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.
Residential vs. Commercial
In a down market, some remodeling firms will look for commercial projects to keep their employees working and to beef up the bottom line.
In a down market, some remodelers will look for commercial projects to keep their employees working and to beef up the bottom line. The problem becomes how to mix and manage those diverse projects.
Tom: Marty, define commercial projects and give examples. Ray, how would you define your commercial projects? Give an example or two.
Marty: We live in an area that's very much a bedroom community, so there's not a lot of commercial opportunities out there. Usually they're really small independent retailers that are going to do a tenant improvement to their facility or wherever they're relocating. So it's kind of a smaller operation as far as the commercial end of it goes.
Tom: Ray, how would you define your commercial projects, and give an example or two.
Ray: It is a bedroom community, but there are so many people here that there's a lot of commercial building. We do projects in the medical field, in the faith of worship churches, Catholic, Protestant churches. We do dentists offices, firehouses, schools, things for Catholic Charities and different organizations. What really got us into this in a big way was when the ADA came about and all these commercial places that were considered to be places that the public would use would have to conform and put in bathrooms and ramps for the handicapped. That opened the door for Jarro, and from that we just grew. It really has enhanced our business. We found that when the residential business goes down, the commercial goes up, and vice-versa. What I do is cross-train everyone, especially my supers. A lot of them can manage both types of work. That is a big plus when one part of the industry slows down and the other one picks up: you can take that same individual and they can make a lateral move. We find that to be very effective for us.
Tom: Ray, you hit upon several good things. Marty, do you see the parallel between residential going up and that relationship to commercial?
Marty: I agree with Ray. From what I've seen, we'll be doing more commercial projects when the residential slows down. I don't know if that's because we're looking for them, or if it's because investors are putting money into their commercial properties as opposed to any kind of residential boom with homeowners. It seems like that's happened over the 15 years that we've been doing this — definitely. One of the things I wanted to point out is that we use a lot of the same trade partners between the residential and the commercial. When we do that, there are about three or four really important things to consider. We're a design/build firm. One of them is the architect. Ray mentioned the ADA compliance. That is a huge part of the planning process as well as implementation — making sure the design is all up to code. I'm sure it's different throughout the United States. We're pretty strict when in comes to the inspection process here in our local community. Davis is pretty notorious for having really outstanding building inspectors and really sticking by the books. Having our plan laid out in the very beginning has really been a backbone for the projects to move forward smoothly. Another consideration would be my electrician: going back and forth between residential and commercial, and having the knowledge of how to change between the two because of the code differential as well as the drywall and the sheet rockers, and getting into the metal stud framing. Ray could probably elaborate on that some more. Having those trade partners be able to go back and forth between residential and commercial makes a really big difference in establishing the long-term relationships with them.
Tom: Good, Marty. Ray, let's just expand on that. Can you expound on the similarities or differences between residential and commercial when it comes to trade contractors?
Ray Accettella, President
Ray: Our trade contractors, or "subs" as we call them, overlap on both; the residential and commercial, especially with the plumbing and electrical, as Marty said. The HVAC is a different situation where we get into providing heating and air conditioning. That's more commercial. People in that business want to do residential or commercial. One of the things that I wanted to expound upon is that we do very much the same thing Marty's doing on the west coast. We have a great architect base. People call us with projects they'd like us to bid on. I don't like to bid on anything; I like to be able to provide a service no one else can provide. It's really important to network if you're going to get into this business. We belong to the AAA, we belong to the National Kitchen & Bath Association and the Long Island Builders Institute, NAHB and NARI. We also belong to a network group here in Long Island where we go to breakfast every Wednesday morning. One person is there from each industry. It's really interesting. There's one lawyer, one doctor, one car dealer, one accountant, one contractor, one carpet guy, one electric guy. We work together and brainstorm. We're able to get a lot of interesting clients this way.
Tom: Marty, what's your relationship with architects? You mentioned it was important and that you're design/build. Have architects become an important part, and do you bid price only or do you work with the architects from a design/build standpoint?
