The remodeling industry has a growing problem on its hands that must be addressed immediately.
Cash Flow Analysis
This sidebar for 'Too Close For Comfort' analyzes in detail the financial elements of one remodeler's sunroom addition.
Ordinarily, Rick Duval collects a hefty down payment and generous progress payments tied to completion of strategic production phases during the job. "We try to set these things so we have a payment every month," he says. The financial plan for the Springer addition was based, Duval says, on a down payment of $15,000 in June, a progress payment of $12,000 at drywall completion in July, another $12,000 due after the tile floor was laid in August and a smaller, final payment due at project completion.
But the drywall wasn’t installed in July because Duval’s drywall man quit. By the end of the month, Duval had forked out nearly $20,000 for labor, subcontractors and materials with nothing but the down payment to carry him. His cash flow dropped into the red to the tune of almost $5,000.
"We usually have a weekly cash flow report on each job," Duval says. "It’s unusual to have negative cash flow." But when the cash flow is negative, "a red flag goes up." Duval then asks: Is there anything we can do to turn the problem around? The solution would have been to get the drywall on quicker, Duval says. But that was not possible.
As soon as the drywall was done in early August, Duval’s cash flow on the project bounced back to a positive $3,883. A delay in tile installation pushed the next progress payment into late September. The final $4,780 arrived three months after the project had been finished, when the Springers settled a dispute with the HVAC subcontractor over carpet damage. "It wasn’t good for cash flow to wait for that," says Duval.
The weight of production problems sank profits on the Springer job. Duval had expected job costs to come in at $30,600. The drywall and tile installation delays plus other snags -- including changes in the roof design and an unbudgeted cost for in-floor heating prep -- drove costs to $32,753. After accounting for overhead, Duval was chagrined to see that net profit had bottomed out at a negative 1.4 percent.
Too Close for Comfort