The remodeling industry has a growing problem on its hands that must be addressed immediately.
Business benchmarks and how to hit them
Revenues dropped in 2003. According to Professional Remodeler's annual business results survey, total annual installed dollar volume dropped by 24.5 percent, from an average of $3.1 million in 2002 to an average of $2,340,370 in 2003. Firm size shrunk too, from anaverage of 18 full-time employees to 12. That's the bad news.
The good news is that we fine-tuned our survey to provide readers with data on both residential and commercial remodeling jobs as well as new homes, recognizing that many remodeling contractors do some combination of the three.
In addition, acknowledging that a snapshot of what is does not necessarily provide an image of what could be, we talked to some remodelers who know how to keep profits and markups up even in tough years to find out how they do it.
One secret they share: participating in a benchmarking group. Whether for contractors in different regions or for local service businesses, these groups give you some idea of low, average and high performance, and help members to raise the bar. Do the same with these pages.
The many models of remodeler
There might be as many business models in the remodeling industry as there are remodeling companies. Think of all product and service offerings: the job types, the architecture and interior design work, the new homes and more. Then think of the different ways to incorporate, to report net profit and owner's compensation, to staff the field with full-time employees or to subcontract most work - it makes for a dizzying array of possibilities.
All of the survey's 225 respondents run or manage companies that do at least some residential remodeling. But 36 percent report doing some commercial remodeling and 41 percent report building some new homes. Pricing and margins on those job types tend to be lower than on residential remodeling, so we asked respondents to address their volume in each of the three areas separately. To improve the accuracy of the information, we only tabulated data for people who did at least 10 percent of their 2003 volume in that area. That left us with 86.6 percent of overall respondents providing data on residential remodeling, 43.6 percent for commercial remodeling and 49.3 percent reporting on new home building.
While the number of jobs per year averaged out at 139.6 for residential remodeling, 17.1 for commercial remodeling and 29.7 for new homes, some large developers raised those numbers. Only 15 percent of respondents did more than 50 residential remodeling jobs in 2003, and only 17 percent did more than 20 commercial jobs. On the new home side, just 19 percent built more than 10 homes.
To find out more about the typical salesperson, we asked some further questions of those firms - just 36 percent -that had an internal sales force besides the owner. Average annual sales per salesperson ranged from $697,230 in residential remodeling to $932,850 in new homes, with commercial remodeling falling in the middle at $762,490.
These firms report converting, on average, 40.7 percent of qualified leads -those where the salesperson met with the prospect face-to-face and/or went through a ballpark pricing exercise - to actual sales. Fourteen percent of respondents said they closed more than 70 percent of such leads.
Gross profit target and actual gross profit are two very different things, as our survey testifies. Respondents report that on average, only 63.1 percent of residential remodeling jobs closing within 3 percent of gross profit target. That number doesn't improve much for new homes (66 percent) or commercial remodeling (67.6 percent).
Assuming our average total annual volume of $2,340,370 and slippage of just 3.1 percent (best-case scenario) on one-third of the jobs and volume, and you've lost approximately $23,942 for the year. That money could have gone for an entry-level employee, new office or field equipment or the owner's retirement.
Referral and repeat business from former clients continues to be the largest source of quality leads for most remodelers. Least popular were broadcast advertising and outdoor advertising, which accounted for no business at all for 86 and 84 percent of respondents, respectively.
The digital world, however, is starting to make a real impact on remodeling, with 44 percent of readers reporting their company Web site as a source of business and 27 percent saying the same for online referral services.
Insurance and materials costs continue to rise. Exceeding the average gross profit and slippage metrics will be essential to staying in business.