Marty Morse, President, CEO
Marty: That's a good question. We basically do design/build in the sense that Morse Remodeling basically provides the contract to the customer whether it's commercial or residential. We basically are in contract. It's not an employee; it's a contract that we have and a really close relationship with a local architect. On top of that, we also have recently added to our payroll an interior designer who can actually take the plan and further enhance it doing 3-D modeling on the computer. We can take the "wow" factor into it and show the client that as well. That has been a really interesting progression for the company. I think people really want to see, whether it is commercial or residential, a 3-D model created showing what their new environment is going to be like. We're going down that path of adding more work force and in-house design.
Tom: Is there a particular software that you use for that 3-D model "wow" factor?
Marty: We use VectorWorks. I have a design background and wanted to become an architect. I started my company and never went to school to become a licensed architect. I grew the company as it went. I have a passion for doing that. As I'm sure Ray can testify, time becomes an issue, and just running the company is the biggest thing we are dealing with. I'm picking people and high-quality personnel to be around me. I have just added someone to the arsenal. UC-Davis is the local college campus here. They have a design program and use that program at the university.
Tom: That's great. Let's change gears. Marty, what is a healthy mix for you of residential and commercial projects that has been successful?
Marty: We don't really market for commercial. Commercial seems to just come across our lap once in a while. It might be an avenue that I will start to look at marketing for as our company keeps maturing and growing. There are probably a lot of potential clients out there who don't know we exist. We've been on a slow growth pace ever since the company's inception 15 years ago. I'm really not quite at the point where maybe around 5–10 percent of our work is commercial. If I went out and marketed it, I bet I could switch up to 30 percent quickly if we had the manpower and workforce to do it. With our recent downsize, that's hard to do. We've gotten away from having in-house carpenters. We have project managers now. We are managing trade partners as opposed to managing our own employees. With that transition happening over the last two years, I haven't been able to go out there and start marketing for commercial. It is something we are definitely looking into. As Ray said, educating the guys to know the difference between the two is the primary nucleus to making sure it happens correctly.
Tom: Ray, you're a larger company, but what would be a healthy mix when it comes to residential and commercial?
Ray: This past year, we finished up with 60/40 percent residential/commercial. Two years ago it was the reverse. It was the matter of the size of the jobs. We built a couple large places of worship. I would like to say it's extremely important for anyone who is going to venture from residential into the commercial business that you let your customers know because every one of those people you're doing the work for either works for somebody or owns a company. We get a lot of referrals by letting them know us through our Web page or the literature that we leave when we have the initial meeting that we also do commercial. Inevitably, it opens up the door: "I didn't know you did commercial!" They'll have an office and they want to move a wall, etc. It goes hand in hand. To me, commercial is easier than residential. We do more residential, and we're also a design/build company. However, the architects in New York don't like to go with a design/build company. Like Marty, we have a designer on staff. Every one of my employees has their own laptop. We all have software that we use.
Tom: What software do you use?
Ray: We use Chief Architect and 20-20. We have a person who handles all the selections. We find that is very important in both sectors. People are so busy today, they don't have the time. They need someone to help them walk through the process. We provide that at no extra charge.
Tom: You're talking about customers, Ray, and we'll just stay with that. How would you say your customers differ between the residential customer and commercial customer? You said that commercial was a little easier, or I would say, maybe just a different way of approaching a customer.
Ray: The commercial customer wants the project done, naturally, to their liking if you listen to their wants and needs. When I say it's easier, that's in the sense that the envelope of the building is structurally sound and either concrete or block with steel joisting. You can just remove walls much easier than when you go into someone's home, where you have to worry about bearing walls and headers and what's supporting below. A lot of the commercial buildings have concrete floors. Like Marty said, you line everything up — metal studs, plumbing — and put the ceiling in. Some of them get more elaborate. Some of the commercial people really want a "good look" when their potential buyers come in. They want glass block, a skylight, a special conference room with sound equipment in it, and we provide all that. It goes hand in hand. We're not just high-end though; we do all types of work. We do public service, public works, right on into private enterprise.
Tom: Marty, how do your customers differ? Is there a difference between the residential customer and the commercial customer?
