The Big Reveal

Instead of resisting client requests for a cost breakdown, Michael Anschel lays all his cards on the table. It sounds like a nightmare but it works like a dream. 

April 30, 2018

Every remodeling sales presentation is a tug of war. The homeowners are pulling for a price breakdown, partly because they’re wary of being overcharged, but also because they need to michael anschel is a professional remodeler practicing pricing transparencymake informed decisions about tradeoffs that affect their budget. The remodeler is pulling in the other direction and wants to reveal only the total cost of the job, partly because it’s easier, but also to avoid questions about markup and profit.

But the dynamics of this timeless struggle are changing, thanks to the leverage homeowners have gained from online research. The information they gather strengthens their resolve to demand more detail and openness—more transparency—around project costs. Some remodelers have adapted by taking a less adversarial approach, as we explored in our October 2017 feature on the subject, but most continue to resist. 

In fact, judging from the reader response, one example in that article seemed to embody remodelers’ worst fears: It gives homeowners a detailed price breakdown, including bare subcontractor bids and undisguised overhead and profit figures. In this article, we follow up with examples from Michael Anschel of Otogawa-Anschel Design+Build in Minneapolis who developed the system in response to the changing buying behavior of his customers and uses it every day.  

Anschel’s job proposals include three types of line items that most other companies avoid like the plague: bare trade contractor bids, supervisory time, and overhead and profit. Let’s look at how and why each one works.

Trade Contract Bids

In addition to itemizing the invoice cost of materials and labor, Anschel also includes subcontractor bids as bare costs without an applied markup. Why? Because it simplifies the conversation.

trade contractor bids from michael anschel, veteran in remodeling

With itemized pricing, subcontractor quotes (for plumbing, in this example) or unit prices for subcontracted work (electrical, tile, and painting, in this example), are listed at cost, which makes them easy to discuss and alter without having to adjust for a baked-in markup. These bare costs also tend to compare more favorably with numbers clients may have obtained online or from friends and relatives.

“Clients rarely question a subcontractor’s price, but they often want to know what’s included,” Anschel says. “Is there a toe-kick heater? Are the lights on dimmers? I can open up my binder in front of them and find the answer. And in that process, I’m never trying to hide the numbers printed on that page.”

Client confidence. There’s another benefit: client confidence. If a client does decide to check up on a trade contractor’s price, the number they get will be closer to a bare bid than a number that includes markup. “And that builds confidence.”

In Anschel’s experience, his clients are relieved by the fact that they can see his subs’ bids. And if they can get a better number, he will consider swapping it out—but he will also explain the advantages to working with trade contractors with whom he has long-standing relationships. (Yes, even with transparency, you still have to sell the job.) 

“If I’m an advocate for the client, why not have them sit on my side of the table and review sub bids to make sure they’re getting what they think they’re getting,” Anschel says. “With this system I can do that without ever having to worry about where I tucked my margin.”

What if the clients take something out of the scope or add to it? That still involves some recalculation, but the adjustments are simpler to make than they are when markup is built-in to every line item. 

Supervision Time

A portion of labor cost on any remodeling job is time spent coordinating with and supervising other people. Most companies treat these tasks as indirect costs that fall “below the line,” and assume they’re covered by their markup. But Anschel disagrees.

“Management costs are direct costs for the job,” he says. “We spend a lot of time managing subs and hand-holding the clients.”

Project management (PM) tasks are listed as direct costs rather than as overhead that is covered by mark-up. This makes for a more accurate estimate, and gives clients a clearer picture of how their budget will be spent. As with subcontractor bids, these numbers can easily be adjusted up or down if the scope of work changes. Overhead and profit are also listed separately and are unaffected by minor changes in other line items. For large up or down adjustments to the scope of work, rather than having to recalculate all line items because they contain a built-in markup, overhead and profit can easily be recalculated in the presence of the client. 

In his system he spells out these tasks in a dozen or so line items that fall “above the line,” where they give him a much more accurate idea of the true costs of the project. 

For example, most estimators include fees for zoning and permit applications, but time spent to administrate those activities is considered part of overhead. Not so with Anschel’s system, which lists a dollar figure for the time required to prepare and follow up. The same is true for ordering materials, scheduling deliveries, and waiting for inspections, as well as client meetings, job documentation, and trade contractor supervision. The idea is to account for all costs that are specifically related to a particular job. 

“No matter how well you plan, someone is going to have to make a few runs to the lumber yard,” says Anschel. “Material has to be unloaded, stacked, and counted, and inevitably some of it will have to be returned to the lumberyard. These aren’t huge costs, but they can add up. And on some jobs—like a third-floor remodel—time spent moving people, tools, and materials up and down can add up fast.” 

