So your crew doesn't smoke on job sites or leave garbage behind. Office employees return clients' calls promptly and write gracious thank-you notes. The company logo holds a prominent place on company vehicles, shirts and stationery. Your projects consistently meet code, and the new software you bought allows you to create attractive, easy-to-read proposals and estimates.
Not bad, but not good enough, not anymore. Perception and process must produce results: profitability, of course, but also productivity, efficiency and satisfaction. Striving for "personal bests" on every job or every quarterly statement is a must for any healthy company, whether growing in volume or growing in ability.
But knowing how your company stacks up against other remodelers opens a world of possibility. Using data to benchmark your company within the industry can verify that a strategy works, reveal that previously undreamed-of heights are attainable and warn that if changes are not made, your company will no longer be competitive.
Although such benchmarking data exist, they are hard to come by. Professional Remodeler published the results of our first Business Management Survey two years ago ("By the Numbers," June 2001), covering not only volume, costs and markup but also salaries and benefits. Upon revisiting the survey this year, we dived deeper - into margins, leads, referrals and other measures of success. The 2001 study covered results in the year 2000; this year's study asked about 2002 performance.
Now, let's hit the books.
We'll start with an overall look at the state of the industry. Of the survey's 320 respondents - three-quarters of whom were presidents, owners, partners, CEOs, vice presidents or general managers - 204, or 64%, work at companies that attributed at least 51% of total 2002 sales to remodeling. Most remodeling contractors engage in a wide variety of remodeling activity. Those who earned more than half of their 2002 income via remodeling tended to do more kitchen/bath work than the other respondents and be more likely to offer full-service remodeling. More than half of the remodelers were involved in commercial work last year, and more than a third built new homes. The biggest firms - those that did $5 million or more in sales volume - were most likely to list commercial remodeling as an area of major activity.
Years in business and number of employees: Three-quarters of respondents' companies have been remodeling for at least 11 years. Only 6% reported having no full-time employees besides the owner. The biggest number of firms reported three to five full-time employees and no part-time employees. The companies whose business is more than half remodeling tended to be smaller, with 47% having three to 10 employees besides the owner. Part-time employees weren't a terribly popular solution to labor needs, with 35% of firms not using part-timers at all.
But the big companies have gotten quite big and raised industry averages. Fifteen percent of all companies said they had more than 50 full-time employees besides the owner, and 5% reported more than 50 part-timers.
Number of jobs and job size: Only 20% of respondents worked on more than 50 jobs last year, with the majority doing 25 or fewer. While a quarter of remodelers reported average job size of less than $20,000, more remodelers than before - 9% - did jobs averaging $500,000 or more, raising the overall mean.
Our data show that the average size of a remodeling project more than doubled in two years, rising to $145,860 from $65,690 in 2000, with a median of $51,250, up from $31,340. Overall, 13% of respondents had a typical job size of less than $10,000. Eighteen percent had an average job size of $10,000 to $29,999, with 17% at $30,000 to $49,999 and 16% at $50,000 to $99,999. Of the remaining third, 30 respondents said they had an average job size of more than $500,000.
Volume: As these charts indicate, the past two years seem to have been good for sales. Average total volume in 2002 was $3.1 million, up from $943,000 in 2000, with a median of $2.12 million, up from $834,000. Remodeling volume increased as well, averaging $2.11 million, up from $723,000 in 2000, with a median of $1.11 million, up from $522,000. Again, limiting participation in the 2003 survey to Professional Remodeler readers might have affected these numbers.
A serious discussion of costs and margins requires comparing like to like, a difficult matter in an industry as fragmented as remodeling. To improve our data for benchmarking purposes, the 2003 survey provided definitions for submitting financial information (see sidebar). We used the same accounting standards used by NAHB Builder 20 and Remodelor 20 clubs. Steve Maltzman & Associates, which monitors 20 club financials, provided the standards.
Gross profit or margin: Reported gross profit averaged about 25% for all respondents and 27% for companies that did 51% or more remodeling. The higher gross profit for those companies makes sense, as remodeling jobs typically earn much higher margins than new homes.
The gross profit average dropped precipitously, to 19%, for companies that did $5 million or more. That could be because these companies do a larger percentage of commercial activity - commercial work tends to have smaller margins and require fiercely competitive bidding. Another likely reason is that because these firms do bigger projects, they believe either that they don't need as big of a margin on high-priced projects or that the market won't pay for a big markup on an already costly project.