Marty: I think there are two types of projects, whether they're commercial or residential. There are the projects where you're dealing with someone that is occupying a space, and there are projects where you're dealing with an unoccupied space. There are huge differences in how you move forward. If you're doing a small project where an office is occupied, you've got to control dust, sound and circulation patterns. It's the same thing with residential as well. You're dealing with homeowners who have high expectations that you're taking care of them. We typically are really good at dealing with the homeowner: the residential application of going in, busting out walls and putting up temporary locations and making the dust control work for them and accommodating their needs. Although, when we get the jobs where the customers move out of their house, it's a much easier project to manage. In the commercial sector, we mostly do the types of tenant improvements where there is an existing space that needs to be retrofitted to accommodate a new business moving in. We don't have to deal with the customer in that. I have maybe once or twice dealt with people in a working environment and doing a remodel around them. From that perspective, it seems like the commercial is much easier for us because we're not dealing with the customer living in the space.
Tom: Marty, you talked a little about marketing. You mentioned that you do more marketing toward the residential side and have not spent as much time with the commercial. Ray, I would ask you: do you market differently, and how and what are the costs of commercial marketing versus residential marketing?
Ray: It's interesting. We had a big marketing program. We used to advertise in different trade journals for the commercial and we do a lot of stuff in the local newspaper and House magazine on the residential side. What is really interesting is that the web has changed the whole business. Ten years ago, when I took a potential lead off the Web site, it was either a "tire kicker" or someone looking for an inexpensive price. Today, my No. 1 lead generator is the Web site. It's phenomenal. There's a whole younger generation; I look at my kids and they don't use a telephone book, everyone uses the Web. I still advertise. I spend $300,000–$400,000 a year on advertising.
Tom: $300,000–$400,000, which would equate to about ½ percent or something like that. Ray, do you bid the projects the same or differently? If you have a project out there that's commercial and a little higher volume or not, do you bid the projects the same or is there a difference between commercial and residential? That would be a question for both of you.
Ray: In my case there is a difference. On residential, if it's a design/build, we go, listen, suggest, and we do a preliminary. They take a look at it, it's modified and goes back on the drawing board again. We get it right, make sure we have all their wants and needs, exactly what they want. We home in on pricing it out. Everyone has a budget and we work around that budget. Sometimes we have to compromise what they want, so people may exceed their budget.
On the commercial end, if it's a public works job, I have to bid it. How I get around that is by working closely with the architects, supporting them at their AAA meetings, and giving them referrals. It gives me an edge on the bid process of a public works job.
If it's a private enterprise, that's done differently. While everyone else is giving bids, I can be more creative and say, "there's an easier way to do this, and it's going to give you the same look, and it's less expensive." If someone who runs a corporation or owns a company is looking to do a job correctly but also has a price in mind, you can be creative. Especially with all the products on the market today, there is so much more to choose from. I say it's a different type of sale from the residential home remodeling to commercial remodeling.
Tom: To sum that up, Ray, would it be fair to say that the residential side appears to be more high-maintenance than commercial?
Ray: In a way. As Marty said, a lot of the jobs, the homeowner is in the house, and it's very difficult; you've got to be sensitive. You've uprooted them; there's dust; there is cold air coming through because the guys are going in and out. Whereas commercial, it's really, "I want it done right, but how fast can you get it done?" They're usually not in the building. If they are in the building, then you put up temporary walls and try to do the best.
Tom: Marty, do you bid projects the same or differently in residential and commercial?
Marty: Primarily, most of the jobs that we do in commercial, as with residential, are design/build, and the process we use is quite similar: preliminary designs, some preliminary budgets, we sign everything, do some value engineering, work on the budget, work on the design and get everything so that we can go forward into a contract and construction/production mode. There is a very defined timeline that we go through. We make it structured so people understand where they're going and where they are in the process. It's not really bidding. We're working to develop that relationship with the client, building up that trust. We do the same thing with the commercial as we do with the residential. However, we have done some government jobs and public works projects where we definitely, by law, have to go out to bid.
(the discussion continues...)
