Last month in this space, I reviewed a series of market projections for 2014 from Harvard University as well as the industry’s leading associations.
A Measure of Success: Annual Business Results Survey
Most remodelers struggle to know how they measure up against other firms. Are you charging enough? How does your average job size match up? Are you paying yourself a big enough salary? Finding the answers to those questions is the idea behind our annual Business Results Survey, now in its sixth year.
Most remodelers struggle to know how they measure up against other firms. Are you charging enough? How does your average job size match up? Are you paying yourself a big enough salary?
Finding the answers to those questions is the idea behind our annual Business Results Survey, now in its sixth year. With the feedback of more than 400 respondents drawn from our circulation and other industry groups, this year's study gives you a good benchmark to see how you compare to other companies across several areas, including revenue, personnel costs, marketing, sales and more.
Not surprisingly, there are significant differences between companies based on their volume, which the tables on this page illustrate. We broke the industry down into four groups based on revenues: less than $500,000; $500,000 to $999,999; $1 million to $3 million; and more than $3 million.
(For reference, 24 percent of respondents had revenues under $500,000; 20 percent were from $500,000 to $999,999; 34 percent from $1 million to $3 million; and 22 percent over $3 million.)
The starkest difference is in job price, where we see the average go from $9,847 for the smallest firms to $133,456 for the largest. This would seem to indicate that many of the smallest firms are performing a lot of home repair or "handyman" work, while the largest firms are getting the bulk of the high-dollar projects.
One area where there is surprisingly little difference is years in business, with the average increasing from 19 years up to 25 years. This flies in the face of conventional wisdom that remodeling companies will grow in revenue as they become more mature. Clearly, there are companies with small volumes that have no intention of moving beyond that $500,000 revenue level. And they must also be finding a way to be profitable if they've been in business for almost 20 years.
We did see some subtle differences. While 64 percent of companies with $500,000 or less in annual revenue have been in business for more than 10 years, that number jumps to 87 percent for the companies with the highest revenues. In fact, 62 percent of those have been in business for more than 20 years.
Last year was brutal in new construction. Although remodelers were hit with some of that pain, the problems seem to have been less widespread. Nearly half of our respondents saw an increase in business in 2007, and only about a third saw business decrease.
The results were relatively constant across companies of all revenue size, with the $1 million to $3 million group being the only one to have more than half (54 percent) report an increase in business.
Remodelers are slightly (emphasis on slightly) more optimistic about 2008, with 56 percent reporting they expect business to increase, compared with only 21 percent that expect a downturn. If those numbers hold, it would be better than 2007, but it's a far cry from a few years ago. Again, those numbers hold steady for companies of all sizes.
There were no significant regional differences in revenue increases or decreases in 2007 or 2008, although respondents in the Midwest did report smaller median revenues ($900,000) than those in other areas. The Northeast ($1.25 million), the South ($1.4 million) and the West ($1.2 million) all came in significantly higher.
One other interesting note on revenues: Although it's difficult to say if the relationship is causal (are they more successful because they're in associations or in associations because they're successful?), the larger a firm is the more likely it is to be a member of NAHB, NARI or some other association. The average revenue of association members was $1.4 million, while nonmembers averaged $725,000.
Only 32 percent of companies reporting less than $500,000 belong to any association, compared with 50 percent for $500,000 to $999,000 firms. Sixty-six percent of companies with revenues in the $1 million to $3 million range and a roughly equal (statistically speaking) 63 percent of those above $3 million are association members.
At the same time, 53 percent of those who belonged to associations saw an increase in business in 2007 compared with 40 percent of those that didn't.
Labor tops expenses
Labor, whether employees or subcontractors, was the largest expense across the board, with the average company spending 21 percent of its revenue on direct labor costs and 25 percent on subcontractors. (We've boiled key expense numbers down to real dollars in the adjacent table.) The amount spent on direct labor didn't vary by company size — all were in the 20 to 21 percent range — but the largest companies spent more on subcontractors — 27 percent for those over $1 million compared with 21 percent for those under $1 million. Building materials accounted for 25 percent of revenue on average, with little difference by company size (24 to 26 percent range).
Owner's compensation averaged 5.5 percent, with the percentage dropping from 8 percent to 3.5 percent from the smallest to largest companies, although the real dollars obviously increased because of the companies' larger volumes. For the smallest firms especially, the real dollar numbers that equates to seems low. As many of these companies are sole proprietorships, perhaps survey respondents were not including the full benefits in profits, company trucks, etc., that they pull out of the business.
The average company is aiming for a gross profit of just under 30 percent, with 57 percent of companies falling between 20 and 40 percent. Disturbingly, 31 percent of firms are aiming for a gross profit below 20 percent. Association members, perhaps because of numerous seminars hitting on the importance of setting the right price, aimed for higher gross profits, with 57 percent looking for gross profits above 30 percent compared with only 24 percent of non-members doing the same.
While all sizes of companies were aiming for roughly the same gross profit, we did uncover differences in what they actually achieve. The average company has a gross of 25 percent, with an average of 21 percent for companies under $500,000, 24 percent for companies $500,000 to $1 million and 27 percent for companies over $1 million. About 62 percent of the smallest firms are getting gross profits below 20 percent, compared with 37 percent of companies with volumes above $500,000.