Maltzman considers that a fallacy. "The whole game is risk versus return," he says. While big markups on big projects might lose a remodeler some jobs, he advocates that route over knocking yourself out on a time-consuming, challenging project without a big return on investment. On the other hand, big companies might have product inventory they need to turn over quickly.
Average job size made a difference in gross profit percentage. In each job size category up to $150,000, the firms averaged gross profit percentages from the mid-20s to the low 30s. Firms with larger job sizes averaged 15.5% to 20%.
The survey also turned up startling regional variations. New England remodelers averaged a 38.6% gross profit - the only group breaking out of the 20s. At the low end, the West North Central region (Minnesota, Iowa, Missouri, North Dakota, South Dakota, Nebraska, Kansas) averaged 20.3%.
Industry experts typically recommend a gross profit of at least 40%, though few remodelers achieve this. In fact, only 13% of respondents reported having a gross profit of 41% or higher. At the other extreme, 5% undoubtedly lost money in 2002, reporting zero gross profit.
"The key to profitability is the margins," Maltzman says. "You sell them, and you keep them."
Net profit: Reported net profit averaged about 11.5% for all respondents, with virtually no difference for companies with a majority of sales from remodeling. This represents a noticeable drop from the 14.2% reported two years ago, but it's the one "average" number coming out of this survey that's above experts' recommendation (5-10% is the usual suggestion for net profit as a percentage of sales).
Were remodelers really less profitable in 2002 than in 2000? That's possible. Our data indicate that subcontractor costs have risen substantially. Launching new divisions or ventures also could have absorbed profits. A more likely possibility is that using the PR-supplied financial definitions changed how remodelers calculated and reported net profit.
However, even 11% seems like a healthy net profit, especially when one considers that the average reported overhead (23.6%) is nearly as much as the average gross profit (25.4%). Per our definitions, a company with those numbers would wind up with a net profit of 1.8%.
It's possible that respondents ignored the definitions or that the variety of corporate structures represented threw off the data. In the 22% of firms that are sole proprietorships, owner salary might be lumped with net profit rather than included under overhead. These firms might track two numbers: net profit and net profit after owner's compensation.
Owner compensation also is more likely to fall under net profit than under overhead in S-corporations and limited liability companies. The reason: taxes. These types of firms represent 48% of our survey respondents. Both S-corporations and LLCs are considered pass-through entities, meaning the company itself does not pay taxes. Instead, profit or loss is passed on to the owners or shareholders, who report it on their personal tax returns.
Only in a C-corporation, representing 27% of respondents, is income taxed twice. The corporation pays taxes on its earnings, and the owners pay taxes on income. As a result, it's advantageous to consider owner compensation part of overhead so it doesn't also show up as corporate earnings and is taxed only once.
Whether or not net profit includes owner compensation, it tends to follow gross profit trends. For instance, companies that did $5 million or more in 2002 volume had the lowest gross profit as well as the lowest average net, 9.6%.
"The net profit is lower on companies over $5 million because the gross profit on companies over $5 million is lower," Maltzman says. But compensation practices, he adds, are also undoubtedly part of the picture. "The owner may be taking bigger bonuses. They may be paying it out to the teams."
Job size again played a factor, with firms that averaged jobs of $150,000 and more showing net profit of 10% or less, and the companies with smaller jobs showing net profit of 10% or more.
Regional variations for net profit echoed regional returns on gross profit. New England again came in highest, with an average net profit of 14.5%, and the West North Central region again came in lowest, at 7.6%.
Markup: Markup is not the same as margin (gross profit), though the closeness of their results indicates that a lot of remodelers confuse the two. Markup is the percentage by which your estimated cost is multiplied to come up with the price you give the client. Margin is the difference between final sales price and final total costs, and it can be expressed as gross profit dollars or gross profit percentage. Industry experts typically recommend a minimum markup of 50%, which provides a 33% margin, with a preferred markup of 67%, which provides a 40% margin.
Only 12% of remodelers reported a markup of more than 50%, with the majority concentrated from 11% to 30%. Average markup was actually lower than in 2000, possibly out of fear of asking for substantial markup in a tougher economic climate. Mike Benshoof, vice president of Steve Maltzman & Associates, says, "Everybody gets worried: If I raise my prices, I can't get more work.