What I find when we do that is — and it's pretty rare with my company when we have done that — our overhead goes up in the sense that there is so much bureaucracy involved and paperwork to do in the office to take care of to make sure you're doing the right payroll, having "prevailing wage," and the insurance claims. It seems that it takes up way more office time that we have when dealing with a residential application. Most of our clientele in the residential is using cash. The payments and everything else is working easily. Typically, when dealing with the government, you have to wait for the money to come in, too. There's the waiting period and setting up the paperwork. It is, from my perspective, a higher overhead.
Tom: Marty, staying with that and with a similar question: are the markup and margins different for the residential and commercial? When you bid it, do you have a different markup and margins for the commercial jobs versus the residential?
Marty: Typically, we'll just stay at our operating markup for residential as long as we're busy and everything is going smoothly. With the commercial, we will look at the job depending where we are and how busy we are and look at the profit margins. What we do is crank up the overhead a little bit more because we know we'll go through that experience in the office with paperwork. Actually, the production in the office is about the same as far as the overhead goes and as far as managing the project. What was the original question?
Tom: Are the markup and margins different for, let's say, a residential high-end kitchen remodel room addition versus a commercial job where you're working with an architect. The myth is that on residential, because you're working with the people, that you have higher markups. And in commercial, because you're working with another business, you actually go in at a lower margin. To us that might be a myth, but I was curious if you use the same numbers in markup on a commercial as you do a residential.
Marty: They're very close. If we really want to get that commercial project and we're going down that path — and the bread and butter is in the other direction, we'll definitely look at potentially lowering our profit margin. That's just because we're looking for that job right now. It's a supply and demand thing. If we're doing really heavy volume in residential and we're going to do a commercial project that comes across our laps, we'll look at that closely. If it's something that we want to take on and really want to have at that point in time, yes, we'll lower it. But if it's not, we'll just keep our same margins. If it's something they want us to use, it depends on what the supply and demand is at the time.
Tom: Ray, how do you do that with markup and margins with commercial versus residential?
Ray: I think Marty said it best. Residential is much higher than our commercial. When business is booming, sometimes that will change, and we'll go with a little higher markup on the commercial. But, we do work on a different lower markup on the commercial side.
Tom: You would justify that because why, Ray?
Ray: I would justify it because on my commercial jobs — and I really run the commercial end of the company — I run all sales of the company and I oversee the commercial end. When we put a project together, we're in and out; all the pieces of the puzzle. Sometimes when you're doing a design/build, even though you've done the model, even though you've done the plan, people cannot conceive, and they'll say, "You know, I don't like that." We'll take it down; change orders start. I like to work with the lease amount of change orders. In commercial, I find we can get a much faster production schedule, provided there's no material shortage. There are a lot more subs in commercial. When my finish carpenters come in and do a high-end kitchen, as you said, my guys install the kitchen. Nobody installs a cabinet but my guys, my master carpenters, because that is the final look. Everything's got to be right.
Tom: That's on residential?
Ray: Yes. If I'm doing an executive suite for someone in a bank or something in a funeral parlor and they want high-end bathrooms, we install the cabinets; my guys do. I use a lot of subs for other parts of the project.
Tom: You use subs more on commercial than you do on residential. But it doesn't matter if it's residential or commercial, with the fine carpentry work you want the finest quality of craftsmanship. Therefore, you use your own and don't sub that particular part out.
Ray: Absolutely correct.
Tom: But, across the board, it sounds like you do sub out a lot more for commercial rather than residential.
Ray: Yes, because if we're doing a bathroom in a residential, I use my own guys, they're in and out, they do it every day. In a commercial job, I'm going to have the guys go in and do a demo, put in the track and the metal stud; the next guy's going to be the plumber; the next guy's the electrician. If there needs to be some duct work moved around for ventilation purposes, fresh air makeup, that's another sub. Then we bring the insulation Sheetrocker in, the spackle guy and paint it. Then if I have to hang items, I'll hang them. I know that my guys under my direction have blocked everything out to support everything and it's going to be perfectly sound for commercial application. But I do cross over my employees on the finish work.
Tom: Marty, let's talk about that. Do you have separate crews for your commercial and residential? And how do you relate to subcontractors?
