As Linda Case once said, “You will never win as a low-price competitor in this business; you will always find someone less educated in knowing the cost of running a remodeling business than you.”
With single-digit profit margins in this industry and cost-estimate differences of 20-to-30 percent at times, you have to wonder where profits are coming from. With an estimated 5-percent net profit on a $100,000 job, and with only a 3- percent slippage (costs exceeding your estimate), you are now left with only a $2,000 profit. If that job took six weeks to produce, you are at a profit of only $1,300 for the month. Now it is your job to eliminate slippage and protect the net profit.
In the first of a four-part series, below are seven of the 25 ways a remodeler can lose money.
1. Permit, design, and engineering fees Every municipality charges a different way for permits, and because they don’t want the liability, many require engineering for more applications than they used to. Always include researching the municipalities permit fee structure and requirements. Never assume fees or requirements for working in a county or city you have not worked in before. Require due diligence such as zoning setbacks, homeowners association requirements and approval process, EPA requirements (prior to 1978), and city ordinances, among others, prior to the design start.
2. Design time Don’t forget about the designers’ time required after the job starts—design modifications, permit issues, client meetings, client changes, job layout, final selections, and unforeseen design changes. All require more design time. Allow for a certain number of hours after the job starts to support the homeowner and the project manager.
3. Site prep Tearing out a master bath on the third floor will require more floor and dust protection than on the main floor. Make sure you estimate for the material, the installation, and the removal. Is the homeowner living through the construction? Will any temporary site conditions be needed? Is a temporary washer and dryer hookup or kitchen sink needed to keep them in working order during construction? Is the project going for several months? Floor protection left too long can damage the finish of the floor, so be sure to allow for replacing the floor protection during construction.
4. Demolition A mud-set tile floor obviously takes longer than a vinyl floor to demolish, but still it is easy to underestimate. I once had a mud-set floor take three days to demolish. A plaster house will take much longer to demolish walls or cut holes for recess lighting. Mud-set tile bathrooms will take much longer than a thin-set installed tile. Site access is also a consideration; a job on a hill or one that you can’t get the dumpster close to the house compared with a dumpster a few feet from a door with a major demolition can have a huge impact on costs. Look into the details. The demolition of a brick veneer wall is very different than a solid brick and block wall even though they look the same from the exterior. Do a little more research on the existing house structure. Is someone verifying all this prior to contract?
5. Missed change orders Sometimes in the job you come across an issue with a beam, maybe rotted sub floor or band board; it is easier for the project manager not to slow down. When you are debriefing the job and the cost is over by $1,000 in framing and it is due to an unplanned repair, there is 1-percent slippage on your $100,000 job. Make it easy for your project manger to get the change orders done, know how to do them, and in which situations. Make sure you set up expectations for unforeseen expenses with your client and employees. Also be sure to talk about what you have done to minimize the unforeseen conditions during construction, such as using a trade walk prior to contract.
6. Concrete, masonry, and excavation Don’t forget to set expectations. Who is doing the final grading, and in what kind of condition are you leaving the site? Is the damaged lawn being seeded? Are you installing sod or are you leaving it rough graded for a landscaper? What are you doing with leftover dirt? Are you leaving it on site or hauling it away? Be clear with the details.
7. Framing A huge area for possible slippage is framing. By allowing two weeks to frame the project, and an in-house crew takes three, there goes your profit. Using a trade for your framing for a fixed fee is one way to minimize, but don’t forget about oversight and framing details. Another way could be by breaking down the framing project so you can monitor the progress and get feedback if the estimate was off so you can correct it.
After 26 years as a remodeler, there have not been many days that I don’t leave work without learning something. Unfortunately I feel I am expert at losing money. Not that at the end of the day we aren’t profitable; it is just that there are so many learned lessons along the way. Many times it comes down to expectations. Over the next three months, I will continue to share more learned lessons. PR
Craig Durosko is the founder of Sun Design, a design/build firm located in McLean and Burke, Va. He can be reached at firstname.lastname@example.org.