"If the customer is telling you they want this project because of X, X and X, then you challenge the price. Why are you being unfair to the customer if they're willing to pay for your differences?"
The firms with a majority of sales in remodeling averaged 3% higher on markup than the overall pool. Remodelers typically do and should use a higher markup than new home builders. With existing construction, some situations can be nearly impossible to predict, and a generous markup can help protect your margin.
Direct costs: Anything that can be assigned to a particular job goes under direct costs. We divided direct costs into three areas: subcontractor costs, in-house labor and burden, and building materials/specific tools. When we asked remodelers for their direct costs as a percentage of sales, they reported an average of 62.5%. However, adding the averages for the three areas - subcontractors (32.9%), labor (24.1%) and materials (27.9%), we come up with direct costs of nearly 85%.
Don't try to calculate the data that way. Firms with high subcontractor costs undoubtedly have low labor costs, and vice versa. In effect, they canceled each other out when we calculated the averages.
Let's start instead by looking at just reported direct costs. In nearly every volume category, firms averaged a direct cost percentage in the low to mid-60s. Firms that did less than $500,000 in volume, however, averaged 54.9% in direct costs.
For the most part, regional variation was not substantial, with a few exceptions. The Mountain region (Idaho, Montana, Nevada, Colorado, Wyoming, Utah, Arizona and New Mexico) reported direct costs averaging 73.7%. The East North Central region (Wisconsin, Illinois, Michigan, Indiana and Ohio) came in at the low end (57.7%), with the South Atlantic (West Virginia, Virginia, Maryland, Delaware, Georgia, North Carolina, South Carolina and Florida) at 58.5%.
Trends in the cost subcategories explain some of these differences.
Subcontractor costs: This number rose noticeably in two years, from an average of 21.68% in 2000 to 32.9%. As remodeling companies grow, they follow more of a builder's business model, with in-house project managers or superintendents and outsourced labor. Even small remodelers are doing this more often as a cost-cutting, profit-enhancing measure.
Many remodelers remain resistant to subcontractors, however, preferring to keep as much labor as possible in-house so they can monitor quality more closely. That explains why companies earning a majority of their dollars from remodeling reported lower average subcontractor costs (29.8%).
Direct labor and burden costs: About one-quarter of sales went toward direct labor and burden. While average subcontractor costs rose more than 10% in two years, the average cost of in-house labor diminished by less than 1%. Overall labor costs clearly aren't going down, so maintaining profitability - let alone growing it - will require your company to cut overhead, reduce wasted time and materials, decrease slippage and increase markup.
Materials and other direct costs: Remodelers reported a slight decrease of less than 1% in this cost category over the past two years. Those on the low side might well be doing more construction management and design of remodeling projects than actual construction. As design/build grows in popularity with consumers, this is becoming a more common business model.
Overhead or total operating expenses: Separate from direct costs, overhead items cannot be or are not assigned to a particular job. Depending on your business model, whether you have a showroom, whether you own or rent office space, etc., overhead can vary quite dramatically.
Analyzing companies by size and region did reveal differences. Firms with less than $500,000 in volume averaged overhead costs of 16.7%, while the other size categories ranged from 23% to 28%. Small firms often operate from the owner's home, eliminating office rent or mortgage costs.
Overhead in all regions averaged 21% to 27% except in the West South Central region (Texas, Oklahoma, Arkansas, Louisiana), at 13.7%.
Who sells? That's one of the biggest challenges facing remodeling companies today. When a firm starts, typically the owner does most of the selling. But for a firm to grow or be sustainable to the point that it can be passed down or sold, the owner cannot be the only person doing sales. The company must be more than the strength of one person's charisma.
Of the 320 respondents, just 155, or 48%, reported having an in-house sales team. The rest are companies where the owner does sales or that use an outside team to call homeowners or knock on their doors.
Finding the right people to sell remodeling is tough. Many remodelers hire experienced salespeople from outside the industry only to find that their experience doesn't do much good without industry knowledge. Some salespeople can pick that up quickly; others can't. Moving a designer, an estimator, a lead carpenter or a production manager into sales is the other option, but typically that requires sales training to give these people the confidence to ask for the price that meets the company's profit needs.
More important for your profitability than sales volume is the amount of sales per salesperson. This is also a key metric for gauging productivity.