Marty: Pretty similar to what Ray just said. We'll use pretty much all trade partners on commercial projects. There are a few trade partners that don't cross over like we talked about before; I think mechanical is a pretty big one, too. Some plumbing where there's a lot more to deal with — fire sprinklers and things like that. There are some that are definitely separate. I would like to back up a little bit. We were talking earlier about dealing with percentages in the markup. What I think happens in the residential application is that the customer is really looking more for that service. They want to be serviced. They want you to take care of them. They want someone to be there every day and they want to see the high quality progress happening. That's why you have the ability to maintain a higher markup on that versus commercial. In commercial, they want to see the product when it's all done. If someone's not there, it's not the end of the world. If it's dusty, it's not the end of the world. That service part of it isn't as important as it's going in production, I think. It's important, but it's not as important. Therefore, they're looking for that end product. You have to look at that from a bidding perspective and know that the service isn't that important. They can go hire a lot of these other guys and there's more competition from that perspective.
Tom: You've picked up a very important thing. In residential, it's all about service. In commercial, it may be all about the product. There are two specific differentials that will make a difference on approaching the topic as far as mixing and managing residential and commercial. As far as the union/non-union situation. Ray, is your company union or non-union?
Tom: Does it come into play at all as far as commercial work, union versus non-union? I understand residential. We're open shop here, and residential is not a problem. Is there any difference on commercial?
Ray: There is now. Union has gotten very well-known with the elected officials. They've supported them in their elections. The unions actually have legislation being passed that if you do public works it has to be a union shop. It hasn't gone through yet. Now, if you do it and industrial development money is used, it must be prevailing wages. As Marty said, when you get into prevailing wages, it's a lot of paperwork. If you're geared up for the paperwork and understand it, and you have to deal with federal agencies like HUD, it's fine if you know what you're getting into. Going back to markup, you've got to adjust for that. If you don't, it's an exercise in futility, because you don't make any money.
Tom: Marty, from California, are you a union or non-union company?
Marty: We're non-union. Really, it's not applicable to my company here. I'm not too familiar with the union in this area.
Tom: We're the same. It's not a big issue, in fact it's a small one. Ten or 15 years ago it was a huge thing. Anything commercial played a big part on the hassle part of it as far as the owners not necessarily giving us problems, but they had a way of intimidation and other things. It's not gone away, but it has sure died down a bit. There's always legislation being introduced to that. It doesn't sound, Ray, like that stops you on normal commercial jobs. Would that be fair to say?
Ray: That's exactly right. Just to be clear on this. If I bid on a job, which has to be prevailing wage, and the union wants to bid on it, they're welcome to bid on it. It's open shop, and if their price is competitive with the rest of the trades, be they union or non-union, it's OK.
Tom: Does prevailing wage come in on just government jobs — not necessarily regular commercial jobs? Is that fair?
Ray: That's a fair statement. They'd like to see that everyone uses prevailing wages regardless even on private enterprise. The union has made that known. I don't have a problem with it, as long as I know about it from the get-go.
Tom: That makes sense. Ray, let's just talk about payment. Is there a difference on how you get paid and how you deliver invoices. It's all about payment. Is there a difference on how you get paid from a residential project versus a commercial project?
Ray: On the residential, if it's a design/build team sale, we take that fee to do that and, once they sign the contract, we deduct that amount, whatever was invested, from the price of the job. We immediately do a checkout and we get another payment. After that, there is a series of payments as we go. The customer is never ahead of me and I'm never ahead of the customer.
Tom: It's usually at the start of the function?
Ray: Always at start. Start of drywall not at the end of drywall.
Tom: How's commercial?
Ray: In the commercial, if it's an AAA contract, which is widely used here, it's according to how it's written. It's usually once a month. I prefer it to be bimonthly. But on most of my jobs, it's once a month. I usually put the package in like on the 25th and get it signed off. I don't have a problem collecting, it's just that it's one big check rather than a series of checks. That's the difference between the residential and the commercial.
Tom: Marty? Do you have a difference in how you present the invoice, how you present the invoice and how you get paid on residential versus commercial?
