I started working in disaster restoration back in the late 1980s. The industry was developing from a mom-and-pop business started by carpet cleaners and remodelers who were looking for business diversification. Don’t get me
wrong — they were full-service, sophisticated contractors, but most were one generation removed from their founding father. In this business world, a handshake was sufficient to seal the deal and a lunch with the adjuster was the core business development strategy. It was easy to find skilled workers, and the main criterion in job completion was the customer’s satisfaction.
In my first five years as a restorer, there was little sophistication or science involved in the restoration process and, therefore, few barriers to entry. I learned to handwrite scopes and estimates, which required an understanding on both restoration as well as labor and material pricing. One of my mentors told me that he would walk the aisles of Home Depot on Saturdays to learn of price changes to materials.
Most of the cleaning and water damage projects allowed you to track the hours spent and then apply a reason-
able labor rate to the work completed. Marketing relied primarily on personal relationships and face-to-face meetings. A strong adjuster relationship would allow you to
cover missed or mispriced items to be easily adjusted with a phone call. Many of the property adjusters were senior staff members who understood construction, restoration and pricing. It was common to encounter top company adjusters with over 20 years of experience.
Fast-forward nearly 30 years and the restoration industry is radically different. Metrics are often more important than the actual work completed. Nearly 100 percent of all estimates are written in industry software with a set-pricing database. The price is not a guideline for the work being completed; rather it is the full, complete and actual price to be charged for the work. Pricing has not escalated as fast as the cost of doing business, and in some cases, the price is lower today than it was five years ago.
Finding skilled labor has become a real challenge in many markets, especially in context of the industry price lists. Locating unskilled labor that is willing to work hard for a reasonable wage has also become difficult. Employment bureaucracy is increasing with new overtime rules, safety requirements and reporting, hazardous material reporting and handling, health care coverage and many more challenges required as a consequence of running a business.
Many times, the adjusters understand computers and software but do not have much experience in understanding
Developing an understanding of your market realities will allow you to gain control of your future. Denying these realities will assure that you continue to get the same results.
the restoration process. Third-party administrators added significant administrative burdens to their projects, which has increased the time commitment needed to complete projects, decreased efficiency and increased the time to complete these projects. These programs also require that every project is treated with the same urgency whether it is a $2,000 water loss or a $100,000 repair. In Canada, we have seen 10 and 10 markups reduced for many programs, along with lower price lists.
There are many significant competitors entering the market, with private equity companies investing significantly into the industry and sophisticated competitors entering the market from other industries.
THE IMPACT OF GLOBAL FINANCE
There are several significant contributors to these changes, and it is important to understand each in order to properly compete in this new environment. The first influence is the business cycle.
It was very clear to me about 10 years ago that the restoration industry was entering new phases of the business cycle. This was characterized by decreasing margins, changes to the competitive environment, with larger and more sophisticated competitors, and consolidation. Some believe restoration is still a growing market. Perhaps I have blinders on, but my experience tells me that we are seeing symptoms of a maturing and declining market.
The second market influence is a change in the global financial industry. The reality is that our clients are global finance companies. They sell insurance in order to get funds to invest and make a market return. In an effort to obtain funds, they will pay out most of today’s investing dollars in claims tomorrow. The hope is that they will be able to make money on the claims side of the business as well as investing. Insurance companies used to be able to count on investing returns of near 10 percent with little market risk. Most of the time from 1970 to 2000, you could earn over six percent on treasury bonds, which are now paying near 1.5 percent.
Today, more than $13 trillion in global debt is trading at a negative yield. If safe investments are offering such a low return, then it would make sense that insurance companies try to cover some of their lost profits from the other side of the equation by reducing their claims costs. If you look at these two industry drivers, it is easy to assume that things are not going to return to the good old days.
ACCEPT NEW REALITIES
Given the realities of a changing marketplace, what is a restorer to do? It seems as though there is a general feeling of malaise in response to these changes — especially from the well-established companies in the industry. While I have several recommendations to address these changes, it still will not change the realities of a very dynamic market.
My first recommendation is to accept the realities of the industry today. This does not make the situation better, but it does allow you to create a successful strategy to combat today’s realities and to create a strategy for success. Regardless of the market realities, you need to create a plan for a profitable business.
For some, an acceptable profit is five percent, and for others, it is over 20 percent. I have seen both numbers in the restoration industry. One is not right and one wrong; it is just important to develop a realistic plan that you can implement in your business today. I would opine that the higher number is a better result.
Define your results and then work your numbers and plan backward to get to your desired destination. You will have to take into account the new market realities and also the potential for future changes. If you budget too low and miss your targets, you may not survive. I think that a key to happiness lies in acceptance of reality and also awareness of your situation. It does not lie in denial of the situation or simply thinking things will get better on their own. Take control of your business and your future.
LOOK AT CUSTOMER AND CLIENT MIX
The next strategy is to look at the market and understand if you can maintain your current operations with your existing clients and work mix. You may have to make changes in order to achieve your needed results. It is essential that you do not continue to do the same thing and expect different results. You will have to adjust your strategy in order to get different returns.
You may not be able to get rid of any of your clients today, yet if you see that some of your current clients or work mix are not helping you achieve your desired business destination, then you should devise a plan that helps you transform your business. I worked with a company that removed an entire department from his business. This was a difficult process since he had to downsize his business by nearly one-half. The end result was that he was making the same net profit and generating more cash, with much less hassle and lower risk.
Building your business strategy will require that you take a look at your current business and determine if you can achieve your desired results given your inputs. Developing an understanding of your market realities will allow you to gain control of your future. Denying these realities will assure that you continue to get the same results.
Do you have clients or profit centers that are dropping margins, increasing complexity and challenging your busi- ness plan? Do you have the right people, in the correct positions, in your business? If you are being asked to do more with less, then do you have the right team to get you there? You may also need to add profitable revenue that allows you to decrease your overhead burden.
REEVALUATE TPA RELATIONSHIPS
Several years ago, Pete Consigli crafted a series of Donnybrook Debates to determine if vendor programs were appropriate for restorers. This was a dynamic debate that opened up a number of real issues regarding working with vendor programs and third-party administrators (TPAs). This issue has been evolving ever since and, perhaps, needs to be addressed again.
As a contractor, you need to make deliberate decisions about who your client is and how you address necessary restoration issues. I talked to a client recently that looked at a water restoration project that was not appropriately handled, which lead to potentially hundreds of thousands of dollars in additional damage. I know the contactor that originally did the work, and they are a quality contractor. They apparently followed the job scope required by the adjuster, which failed.
If you are the contractor on a job, do you have the ability to control scope items that properly restore the property to a pre-loss condition? Related to this issue are various contractual issues and job control issues that may create a conflict of who is truly the contractor on a project. All of these issues need consideration. Many contractors simply fill out the applications and accept the vendor-directed work. As a professional business, you need to consider the full parameters of participating in each program. Since they are the norm these days, it is not easy to avoid them altogether but you should have a deliberate plan and not simply go through the motions.
When you are operating in a challenging situation, you will need to deploy strong management skills and leadership. Consider the following challenge: Can you lower your overhead by two percent, increase your gross margin by two percent and increase your revenue by two percent? Successfully achieving this will help you transform your business in the face of challenging times.
Times like we are experiencing in restoration demand your best leadership skills and require that you make bold market moves. Understand the realities of your business and then craft a sustainable plan that gets you to your desired destination. Running a business is not simply a matter of letting the current drive your company. Rather, you need to be at the helm actively charting a course and navigating your business to the desired destination. RIA
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