The last two items on the estimate—overhead and profit— are in plain sight and have to be acknowledged and possibly explained and justified.

Rather than leave those costs to chance (or harbor an unrealistic hope that the crew will avoid them), Anchel lists them directly. It also serves as reminder to the estimator to consider any special circumstances that a given job may require, and, Anschel says, it helps clients understand where some of the total project cost comes from.

Preconstruction services. Two line items provide for costs associated with preconstruction project reviews, one done internally with field carpenters, and one done with subs. “What we learned over time is that if we go through the project with our carpenters early on, we catch lots of things that the project manager might not see,” Anschel says. “The same is true with subs. When we get everybody at the site for a dry run, they see things they would otherwise miss.”

If some management categories aren’t needed, they can be left out; in other cases—managing an HOA or condo association, for example—special categories may be added. “This system really gives the contractor the ability to be more flexible and more fluid,” Anschel says, “and it captures all of the real costs.” Plus, he says, if you don’t make money on the job, you can easily job cost to find out what happened. “The end game for the contractor is improving net, which you can do by being more accurate.”

Overhead and Profit

For a lot of remodelers, however, the elephant is still in the room. While Anschel’s transparent system may provide a more accurate estimate, overhead and profit, the last two line items on the estimate, are out there in plain sight and have to be acknowledged—and possibly explained and justified. 

For Anschel, the positives of this situation far outweigh any negatives. As we have seen, with no hidden markup to manipulate, adjusting allowances and trade contractor prices is simpler. But the same is true of other changes.

“Let’s say the client wants his uncle to build and install the cabinets,” Anschel says. “If you pull out something large like that, yes, you need to recalculate the estimate, but because you’re not distributing [overhead and profit] across categories, it’s easy math that you could do in front of the client.” In the case of the cabinets, some PM codes, such as order prep, could be deleted and others could be reduced. “If we assigned 11 hours to manage that process, we might reduce it to 5,” Anschel explains. “Plus, our warranty exposure is reduced because the cabinets are not on our shoulders anymore.”

The Bottom Line

Anschel believes his breakdown gives him not just more profitable pricing, but a competitive advantage. He knows he’s charging for all of his costs and his competitors are not—that’s always been true. But now he can encourage clients to use his estimate to make comparisons. “Other contractors are going to say they can do it for 30 percent less,” Anschel says, “but when clients compare, they discover that a lot of stuff is missing. And that erodes their confidence.”

Anschel’s system is mostly automated via Clear Estimates software which, after it’s set up, makes it easy to produce the line-item breakdown. And in practice, most of Anschel’s clients don’t pick apart the estimate. “The purpose is not to give this to the client and say, ‘Go through this and analyze it.’” Anschel explains. “Simply having the detail on the table while you’re talking is a huge psychological advantage. It’s not hidden, it’s not a black box.” 

For Anschel, transparency is one hallmark of the digital age, and he’s certain that homeowners are going to be exposed to it somehow. “If contractors don’t do this,” he says, “somebody else in their market will.” For him the risk of doing things the way we’ve always done them is greater than the risk of doing things differently and potentially losing a job because he showed his true costs. 

“Maybe I won’t get all the jobs I price,” he says, “but I don’t want all the jobs. I want the jobs I get paid for.” 

About the Author


About the Author


Sal Alfano is executive editor for Professional Remodelersalfano@sgcmail.com, 202.365.9070

Comments

Comments

Hi Sal,

Really interesting and quite atypical!
We also have a more transparent approach although a different structure where in we line itemize the work, explaining what is included and whats not in language that the client can understand. We also provide options a-la-carte for possible extras so that clients can easily see what the added items will cost and control their over all total. We seperate the finish products from the labor proposal and start with ballpark prices based on similar client purchases until we do the shopping with our clients at which point they review and approve a products list. That also allows them to control their total without having to backtrack product allowances that some companies include and then revise based on choices.

Michael Anschel is entirely correct in moving any management tasks he can out of a catch-all Overhead category and into the more precise and accurately defined Direct Job Costs. That is certainly a “Best Practice”.

But this bit about breaking out and displaying Overhead & Profit figures is an unfortunate and even tragic leftover artifact from the 1980s where in the days before Excel was so ubiquitous a contractor would purchase an Estimate Worksheet and then list labor and material and subcontractor costs for a project and then there at the bottom of the sheet there would be a field for entering a percentage to multiply the Direct Job Cost total by to come up with an appropriate amount to add to that total to cover OH &P.

