$2 Million and Counting

Alpha Contracting rethinks its company strategy, ventures in a new direction and reports record growth.

March 31, 2001

In 1995, Allan Lutes had a revelation about his company, Alpha Remodeling. Lutes realized that he was working just as hard at smaller remodeling projects as he would have to with larger jobs. He discovered larger projects were easier to manage, could utilize one highly skilled carpenter to manage lesser skilled employees, and yielded more profit dollars.

After thorough review and analysis, Lutes began a transformation that literally meant turning his back on his existing business. Doing so would eventually bump his business up to the $2-million benchmark.

Focused primarily on custom remodeling and fire and flood insurance, Alpha Contracting began in 1989 as an adjunct to the commercial real estate company where Allan Lutes was employed. Rather than continue paying subcontractors to perform handyman and maintenance services in apartment buildings and fraternity and sorority houses, Lutes’ company began to complete those tasks in-house. Based upon an agreement with the owners of the real estate company, Lutes took over ownership of Alpha Contracting and separated it from the real estate company. He joined Alpha full-time in 1994.

Alpha Contracting continued as a typical remodeling company, completing small jobs and a variety of handyman services. Lutes and his three employees steadily grew the business to more $800,000 that year. The remodeling firm that evolved has steadily grown in annual revenue. Because Alpha Contracting is a design/build firm, many of the tasks - from job creation to completion - are in-house, allowing the company to exercise complete control over projects. Lutes has developed a variety of systems to manage the different aspects of his business. The fact that 85 percent of Alpha’s remodeling work stems from referrals is indicative of solid systems and a satisfied customer base.

 

Projected ratios for a single-line trades division as an adjunct to a $2-million remodeling company
 
Single-line trades
Remodeling
Receipts
100%
100%
minus direct cost
63-37%
65-67%
= Gross Profit
33-37%
33-35%
minus Overhead
25%
24-26%
= Operating Profit (before taxes)
8-12%
8-10%

But it was the $2-million epiphany that created the company Alpha Construction is today. By paying attention to his numbers, Lutes reached three significant conclusions. First, he noticed larger remodeling projects yielded substantially more gross profit dollars. Second, he realized how difficult it was getting to recruit skilled crafts people. And third, Lutes observed he was receiving a lot of calls for single-line trades (i.e. windows and siding) but not pursuing them. Sensing opportunity, Lutes realized it was time to take a different path for future growth.

Lutes began a year-long study of the marketplace. Because Lutes believes deeply in industry associations, he first turned to building associations to learn about the marketplace. For product information, he went to window and siding manufacturers and his own material suppliers. He also frequented remodeler conventions and visited manufacturer booths.

Franchise research was conducted for the possible purchase of a window or siding franchise, but that route was ultimately dismissed. Ever the astute businessman, Lutes felt the franchises did not offer sufficient business support.

Lutes also contacted single-line trade companies he read about in trade publications and found they freely shared information. Apparently, the companies outside of his market area did not see Alpha Contracting as a threat to their customer base. Finally, to get a sense of how to conduct this new type of business in his own area, Lutes also called upon local single-line trade contractors.

After analyzing housing stock in the community (including age of housing and number of residents), local competition, and the opportunity to snag market share, Lutes reached a conclusion: He would expand into windows and siding.

The first thing Lutes did was the same thing he does every time he seeks to grow his business - install operational systems. "Investing in systems," says Lutes, "is more important than growth." Next, Lutes set out to find the most experienced people in the window and siding business and hire them. "It was the best thing I did," he says. In turn, the new employees hired by Alpha Contracting retained sales people on a subcontractor basis. "It’s a tight-knit group of people who do this sort of work," says Lutes. "Hiring good people who knew the industry led me to more good people in the industry."

There have been other discoveries along the way. Lutes said trial-and-error was practiced when the new division was first started. When window installations and vinyl siding jobs were run as remodeling projects, Lutes discovered they were different. They didn’t require as much customer contact or the same detail of supervision. In addition, marketing the remodeling division of Alpha Contracting costs approximately 11/2 percent of sales. But marketing a windows and siding business costs upwards of 8 to 10 percent of sales. And the cost of sales, defined as commissions to sales persons, represents another 10 to 15 percent of revenue.

The progression of learning this new type of business was "learn to crawl, learn to walk, learn to walk faster, learn to run," says Lutes.

Overhead and direct costs for a window-and-siding division are significantly different from those for a remodeling company, though Lutes’ total ratios are remarkably similar. For example, fees to obtain leads through such routes as telemarketers can cost 2 percent of sales, marketing expenses approximately 3 percent and sales commissions up to 10 percent. The bottom line is the need to continually feed more and more leads to a division that can churn out a substantial number of jobs.

Aside from the higher costs to obtain window and siding jobs, the trades require a different skill set in terms of crafts people and customer education. The level of management is different, skills by the applicators are not as detailed as those required by a general carpenter, and there is no need to spend as much time educating the customer.

With a complement of 20 employees, Lutes has assigned only two to the new windows-and-siding division. Their job is to oversee the subcontracted sales people and installers. (To keep subcontracted labor dedicated to Alpha Contracting, Lutes provides steady work and weekly pay.) The two Alpha employees review contracts, visit job sites, and hire additional subcontractors as necessary. They work out of the offices of Alpha Contracting, but spend a significant amount of time on the road.

Ultimately, Lutes believes, the windows-and-siding division may grow large enough to spin off as its own company. Considerations for spinning off the division include whether he can build sufficient brand identity as he has with Alpha Contracting, and legal, tax, and other liability issues. But his immediate intent is to maintain profitability, increase revenue, and continue expansion.

In terms of compensation for owners, Lutes says the owner of a $2-million remodeling company should budget (as a part of fixed overhead expenses) 5 percent of revenues as gross salary. In addition, a successful year should yield approximately 5 percent net profit. In turn, those dollars can be used for an owner’s bonus or investment back into the company. (Lutes also subscribes to the concept of wealth-building. As an example, he owns the building where Alpha Contracting rents office space. This allows him to build equity outside of the business so he can invest in other ventures unrelated to the ebb and flow of the home-remodeling industry.)

Looking at the future for the custom-remodeling division of Alpha Contracting, Lutes sees continued, controlled growth ahead. "As our skills improve, fewer companies will compete with us to take on larger projects," he says. His short-term goal is to grow the remodeling division to just under $3 million, and add $2.5 million in the window-and-siding division. At that point, Lutes envisions opening an office at a second location in order to grow his business even more.

With less competition for larger remodeling projects, market penetration in the window-and-siding business, and a second location, who knows what Alpha Contracting will take on next.

 

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