of the applicant’s construction
operations.
(e) Violation of this section shall constitute a cause for disciplinary action and shall be punishable as a misdemeanor by imprisonment in a county jail not to exceed six months, by a fine of not less than three thousand dollars ($3,000), but not to exceed five thousand dollars ($5,000), or by both the fine and imprisonment.
This section of the BPC explicitly states an applicant or an applicant’s permanent employee is responsible “for supervision and control of the applicant’s construction operations.” This is not a cost directly attributable to “specific tasks” and, therefore, the cost is not Job-Related Overhead. Rather, the “duties and responsibilities” are a part of the operational “tasks” excluded from Xactware’s White Paper’s description of Job-Related Overhead, and which are included in the business’ General Overhead costs for “the applicant’s construction operations.”
Everything described in the “Cal. Admin. Code” (Code of Regulations) Title 16, section 823(b) as “direct supervision and control” covers what is included in the general contractor and public adjuster notes quoted earlier to justify their estimates’ line-item for residential supervision.
Here is another example from a recent Southern California estimate submitted by a public adjuster who, though without the specific reference to the Xactware “Overhead and profit” paper or to the “Cal. Admin. Code,” nonetheless claims one-hundred and sixty hours of “Residential Supervision / Project Management” for “activities” or ‘specific tasks’ (the wording of the Xactware paper for what is not Job-Related Overhead):
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Obviously, a lot of money is being wrongly claimed under this line-item and those claiming it are either victims of the errors of other contractors or public adjusters, or they are knowingly committing fraud by claiming thousands of dollars for what is already included in the General Overhead allowance of the same estimate. Note again what the Xactware White Paper says right after defining “General Overhead” and about what is not considered Job-Related Overhead, “expenses that can be attributed to a project, but cannot be attributed to a specific task.”
After studying the coursework involved in becoming a Certified Construction Project Manager through San Diego State University’s Associated General Contractors’ (AGC) Supervisory Training Program (STP), it becomes obvious there are numerous “tasks” a supervisor or project manager must complete which are not attributable to an individual project. They are a part of a business’ operational activities for every job. These ‘tasks’ include the very things described by the California Code of Regulations, Title 16, section 823(b), namely, “supervising construction,” “managing construction,” “making technical and administrative decisions,” “checking jobs for proper workmanship,” and “direct supervision on construction job sites.”
Many construction companies have more than one project manager or supervisor on staff, who are often involved in the same projects. Each of these supervisors or project managers have similar or different responsibilities involving these very same tasks. Different tasks can also be delegated form one person to another as a part of a business’ operation.
For this reason, the AGC STP Manual 4, “Contract Documents and Construction Law,” page 5-17, emphasizes the task-awareness of a project manager’s or job supervisor’s role in the company as follows (with my underlining): “Analyze the tasks that you perform. Determine which you perform by virtue of delegated authority and which you carry out because it is your responsibility to do so. This is how you can analyze the limits and the bounds of the daily tasks you are expected to perform.”
In
conclusion, since the BPC and the Code of Regulations requires a company to have
a supervisor or project manager prior to starting or even signing a specific project,
the operational “tasks” paid for under General Overhead to be completed once
projects are on the books could not possibly be considered Job-Related Overhead,
as defined by Xactware’s “Overhead and profit” White Paper. If there are
particular security concerns or extreme location or site issues involved with an
individual project and which are not attributable to specific “tasks,” only
then should a separate line-item be added to the body of an estimate in
addition to the estimate’s General Overhead.
For a video presentation of much of this same information, see my "Supervision Fraud in Property Claims Using #Xactimate (#Xactware)," Property Insurance Claims Fraud Review (October 12, 2020):
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