I like to say if this was such a good idea why are we the only industry that does it?

My thinking is Don’t Display Overhead & Profit Figures In Their Own Separate Categories especially if they appear at the end of your estimate where you are displaying the Total Project Price. That is the first place your clients will look at when reviewing your estimate and human cognitive biases being what they are when the potential client sees those big numbers for Overhead & Profit they will be subject to the “Anchoring Effect” (a bias that causes people to focus on the first available piece of information, the “anchor” given to them when making decisions). Their focus should be on the actionable elements of their estimate.

Another cognitive bias those numbers will be subject too is Loss Aversion Bias. The Loss Aversion Bias is people have a tendency to prefer avoiding losses than to making equivalent gains: it is better to not lose $100 than to find $100. If they look at the big lump sum numbers for Overhead & Profit and in any way feel they might be too large or inflated that will consciously or even sub-consciously influence their decision making and they will weight the loss of the money they are paying you for Overhead & Profit over the cost of those incredibly beautiful cabinets they always wanted.

In Lean Thinking value is always defined by the Customer. At the end of the day, it doesn’t matter whether you came up with a great idea if the customer doesn’t see any value and he or she is not ready to pay for your great idea.

I think your company’s Overhead and Profit are tough sells to the prospective client in terms of value to them. Overhead and Profit can probably “Necessary Waste” in the Lean Thinking world, they are activities that our customers have no interest paying for, but they are required to maximize the value of the end product.

No one wants to eat a whole bowl full of salt but a little bit of salt distributed sprinkled on all the different components can enhance the taste of those items. Displaying you Overhead and Profit in big bowls of their own at the end of an estimate (which as I just alluded to is really displaying them right at the top) isn’t as appetizing as it is spread around throughout the meal.

More on my thinking on this, this one really got under my skin and there is more to it than just what I’ve written here…

https://paradigmprojects.com/estimating/a-look-at-the-proremodeler-the-b...

Jerrald,
I read your comments here, and your comments on your website, and your comments on FB. You've given this more thought than 99.9% of our industry and I thoroughly appreciate your commentary and am taking all of it under consideration. I think we agree on more than we disagree on, and that is a wonderful thing. In fact we are both strong proponents of getting rid of sloppy markups and getting detailed and internally clear about our costs. To be honest, if we can just get the industry to be accurate and honest about the real project costs, that would be a small miracle.
So, overhead and Profit. I get your beef with it. But here is my mult-fold rebuttal. (and you won't like it.)
1. Remodeling is a service industry. There are a couple of segments that operate like retail, but the industry overall is NOT a retail industry and any comparisons to retail industries are without value. Remodeling is a knowledge based technical service industry. The design and architecture side is pure service/consulting. The build side is service/technician/craftsperson. . Comparing a laptop to a remodel creates a false bias, and isn't useful.
2. The industry competes against itself in a modality that does not benefit the industry, yet it is a perpetuated condition that must be addressed.
3. Overhead and Profit are not something any company wants to share, and indeed most industries don't. However, the remodeling and building industry is horribly inconsistent, shows no loyalty, and is ruthless in undercutting one another, even taking a loss to sustain a cash flow position. The industry is flooded with part time operators, handy people, and retirees who undercut every legitimate company, and make the consistency and trustworthiness of our industry a subject of concern. HGTV makes it worse by removing all costs other than materials and cheap labor, further undercutting the industry by ignoring all of the costs to bring the project to fruition, answer client questions, manage subs, address site conditions, and the myriad details involved in a successful remodel.
So, where does that leave us as an industry. We have the gross markup companies who don't build accurate estimating models, and we have the hyper accurate companies that engage in insurance and restoration work. My response is that we need to move the majority forward. We desperately need to get out of sloppy markups. The OH/P lines are indeed unfortunate relics, but the industry perpetuates them as valued elements. How far do you buck the system in order to change it? My position is simply, in an industry that has made almost every element searchable, we can't take a retail markup approach. The commodity is too widely accessible. However, the service, and trust components are not so easily bought, and therefore, the opportunity to move the industry forward lies in that space. Revealing the OH/P within the context of a highly detailed and fully visible project is regarded with respect and garners more trust overall. It provides more flexibility for the contractor, while wasting less time re-shuffling margin from one item to the next to avoid looking overpriced. One shell game for another? This system addresses the reality of our industry in the reality of our age. Yes, there are better ways. No, I'm not convinced the industry is ready for them.
Hope this helps. Thank you for your very thorought writtings.

Michael

Add new comment

By submitting this form, you accept the Mollom privacy policy.
Overlay Init