Keeping the Client, Whatever the Cost

After scouring the Virginia countryside for years in search of the right historic house, Dave and Stacey Miller found a derelict place with enough potential for them to want a rehab estimate. Their real estate agent suggested bringing in remodeler Rob Lauten, president of Lauten Construction Co. in Purcellville, Va.

"He came out on the hottest day of summer and spent two or three hours with us," says Dave Miller, a 30-something, stay-at-home dad. The Millers appreciated LautenÆs professional estimate but decided not to buy the house because it needed so much rehab. "Rob never got paid a dime," Miller says.

Two years later, when Miller was ready to remodel the house he did buy, Lauten was the first person he called. "I felt I owed him one," Miller explains.

In Loudoun County, Va. ù which Lauten says "still plays like a small town" ù positive impressions and word-of-mouth recommendations are LautenÆs main marketing tools. More than half of his leads come from past customers and direct referrals, as do more than half of his jobs sold. Other leads come as responses to the small ads Lauten runs in neighborhood newspapers. If and when those prospects ask their friends and neighbors about his work, Lauten wants the feedback to be positive. His close rate is 38%.

ThatÆs why he spent hours discussing a house the Millers had not even purchased. ItÆs why he got the job rehabbing the house they did buy without having to compete with other remodelers. And itÆs why Lauten Construction wrote off a number of costs ù including more than $14,000 of the production managerÆs time ù to keep Miller happy when his feathers got ruffled over rising costs on the cost-plus job.

Writing off costs "may not seem to be a sensible short-term strategy," says Lauten, "but I want to treat my customers fairly, and they have to feel that they are being treated fairly. People respond pretty well to that mutually trusting relationship." With LautenÆs open-book billing system, all the numbers were there for Miller. Even so, says Lauten, "A lot of people have a pretty good ability to ignore that. ItÆs our ongoing challenge to educate them."

Early economies

Perched on a steep rise overlooking a pond and accompanied by historic outbuildings, the MillersÆ old farmhouse dates back to the 1730s. In 1760 it was doubled in size, and in 1800 it gained a one-over-one room. "It may have been a Quaker meeting house with separate sides for men and women," Miller says. When the farmland was subdivided in the 1980s, the run-down house was restored in keeping with its historical character while also acquiring a fully equipped kitchen, four bathrooms and a laundry room. When the Millers purchased it, the house had 3,260 square feet and three bedrooms.

After living in the house a year, Miller decided to add a two-car garage connected to the main house via a mudroom. To blend with the house and outbuildings, he wanted the garage to look like a carriage house.

In April 1999, he met with Lauten to discuss the job. Lauten recommended architect John Burroughs, whom Lauten often hires as a subcontractor on design/build projects. Miller worked with Burroughs directly, while Lauten offered feedback on aesthetics and budget as the plans took shape.

The planned garage soon became bigger than Miller expected. "I drive a big truck ù a Suburban ù so we needed a big garage," he explains. To maintain the right proportions and the vintage steep-pitched roof, the garage grew high as well as wide. To capitalize on the extra overhead space, Miller decided to top the garage with a guest suite.

MillerÆs preference for historical accuracy and quality products guided LautenÆs hand as he prepared the initial, $137,900 estimate. "I was assuming in the original budget that he wanted more high-end things," Lauten says.

But then Miller wanted to negotiate down. "The owner was letting me know that he was counting his pennies," Lauten says. Accordingly, Lauten cut about $10,800 from the estimate, mainly by specifying a through-wall HVAC unit instead of a ducted system and planning for other less expensive products. On cost-plus jobs, he explains, "We negotiate a contract to where the owner wants to be." Miller also thought the $14,000 estimate for painting was too high. But production manager J.R. Sapp wouldnÆt cut the margin to drop the cost because of the liability involved in bringing a contractor onto the site. Sapp took the painting out of the contract, and Miller found his own painter. Finally, Miller signed the construction contract on July 28, 1999.

