Business Results Study

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Our fourth Business Results Study suggests that remodelers are modifying their strategies to combat costs and promote profits

February 01, 2006

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Methodology:
Financial Definitions

The past six years have been good to Dale Nikula and his company, Encore Construction, located in Dennisport, Mass., on Cape Cod. Annual volume has risen from $1 million to more than $6 million. Encore employs 22 people in addition to Nikula, and completes three or four new homes a year in addition to kitchen remodels, large design/build projects, additions and whole-house renovations. For existing clients, Encore will take on small remodels, including repairs and replacements. The home page of Encore's Web site (www.encoreconstructionco.com) says that the company is known for completing projects on time and on budget, with a zero punchlist.

Production manager Craig McConchie and president Dale Nikula have found that increasing production planning time on a job increases profits.
Photo by Dave Bradley Photography

"Our jobs run from 2 to 3 percent under budget," says Nikula, CAPS. "If you're doing $6.5 million a year, that's quite a bit of savings."

Rising costs, however, have him looking for ways to improve efficiency and value to remain competitive.

"Labor costs preceded some of the material bump-ups here," says Nikula. "In terms of our roofing and siding labor, costs have probably gone up 50 to 60 percent. That started happening about two years ago." Since then, he has seen concrete prices rise 30 percent. Plywood, steel and asphalt-based products cost more, too.

Knowing that contractors across the country face similar challenges, Professional Remodeler editors were pleasantly surprised to find the respondents of our fourth Business Results Study reported increased gross profits.

Does this mean that more remodelers are charging what they're worth, or that those that don't are going out of business? Perhaps both. Check out the survey results to find out how your business compares to industry averages.

A typical remodeler?

Of the survey's 163 respondents, 90 percent did at least 10 percent of their 2004 volume in residential remodeling, while 69 percent earned one-tenth or more of their volume in commercial remodeling and 56 percent did so in new home building.

Despite the diversified nature of most of these businesses, only 66 percent said they offered full-service remodeling, down from 70 percent in 2002 and 2003. The number of remodelers who reported doing kitchen and bath remodeling and exterior contracting, however, grew substantially. More than half now make these two areas part of their work focus.

The S-corporation is nearly twice as popular as it was in 2002, while C-corporations have decreased. The percentage of sole proprietorships remains constant.

In terms of employees, remodeling firms, like many other businesses, have made do with fewer. The average number of full-time employees dropped from 18 in 2002 to 12 in 2003 to 10 in 2005. They hired fewer part-timers, too, with the average dropping from 7 to 6 to 3. In fact, 12 percent of firms had no full-time employees besides the owner, and 38 percent of firms had no part-timers at all. Remodelers, like home builders, may be subcontracting more labor.

Volume and job sizes returned to 2002 levels after a drop-off in 2003. Respondents averaged $3.4 million in total annual installed volume, with an average remodeling job size of $101,000. Regional disparities turned up here, with higher annual volumes in the Northeast and Midwest, but 50 percent larger job sizes in the South and West. The predicted increase in remodeling as Sunbelt housing stock hit 30-plus years of age has definitely hit.

To market, to market

What tactics and methods resulted in business for remodelers? As in past surveys, repeat business and referrals from former clients dominate the top two spots, with referrals from suppliers, subcontractors and architects coming in third.

Remodelers reported higher material and other direct costs on new homes. Despite more overhead on remodels, those jobs realized higher gross and net profits. Net profit includes owner salary.

Traditional methods of marketing — print ads and a listing in the phone book — lost ground. Remodelers instead turned to branding — job signs and vehicles with company logos and contact information — and to the Internet, with nearly one-third of respondents claiming their Web site as a major source of business. Television and radio advertising and direct mail proved to be least popular.

While Nikula hasn't necessarily noticed more of his leads coming from the Encore Web site, he does know that technology has changed the remodeling business as he used to know it.

"We're dealing with people who are accustomed to getting things quickly," he says. "It started with McDonald's and evolved into the Internet." Now, Encore's Web site has a password-protected area where clients — especially those having work done on a second home — can view job photos and the schedule, updated weekly. Encore's tech-savvy helps sell the company, adds Nikula, especially the Microsoft Project schedules included in each proposal.

"Clients are becoming more and more sophisticated," he says. "To present a schedule with a proposal makes us very professional."

Remodelers reported an average lead-to-sales conversion rate of 54 percent in 2005. This represents an increase from 41 percent in 2003 and 37 percent in 2002. Conversion rates fluctuated by region, reflecting the local economy. Remodelers in the West averaged a conversion rate of 63 percent, nine points higher, while those in the Midwest did three points under the national average.

Construction quality

Although 11 percent of respondents claimed to average 0 punchlist items upon walk-through with the client at a job's close, 14 percent said they averaged 10 to 15 items and another 7 percent said they averaged more than 15 punchlist items. Overall, remodelers averaged 5.7, up slightly from 5.5 in 2003.

One of consumers' biggest complaints against contractors is not finishing the job, or leaving a lot of little things to be done that they don't get back to complete without a lot of phone calls. Bringing down this punchlist average would do a lot to improve customer satisfaction and consumer perception of the industry.

Thirty-four percent of remodelers said they typically don't have any open warranty requests. Another 30 percent said they averaged only one, and another 17 percent said they averaged two open warranty items. Average time to complete a warranty request: 5.8 days, an improvement over 6.3 days in 2003 and 7.8 days in 2002. Seven percent of respondents said they completed warranty work within one day.

