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Plugging Profit Leaks

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Financials

Plugging Profit Leaks

When more work becomes too much work, it often leads to less profit, not more


August 21, 2018

Remodelers tell me business is booming. Many are experiencing an uptick in average job size, a healthy backlog, and a steady flow of leads. Demand is high and supply is short, and that’s a good thing.

Or at least it should be. But experience tells me that, in our industry, too much of a good thing often leads to overwhelm, which leads to inefficiencies, which leads to problems with a capital “P” and that rhymes with “T” and that stands for “Trouble.” In times like these, remodelers’ time and energy is spread thin between starting new work and completing work that’s underway. Often, the result is that more work leads to less profit, not more.

Experience also tells me it doesn’t have to be that way. Companies who stay out of “Trouble” aren’t just lucky: They take specific steps to avoid it. It may be too late to do much about jobs that are underway, but here’s a list of things you can do to ensure that the explosion of new work you’re estimating now doesn’t blow up your business.

Keep costs current. More business means more estimates with less time to do them. Using historic prices is a useful shortcut, but that kitchen you remodeled last year will cost more this year, maybe a lot more. The most reliable way to stay current is to implement a job cost system, and update it in real time, which means entering all invoices as soon as they come in. (BTW, this is also a good way to figure out if you’re making or losing money on the job.)

Lock in vendor pricing. But real-time job costing is easier said than done, especially if you don’t have the necessary software. A common alternative is to get quotes from suppliers and vendors, but it’s easy to forget that these numbers are usually only good for 30 days—maybe less given price volatility caused by shortages and uncertainty over the effects of recent trade tariffs. So when subs and suppliers quote you a price, make sure you understand how long that price will hold. If it doesn’t cover the project’s time frame, work with them to extend the price protection. (This is where years of vendor loyalty come in handy.) 

Time is money. For most remodelers, the biggest profit leak occurs when a job drags on past its estimated completion date. Every extra hour your crew spends on today’s project hurts you twice: once, by cutting into the profits on today’s project (one extra day on a 4-week project is a 5% labor cost overrun); and a second time, by delaying the start of tomorrow’s project. Multiply that by the number of jobs going at any given time, and it’s easy to see how fast the problem snowballs.  

Money is money. Speaking of labor, don’t forget to factor in how future pay raises will affect future jobs. If you’re in the habit of giving pay raises around the first of the year, estimates you perform in the coming months should use the higher numbers because those projects are likely to spill over into the new year. Obvious for sure, but easily overlooked.

Less obvious and even easier to overlook are large projects with timelines that straddle the date you raise wages. And because large projects often experience a labor-heavy flurry of activity near the completion date, the damage done by underestimating wages could significantly eat into profits. 

Use an escalation clause. This is contract language that explains under what circumstances clients will pay for price increases that occur after the contract is signed. Your clients may have never seen this kind of contract provision (many contractors haven’t either), so a frank and open discussion about it will help explain not just what it is but why it’s needed and how it works. 

Speaking of how it works, to collect on increased costs, you must compare estimated costs to actual costs. The more transparent you are about your pricing, the easier this will be. And for those of you who are worried about having to reveal your markup, relax—the whole transaction is typically based on invoice cost. You will, however, still have to itemize the specific products for which you deem pricing to be volatile (framing lumber, concrete, drywall, etc.), and you will have to produce invoices to be able to collect the difference. You won’t have to reveal your margin, but you won’t earn it on the overage either.

Every boom is followed by a bust. Take steps now to make sure it doesn’t end with a bang.


written by

Sal Alfano

Executive Editor

Sal Alfano is executive editor for Professional Remodelersal.alfano@gmail.com, 202.365.9070

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