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.
Project Spotlight: Too Close for Comfort
One remodeler recovers after a sunroom addition leaves him in the red.
Naturally, Dick and Terri Springer invited Rick Duval to bid on the room addition they planned for their Fargo, N.D., house. After all, Duval was a family friend -- his lakefront cabin is next to the cabin Dick’s father owns -- and they’d heard he did good work.
And naturally, Duval bent over backward to give the Springers a satisfactory price -- a friends’ discount plus generous accommodations during contract negotiations.
"I thought everything was going to be OK," Duval says. From the Springers’ perspective, he was right. The room looks great; Terri calls it just about perfect. From a financial perspective, though, Duval admits this job isn’t real pretty.
In 17 years of business, Rick Duval Construction has earned a first-rate reputation in Fargo and gained the lead as the "biggest remodeling company in our area," says Duval. "We’re good at hand-holding high-end clients." But business has been a constant struggle for Duval Construction since 1996, when the company strayed from this niche to take on three large light-commercial projects. High revenue numbers drew Duval into it, he says, but he underestimated the impact of the lower profit margins. Once committed to the months-long projects, Duval’s crews were unavailable for higher-margin residential work, and he’s still paying for that mistake.
Relationships in the office started breaking down when the company was ensnared in the commercial jobs, he says. Two salespeople left to compete with Duval, taking three leads and some laborers with them. The new competition pays just a little bit more, he says. With unemployment hovering around zero, nobody is looking for work in Fargo. Duval has had a devil of a time restaffing. Even when he finds somebody good, training the new employee cuts into his selling time.
Duval also is battling overhead. The expense of a production manager and other operating costs pushes overhead to a steady 40% on markup, give or take a percent or two. That high expense factor has squeezed the bottom line, which Duval says is pretty close to break-even.
Lately, the picture has improved. A good estimating draftsperson and another salesperson recently joined the company. Duval is focused on trying to keep overhead down and sell more product. There has been no shortage of calls from prospective customers, and Duval Construction is positioned to handle projects more profitably.
One thing that has not changed is Duval’s steadfast commitment to give his customers a quality remodeling product at a fair price. "You want to negotiate to the point where they’re happy and I’m happy," he says. Once the contract is signed, he adds, "You have to do what you said whether you make money or not."
At the time the Springer contract was negotiated, Duval says, “I felt comfortable with the price.” His initial proposal, $45,000, detailed construction of the room addition and adjoining deck. That price, says Terri Springer, was too high. Even though Duval had discounted the markup by several percentage points, his quote was several thousand dollars higher than that of the second bidder and $16,000 higher than that of bidder No. 3.
Still, Duval was the top contender. One reason was that he was ready to tackle the job immediately, and the other remodelers were not. “I didn’t want an eight-month project,” says Terri. The other reason: Duval’s proposal was thorough and reflected what the Springers wanted — a sunny, draft-free room where they would install a hot tub and where their Amazon parrot would thrive. “The others were trying to sell us on what they wanted,” such as an all-glass room that, Terri says, would not be practical in chilly Fargo.
The Springers asked Duval to drop his price to $42,000. To bring down costs, they offered to reduce the scope of work by taking responsibility for cleanup, garbage removal and deck construction. Duval agreed, realizing that his carpenter would organize the waste anyway. For his part, Duval says he took out the contingency factor. After the Springers selected a large hot tub, they decided to make the room 4 feet wider and incorporate the stone chimney of an existing outdoor fireplace. That raised the estimate to $43,200. The contract was signed June 9, 1998, the design was tweaked over the next two weeks, and Duval broke ground June 23.
Well aware that the contract price cut dangerously close to costs, Duval went into the job hopeful that production would flow smoothly and that he’d be able to hold on to a slim profit. That’s not what happened.
The job started easily enough. Dick Springer came home from work one day and decided to do the backfilling using his own tractor, but that generated a credit of only $200. The first serious glitch occurred during roof framing.
Duval put the roof in, and it wasn’t lining up with the existing house. “The fascia boards were not lining up,” Duval says. The Springers were out of town, so Duval tore out the roof and vaulted ceiling, redesigned the roof system and rebuilt it so it came together right on the inside. When the Springers returned from their trip, they were not happy.
“We wanted vaulted ceilings,” says Terri. “When we came back, we had only 6 1/2-foot walls [intersecting with a ceiling that rose to] a sharp peak.” Duval tore out the rafters again and built 8-foot walls, a 2-foot ring of flat ceiling around the room’s perimeter, and a central, vaulted ceiling. All told, the roof-framing problem cost Duval two days of production time.
The next black eye occurred during drywall in late July. Duval’s drywall installer, a company employee, put in two days of work and then quit to work for Duval’s new competitor. “The job was sitting there with the first coat of tape on,” says Duval. The quickest fix would have been for a drywall subcontractor to jump on the job, but Duval Construction had no relationships with drywall subs because it handled the work in-house. Finding a subcontractor on short notice was not going to happen. Instead, lead carpenter Mark Volesky stopped installing siding and taped drywall. Cost to Duval Construction: four days of production time.
After construction began, the Springers decided to add in-floor heating. “That was a killer,” says Duval. To price the change order, he received a quote from the heating contractor; it did not include prep work such as filling in between heating coils with concrete and adding a layer of mortar before tile installation. Duval lost another day of production time and the cost of the mortar layer. Worse yet, the tile installer announced he’d be 10 days late starting his work because a bigger customer needed him. Duval prepared the Springer addition for the tile subcontractor and then sat for days, waiting for the tile to be laid. Once the tile sub arrived, he did beautiful work, but he also charged Duval an extra $100 to cope the tile around the chimney.
The final blow came when the HVAC contractor cut the Springers’ carpet between border and field while extending the ductwork into the addition, which was totally against the rules, says Duval. And the cut wasn’t even straight. The Springers wanted all the carpeting replaced, the HVAC company’s insurance denied the claim, and three months later Duval finally mediated an agreement between his client and his sub. The room addition was completed in September, but because of the carpet dispute, Duval did not receive the final progress payment until December.
In the end, Duval lost money. Yet, he’s proud of the finished product. “The outcome was great,” he says. “It’s a good job. We took the long road [to get there, but we] stayed with it, navigated it, did our best.”
Throughout the project, the Springers were understanding when Duval ran into problems. “What I wanted them to care about was that they got what they wanted,” says Duval. Mission accomplished. Terri Springer says she and her husband are happy with the room addition. What’s more, she says, “Our relationship with [Duval] is as good now as it was before.” Terri recommends Duval to friends who want to remodel their homes. She tells them his prices are high — and so is the quality of his work.
Cash Flow Analysis