Profits and costs

After reporting gross profits between 27 and 28 percent in our last two surveys, residential remodelers reported an average gross profit of 31.3 percent. On the new home side, that figure jumped from 23 to 27.4 percent. Commercial remodeling increased from 24 to 31 percent. Costs, too, resembled residential remodeling. As in the past, to create consistency the survey provided definitions of financial terms (see "Financial Definitions," page 24), using the same standards as the NAHB Builder 20 and Remodelor 20 clubs.

It's important that remodelers who build custom homes recognize the need to price the jobs differently, putting a higher markup on remodels.

"In remodeling you have a lot more unknowns, so there's a higher risk," explains Nikula. "You're dealing with an existing structure and don't know exactly how it was built. Secondly, remodeling is just a lot more labor intensive. Everything takes longer to do because you're trying to tie into existing systems."

Gross profit target and actual gross profit can be two very different numbers. Respondents report only 71 percent of residential remodeling jobs closing within 3 percent of gross profit target. That number slips to 69 percent for commercial remodeling and 68 percent for new homes. It's a safe bet that most of the other jobs cost more than expected rather than upping profits.

Here's where Encore Construction excels. Nikula passes along cost increases to his customers rather than reduce his markup and profits. Also, he increased planning to reduce surprise costs. Before the sales/production turnover meeting and the pre-construction client meeting, Encore inserted an on-site meeting where the estimator, project lead and project manager try to discover as many potential problems as possible before the job starts. Nikula estimates that this added step in the process saves Encore about 5 or 6 percent of a job.

Reviews after every job allow the team to uncover recurring gaps between estimated and actual costs and schedule. Updating prices and time frames regularly prevents Encore from being hit with a big loss at the end of the year.

It's never too late to start benchmarking — and improving — your business results.

For more Best Practices, visit www.HousingZone.com/PRbestpractices


An "average" remodeling firm

Years in business 18
Full-time employees (besides owner) 10
Part-time employees 3
Total annual installed volume $3,361,000
Total residential remodeling installed volume $1,255,000
Total commercial remodeling installed volume $930,000
Total new home building installed volume $1,175,000
Residential remodeling jobs 35
Residential remodeling job size $101,000
Commercial remodeling jobs 8
Commercial remodeling job size $176,000
New homes 5
New home price $416,000
Averages based on respondents who do at least 10 percent of their volume in residential remodeling (147); commercial remodeling (113); and/or home building (92). Responses applied only to work in that area.


Good Sources of Business

2005 Rank 2003 Rank Top Marketing Strategies All Responses Residential Remodeling Commercial Remodeling New Home Building
1 2 Client referrals 89% 90% 71% 79%
2 1 Repeat business 88% 87% 78% 69%
3 3 Referrals from suppliers/subs/architects 64% 64% 46% 49%
4 7 Job signs or trucks 50% 51% 36% 43%
5 11 Company Web site 33% 31% 21% 27%
6 6 Organization or community networking 32% 32% 19% 18%
7 5 Phone book 28% 29% 21% 19%
8 4 Print advertising 28% 27% 15% 21%
9 9 Home shows/parade of homes 24% 25% 8% 16%
10 12 Outdoor advertising 21% 21% 10% 9%
11 8 Online referral services 19% 18% 7% 9%
12 10 Direct mail 18% 16% 6% 6%
13 13 TV radio/advertising 11% 11% 5% 4%



Increasing Specialization

Specialty 2005 2003
Full-service remodeling 66% 70%
Kitchen/bath 55% 41%
Exterior contracting 53% 38%
Design/build 48% 45%
Single-line/specialty contracting 24% 17%
Respondents were asked to check all categories that applied to their business.


Labor Costs Add Up in West

 

Residential remodeling Commercial remodeling New home building
Northeast 32% 33% 29%
Midwest 31% 33% 31%
South 31% 31% 30%
West 35% 38% 39%
Labor costs expressed as a percentage of total annual installed dollar volume.


 

Methodology:

In late 2005, Professional Remodeler conducted the Business Results Study to gather business performance and financial information about companies in the remodeling industry. The 2005 study was conducted by canvassing a random sample of Professional Remodeler readers. Results are based on 163 responses.

Financial Definitions

Gross profit: sales volume/sale price - direct costs
Net profit: gross profit - overhead
Overhead: indirect construction costs + sales and marketing expenses + general and administrative expenses

  • Indirect construction costs: construction costs NOT charged to a particular job, such as small tools and equipment, construction vehicles, mileage reimbursements, callbacks and warranty
  • Sales and marketing expenses: sales manager compensation, sales staff compensation and commissions, estimating personnel compensation and marketing
  • General and administrative expenses: owner compensation; production management salaries; design personnel salaries not directly charged to a job; office and clerical salaries; payroll taxes and benefits; retirement pension and profit sharing; bonuses; general office expense; rent and utilities; office communications; computers; vehicles; liability; property taxes; licenses and state fees; and professional services

Direct costs: labor costs + building material costs + other direct costs

  • Labor costs: direct labor, burden and subcontractors
  • Building material costs: all products used in a project
  • Other direct costs: rental equipment, small tools and professional design fees for a specific job
    Markup: the percentage added to total direct costs to arrive at the sale price

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