Marty: Most of our jobs are quite similar in that we're working with a private party. We can negotiate the payment schedule for both residential and commercial. For residential, we stick with percentage draw, basically running unique with the project. We do it at the completion of a certain trade, which is interesting. I might want to look at the start, which makes a little more sense, I believe. We do it at completion of demo, completion of drywall, completion of painting. It's usually a 10–15 percent draw. When we do the commercial, though, we tend to do a larger percentage and less draw payments. It seems like facilitating the payment from the commercial project is a little more cumbersome. When we do the government jobs, of course, it seems like getting the money takes a lot more time. It is more of a monthly scheduled thing. One reason we like to do the residential because it seems like getting paid on time is a lot easier and the turnover is a lot quicker from the billing cycle.
Tom: Makes sense. Marty, staying with that. As we have a little downturn, we see there are times where people in the remodeling business across the United States look to diversify. "How can I get into something?" if in fact they've had a little downturn. Some pockets haven't, but there are some others that have, especially if they follow new construction. What would you say is the major difference between residential and commercial projects? In other words, if you have one area where you'd like to say, "Here's the major difference if you're going to get into commercial projects." What would it be?
Marty: If you're a residential remodeling contractor and looking at getting into commercial projects? From my perspective, which might be different from Ray's, it seems like the commercial end of it is a little easier to get into. It's hard to say what kind of advice I'd give. I'd probably say that you need to market yourself.
Tom: What would you do first, then? They call you up and having read this article will say they want to get into commercial. What's my first step?
Marty: First step, in our community, the way we operate here with local real-estate and commercial real estate I would actually go to the commercial real-estate people. Say, "This is my company and this is what we do, and I'm willing to do whatever commercial projects that you have." I would network and get in front of the people that are going to be looking for potential commercial remodeling contractors.
Tom: Would that be the Chamber of Commerce?
Marty: Very likely could be. We are involved with the local Davis Chamber of Commerce here. Yes, that is a huge networking tool. In our market, too, getting to know the real-estate agents and the different organizations for real-estate around here is a huge part of business. A lot of residential remodeling contractors start off by doing little odds and ends for resale inspections that need to happen around here, and the companies grow from there. I would do the same thing from the commercial perspective. In our community, there are a certain few that you could go to, and all of a sudden you probably could have quite a bit of work. In this local arena, that's probably what I would do. You have to realize that we're in a community of about 60,000 people in an agricultural area. The surrounding communities are about 10 miles away. It's a really confined, small-town atmosphere where word of mouth is probably the No. 1 form of advertising.
Tom: Ray, what advice would you have to give to a remodeling contractor out there who will read this article and are wanting to get into the commercial field? What advice on where they start and the best route to go to get started successfully?
Ray: The first thing would be to take a look at what part of the commercial renovation business you want to get into. I think you've got to crawl before you walk and I think the education process is extremely important. Commercial is completely different. There are different codes that you have to meet: fire codes, door ratings, egress. The best way to do it is to get an education. You can go to NAHB and take some courses. Read up on it first and then go into the business. So many people try this and they go in gung-ho. It comes back to bite them, and they're unsuccessful. I think it's extremely important to have a plan. Start off slow and, once you understand the business and the demands that it takes, weigh the positives and negatives. We can point them out and talk about them forever, but if you don't understand and don't get that education it will come back to bite you. I thinks it's very, very important. And, don't try to go out and do it all at once. It's a big business. When I first started, I did a chocolate factory, and then the next thing I'm doing is an emergency room in a hospital. And then it just kept growing. You have to understand all that. There's a whole different mechanics that go into commercial renovation and codes to meet than there are in residential remodeling.
Tom: Let me summarize what I recall. We're talking with Ray Accettella and Marty Morse from both ends of the spectrum, one from New York and one from California.
We talked about defining commercial projects, different than design/build. We talked about anywhere from the medical field to churches, firehouses, schools and the like. An interesting thing came out of this. The major breakthrough and change was when the ADA came out; accessible bathrooms lead to ramps, and it went on from there.