Whether because of a flaw in our survey or because of inaccuracies in the way numbers were reported by respondents, we were unable to get an accurate figure for net profits in this year's study.
Nearly half of the revenue a company brings in goes to labor, in-house or subcontracted. The average company responding to our survey reported four field employees and one office staff, not including the owner. More than 90 percent of remodelers have five or fewer office employees. About 13 percent reported no field employees and another 48 percent reported having one to five, so most firms are running with small teams, and/or making extensive use of subcontractors.
Not surprisingly, employee numbers grew as company size increased, but even the largest firms only reported 14 total field and office employees.
An average of 41 percent of fieldwork is performed by subcontractors, although 11 percent said they use no trades at all. The smallest firms were the least likely to subcontract work, with those under $500,000 farming out only 32 percent of labor, compared to 45 percent for those from $500,000 to $3 million and 40 percent for those over $3 million.
Specialty trades topped the list of services for which companies used trade contractors, with about 80 percent subcontracting plumbing, electrical and HVAC work. Many companies also subcontracted office jobs. Half reported subcontracting architectural services, 28 percent interior design and 8 percent sales.
Whole-house, kitchens top projects
The average company worked on 83 jobs in 2007, with an average job size of $65,216. At the same time, there were quite a few companies doing smaller amounts of work; 38 percent reported fewer than 20 projects in 2007. And that may have been the place to be in 2007, as companies doing fewer, larger projects seem to have enjoyed more success last year; those who reported business was up had an average project size of $126,694, and those who said it was down or unchanged had an average job of $36,940.
The most popular type of job in 2007 was home repair work, accounting for more than a quarter of all remodeling projects. Because of its low average price tag (see adjacent chart), though, that category only accounted for about 5 percent of total revenue. The top revenue producers were whole-house remodels and kitchens, both at about 15 percent, and additions at 14 percent. Whole-house projects topped the list for the South and West, while kitchens led in the Midwest and additions in the Northeast.
Other popular projects were bathrooms and single-line remodels, each accounting for about 11 percent of projects, and 12 percent and 7 percent of revenues, respectively. Besides remodeling, the average company also built about two custom homes a year, representing about 10 percent of total revenue.
A reason for the slippage in gross profit we noted previously may be that some remodelers had trouble sticking to their schedule. Only about 78 percent of jobs closed on time last year, and 14 percent of companies closed less than half their jobs on time.
Repeats and referrals lead the way
Remodelers always say repeats and referrals drive their businesses, and the results seem to bear that out, with about 80 percent of leads coming from repeat business and referrals from past clients and other professionals.
Repeat business generates 32 percent of leads, although 22 percent of companies reported they get less than 10 percent of their business from repeat customers. Referrals from past clients account for 35 percent of leads, and 33 percent of companies report getting more than half their business that way. Referrals from other professionals such as suppliers and architects resulted in 13 percent of leads, [but 66 percent of respondents said those referrals account for less than 10 percent.]
The average company gets almost 20 percent of leads from other sources, but more than a quarter of all firms said they exist solely on repeats and referrals. Of those other sources, job/truck signs were the most popular, being used by 67 percent of companies. Other common tactics were a company Web site (56 percent), organization membership (50 percent), print advertising (42 percent), Yellow Pages (38 percent), direct mail (32 percent), online referral services and home shows (both at 26 percent). No-call lists have clearly had a major impact over the last few years. Telemarketing, once a significant tactic for many remodelers, is now used by only 2 percent of companies.
We also asked respondents to select their two most successful marketing tactics besides repeats and referrals. Top choices were a mix of the low- and high-tech: job/truck signs, company Web site, print advertising, Yellow Pages, online referral services and home shows.
Just as with field and office staff, companies are running very lean operations in sales as well. Including the owner, companies reported an average of 1.8 salespeople. The only company size to average more than one sales employee beyond the owner were those over $3 million. More than half of all companies — more than 70 percent of those under $1 million — reported no salespeople besides the owner, and 98 percent said they had five or fewer.
Ninety-one percent of owners spend at least part of their time selling. Even for those companies over $3 million, that number is 83 percent. Of those owners who do sell, 35 percent of their time is spent on sales, and 20 percent spend more than half their time selling.
Despite the downturn in the market in 2007, 33 percent of companies reported receiving more leads last year than they did in 2006 and only 36 percent reported a decrease. There is, of course, a strong correlation between leads and sales — 52 percent of those that saw business increase reported more leads and 51 percent of those whose business was down saw fewer leads. At the same time, that means 48 percent of those that had larger revenues had fewer or the same number of leads (and 17 percent of those who lost business actually increased leads).
Companies reported converting 47 percent of qualified leads into sales. (We defined qualified as someone the remodeler met in person or at least provided a ballpark price.) Thirty-nine percent converted more than half their leads into sales. The smallest companies had the best conversion rate, as those under $1 million sold 51 percent of leads and those over $1 million closed less than 45 percent.