For about one-third of the firms, that number is less than $600,000. Another third fall between $600,000 and $1 million, with the final third at more than $1 million per salesperson.
The lead-to-sales conversion rate is another measure of productivity. Of course, one firm might define a lead as a phone call or a mailing list sign-up, while another remodeler might wait until more qualifying has been done before considering the contact a lead. Also, specialty or handyman firms that rely more on advertising or marketing usually have lower conversion rates than full-service remodelers who rely primarily on referral marketing.
Overall, respondents averaged a conversation rate of 36.5%. Comparing lead-to-sales conversion with referral rates shows a direct relationship between the two - the higher referrals are as a percentage of business, the higher the conversion rate is. Comparing repeat business rates with lead-to-sales conversion did not indicate a relationship.
On-time closings: As the 2002 and 2003 NRS homeowner satisfaction studies prove (see September 2003 PR), closing jobs in a timely fashion is a key to customer satisfaction. Yet nearly half of the remodelers who responded to our survey admitted to falling behind schedule on at least one of every five jobs. Nearly 20% admitted to being on schedule with fewer than half of their projects.
Overall, firms reported that an average of 75% of their jobs closed on time. The definition of on time might be another matter, as might the definition of close.
On-budget closings: Staying on budget affects remodeler profitability as well as customer satisfaction. Seventeen percent said they hit the mark less than half the time, while more than a third of respondents claimed to be on budget with at least nine out of 10 projects.
As with on-time closings, firms reported that on average 75% of their jobs closed on budget. With change orders or without? That's a question worth exploring in the future.
Punchlist and warranty: The term zero punch is becoming more common in the industry, and 9% of remodelers claimed to achieve it regularly. Twenty-five percent of respondents fell in the more typical range of three to four punchlist items per job, while 24% reported lists of 10 items or more as standard. The 2003 NRS study showed that punchlist length is remodelers' biggest weakness when it comes to customer satisfaction. A lengthy punchlist also costs you time and money. Pre-close walk-throughs and punchlists are well worth the time spent.
How many warranty requests do you have waiting to be fulfilled on any given day? Forty-one percent of remodelers claimed that for most of 2002, they had none. Thirty-six percent said they had only one or two. Just 5% said they had 10 or more regularly open. This is not desirable but is not necessarily atypical for a firm that annually does many jobs. The overall low numbers show why top remodelers might not need a position dedicated to warranty service - it's seldom an issue.
Consumer studies show that warranty service is a sore spot regardless of industry. Done well, it also can be an incredible means of differentiation.
Fifty-six percent of our respondents said they regularly took care of warranty work within a week in 2002. Another 21% said they got to it within two weeks. The brave - or foolhardy - 16% who took more than two weeks could improve customer satisfaction and in turn profitability by shortening that time.
Most impressive of all: 8% of respondents said they completed warranty work within one day.
Human resources results
Metrics on employees are difficult to come by because everyone uses a different method. The 2003 list of the 101 Best Companies to Work For in the Residential Construction Industry provides data on what the top-performing firms in this area have achieved.
For this study, we measured only employee tenure, with 7.4 years being the average. Most employees were clustered in the range from three to 10 years. People don't stay at a company that long if they're not happy, so it's a powerful statistic. But tenure can be a double-edged sword: Your company might need to make new hires to bring in fresh ideas or work harder to attract young talent.
Customer service results
The amount of referral and repeat business a remodeler does is a good measure of customer satisfaction. The nature of their business dictates that specialty contractors and handyman firms have lower rates; even so, these are still useful metrics.
Referral business: Proving that the importance of referral marketing has hit home in the remodeling industry, more than a third of respondents reported that at least 80% of their business came from referrals.
The smaller the firm, the higher the referral rate seemed to be, with firms of $5 million or more averaging a 56.4% referral rate and firms at less than $500,000 averaging 74%.
Repeat business: Half of the remodelers surveyed got at least 40% of their business from repeat customers.
Analysis did not reveal an overall relationship between repeat business and firm size. However, the biggest firms reported the highest rate of repeat business. Working from conclusions drawn earlier that these firms do a great deal of commercial work, it seems likely that they have relationships with particular hotel or restaurant chains, hospitals or educational institutions and therefore do a significant amount of business for the same clients, though in various locations.