You both came to the consensus that when residential goes down, commercial goes up, and vise versa, which I found very interesting. The cross-training of your employees was very important. When it came to trade partners, trade contractors or subs; I use all those as one entity, but it's the trade contractors that we use. In that particular case there is some overlapping. Maybe more in plumbing and electrical but when it gets to heating and HVAC it is different in residential and commercial. In codes, it's just different whether if it's a dry waller or Sheetrocker or whatever the case may be. They better know the codes because of the major differences between residential and commercial.
We talked about getting an architect base and that networking is important. Ray, you mentioned that you were in the AIA association, the Kitchen and Bath; NAHB and NARI becomes important. I found it interesting from the local standpoint on networking groups meeting once a week, where one member of each profession attends. As far as how to get started, that would be a great place as far as a networking area.
Marty talked about VectorWorks software. Ray, you use 20-20 and Chief Architect. The close relationships with the architects and how you both have an interior designer or decorator on staff to get the "wow" factor.
We talked about a healthy mix. It was important to have your residential customers know that you did commercial, because that's repeat referral. We track that here in our office. It sounds to me like we need to do a better job. The residential people you deal with either own a business or they work at some business or they know some other commercial. That word of mouth becomes very important.
The difference between residential and commercial customers became clear. There are two types of projects: occupied and non-occupied. It's a little easier and more prevalent, in commercial, to be unoccupied. You both make it sound that, in some ways, commercial is a little easier, or a little different from residential. Ray, you pointed out that the No. 1 lead generation is your Web site. That's interesting to hear.
Bidding is different. The residential design/build. You design, listen, create and go to budget and compromise and move forward to contract. They pay for that design in some cases. In commercial you've got to bid if it's a certain kind. You work with private architects and, as Ray mentioned, suggest better ways and maybe for a little more value to get the same products.
We can build a payment schedule in for residential a little bit easier than the government with the prevailing wage because we have to wait for the money.
The markup and margin was interesting. Marty pointed out that residential is about the service and commercial is about the product. The commercial side might be a lower markup because you've identified lower expenses.
Crews and subs; we mentioned that we used about the same. Ray was very confident in that you use more subs in commercial. However, when it comes to special high-end cabinet or woodworking or craftsmanship, you make sure that your guys were used.
We talked about trade unions. It didn't sound like they were a major stumbling block. We talked about payment schedules. Ray, we were successful in moving Marty to getting his payment schedule at the start of an event and opposed to at completion.
We talked about getting into the commercial. Take the first step and network with the Chamber and real-estate people. Don't just jump into it. You can't just say "today I want to be a commercial contractor." That education is very important. I love the term you used that you need to crawl before you walk. I think in this business we start wanting to run right from the block. Education is important because codes are different; read up and take some courses. Then systematically go after it instead of just jumping to a conclusion.
Tom: Marty, what have I missed?
Marty: That was one of the best summaries I've ever heard. I wanted to comment a little more on the same token, it was fun to hear Ray's side of it. Obviously he's doing a bigger business and lot more commercial than we are. He touched base on something that's really important: it's that in the commercial avenue you really need to have that education and work experience. You are dealing with the public and your liability is huge. You can get taken down very quickly if you don't know what you're doing. More so in the commercial avenue. That was a very good point. One other thing, the Web site is a wonderful tool for us. Our clients will know more about us than we know about ourselves. It's neat that you can educate your customer before they even walk in your door about how you operate.
Tom: Ray, final comments?
Ray: Your summary was great. I think the business has been very good to Jarro Building Industries, and I love what I do. And if you love what you do and you're still open to be creative, you can find different niches in the business, it's a fun business to be in. It's a challenge and I like to be challenged. I love to work with people. One thing I'd like to say in closing, I find it to be very successful is that I'm involved in the community. I give back to the community, and I get a lot of publicity from it. Example is we just built a handicapped ramp with a treehouse for terminally ill children with cancer. We're going to get front page from this July 4th weekend. We volunteer our services for coaching. We support the little league. Even my staff, even my employees, I find out I happen to be a 35-year volunteer fireman, and that's how I got into renovating firehouses. And my employees are firemen. It's all part of networking. If you look at your base, it's right there in front of you.