A friend indeed

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For repeat clients, especially friends, Mike McCutcheon of McCutcheon Construction in Berkeley, Calif., makes an extra effort to accommodate their needs. When psychologist Luli Emmons and landscaper Frank Graetch came to him in 2003 with ideas for a kitchen remodel that cost more than they wanted to spend, McCutcheon proposed a solution: time-and-materials pricing.

April 01, 2004

Sidebars:
Snapshot
The Fnancials
Budget History

For repeat clients, especially friends, Mike McCutcheon of McCutcheon Construction in Berkeley, Calif., makes an extra effort to accommodate their needs. When psychologist Luli Emmons and landscaper Frank Graetch came to him in 2003 with ideas for a kitchen remodel that cost more than they wanted to spend, McCutcheon proposed a solution: time-and-materials pricing.

"When we have an owner who's really trying to save and wants to do as much of the work themselves as possible, that's one of the cases when time-and-materials makes a lot of sense," says McCutcheon. While his company does both fixed-price and cost-plus jobs, he says fixed-price doesn't always fly in the San Francisco Bay area.

"These people are highly educated, super-consumer types," he explains. "They want to know the details. They want to get involved. Our systems lend themselves to that kind of clientele."

Advantages to the client

Emmons and Graetch had hired McCutcheon several years earlier for a bathroom remodel on their 1948 split-level Colonial and had wanted to redo their kitchen since moving into the home in 1985. The drawings and elevations they brought to McCutcheon, created with the help of several family members and friends who are architects, showed a kitchen that McCutcheon estimated at approximately $100,000, fixed-cost.

The clients wanted to bring the price down by $20,000 to $30,000. McCutcheon proposed a T&M approach and letting Graetch do some of the work and provide some of the materials. McCutcheon Construction's employees were familiar with Graetch's landscape contracting work, which made it easier for McCutcheon to give up some control.

"It took a lot of mutual trust," Emmons says. "Michael was willing at every stage of the process to work with us and decide if we could do it, and then bring down the price. He was very considerate of our needs."

McCutcheon and production manager Bill Lowe assigned project manager Rik Pickrell to the job. "Time-and-materials jobs depend on people who can move to be really successful," Lowe explains. With 20 years' experience at McCutcheon Construction, Pickrell had the speed and skills to keep the job moving without using subcontractors for much of the work.

The construction contract was signed and the permit was pulled in mid-March. Construction started April 2, 2003. Lowe says speed to production is one advantage of a T&M project. "There's more goodwill, more faith about things being done aboveboard."

Graetch did most of the demolition, as well as cleanup, dust protection, insulation and painting. He and Emmons purchased lighting fixtures, plumbing fixtures and appliances. Graetch also helped assemble and install the cabinets, which came from Ikea. Some of the money saved on the product went toward labor, though, to reinforce the cabinets. For instance, Pickrell added an angle iron across the base cabinet to help support the heavy sink.

Pickrell came to the site daily, and Lowe visited weekly to meet with the clients. Each meeting included a review of the budget and schedule to ensure that costs didn't creep out of control.

"There was no stress in this whole experience," Emmons says. "It was so much fun."

 

Snapshot

Michael McCutcheon

McCutcheon Construction Inc.

Location: Berkeley, Calif.

Type of company:full-service remodeling

Staff model: 13 office, 29 field

Sales history:

1999.....$1,679,691.25

2000.....$3,022,755.89

2001.....$4,384,807.95

2002.....$7,408,405.56

2003..... $6,426,223.18

Average annual jobs: 50-80

Workweek: 35-45 hours

Software: Intuit Master

Builder, ACT!, Chief Architect, VectorWorks, Microsoft Office and Project

Contact: www.mcbuild.net

The Fnancials

Michael McCutcheon knows that many remodelers would turn away a job before accepting a gross profit of less than 30% or letting customers supply labor and materials. He prefers to be flexible.

"You can't just look at percentages. You've got to look at dollars," he says. "The real choice was between $0 and $20,000. The question is: Do we have so much work that we want to give this up?"

At the time, his answer was no. Early last year, McCutcheon thought the market for large jobs was softening and that the company couldn't "coast" on large referrals from architects.

The firm creates time-and-materials estimates using Master Builder's power takeoff feature, which can create reports at a level of line detail beyond Construction Specification Institute codes. Hourly labor rates include a labor markup of approximately 30%. McCutcheon adds a 20% fee to the total estimated labor, materials and subcontractor costs to come up with the final estimate to present to the client. Fixed-price bids are created the same way, except McCutcheon adds a 5% "contingency" fee to guarantee the price.

"We think it helps us sell the jobs when we show the details," says McCutcheon.

Cash flow: California law allows remodelers to ask for only 10% of the contract amount or $1,000, whichever is less, as a deposit. McCutcheon Construction forgoes the $1,000 and invoices clients biweekly beginning two weeks after the start date. The company bills for actual work completed, including labor, materials, subcontractors and fee.

Profitability: McCutcheon says most of his T&M jobs make a 30% gross profit. With overhead costs running at 20% of sales, that leaves a 10% net profit.

With McCutcheon's T&M structure, this job couldn't achieve a 30% gross profit because of the amount of labor and materials supplied by the client.

Budget History

Initial estimate: $100,000-$105,000

Reductions:

Owner demolition (saved about $2,500)

Owner hauling (saved about $2,000)

Owner painting (saved about $4,000)

Owner appliances (saved about $10,000)

Deleted contingency fee (5%)

Final estimate: $77,797

Final price of job: $66,489

Cost to produce: $50,367

Gross profit: $16,122

Budgeted gross profit: 25.50%

Actual gross profit: 24.25%

Comments on: "A friend indeed"

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