Trouble underground

Ordinarily construction would have started about six weeks later, but Sapp, whoÆs also a Lauten Construction vice president, discovered that the houseÆs sewage line ran across the path of the proposed driveway. "We had to move the sewage line over, to 10 feet off the edge of the road," says Sapp. That meant trenching, laying and reconnecting 150 feet of line and also reconfiguring the wiring to the pump station. The problem delayed permits a month and cost Miller about $10,000.

Another hurdle encountered at jobÆs start was that a concrete stoop on the site planned for the garage was far more than a stoop. Under it was about 10 feet of concrete; the stoop was actually a retaining wall built in the 1980s. LautenÆs subcontractor "jackhammered for days" to make way for the garage foundation, recalls Miller. Sapp says, "We took out as much as possible."

As the space under the garage grew, Miller decided to turn it into a basement with a mechanical equipment room and playroom. "We used part of the retaining wall as part of the room wall by forming up and pouring tight to it," Sapp says.

Plan expansion

As construction progressed, Miller "opened up to the possibilities of the job," Lauten says. "He wanted it to be really nice." At $47,000, the basement was one of the biggest changes to the plan. Eventually, Miller also added two bathroom remodels in the main house plus a new roof on the old corncrib and random fieldstone flooring in the guest suite foyer. He also enlisted Lauten to move a wall and install drywall to prepare for the kitchen remodel that MillerÆs friend, Eric Lieberknecht of Rutt Custom Cabinetry, was handling. Miller also upgraded to the HVAC system originally specified and opted to cover the rear facade with stone, an idea that had been considered but rejected for budget reasons during the design phase.

The architectÆs original plans called for siding on the rear facade augmented, for a historical look, by stone veneer piers tapered on top. For the new plan, Lauten had to pad out the wall to be flush with the piers. Installing the facade called for lots of stone plus heavy-duty scaffolding and equipment. It also necessitated additional silt fencing and an expanded retainer ditch to route runoff away from the pond at the foot of the slope. All told, the stone facade added $35,000 to the project price.

The cost sent Miller into sticker shock. "I think that padding out should have been factored in with the stone columns," he says. He resisted paying for the padding, which involved about 16 hours of labor and $400 in framing material. To please Miller, Lauten backed down and deducted the entire charge.

"Every client has some areas where they are rigid and inflexible, and other areas where they are soft and giving," says Lauten. "The trick is to match your style of negotiation to the clientÆs style."

Lauten says his team wrote 26 change orders for the job in addition to processing several additional changes without formal change order documentation. This meant that although changes and costs were approved by the client, the cost impact was not captured in writing, which Lauten realizes contributed to MillerÆs dissatisfaction with costs. In retrospect, Lauten calls his former change order system embarrassing. He now requires all team members to use change order forms.

Decision distress

Miller became frustrated about product selection as he gravitated to products more costly than the estimate allowed, thus raising project costs. This is a common situation, Lauten notes: Materials costs are trimmed during budget negotiations, but actual product selections drift toward homeownersÆ more high-end preferences. "After a project gets started, people want more things, better things," Sapp agrees.

Exacerbating the situation was that the architectÆs drawings lacked detail that Miller did not know to request, requiring many decisions down the line that Miller had not anticipated. When Lauten hires an architect, he makes sure details are ironed out early in the process. "I have worked with Burroughs often on design/build, and itÆs been fine," Lauten says. Although having the architect work for the homeowner rather than the contractor saved Miller a subcontracting fee in the beginning, he paid a price later in frustration.

Sapp and project manager Gary Colt met with Miller every week to list decisions that needed to be made, outline plans, and discuss job progress, concerns and questions. Lauten and subcontractors attended the meetings when necessary. At every other meeting, Sapp presented Miller with an itemized invoice, supported by timecards, subcontractor invoices, materials bills and the cost-plus percentage calculation. He and Colt then finalized change orders, written or oral, describing additional work requests.

Although charges for Sapp to attend the meetings appeared on billings, Miller didnÆt realize until near the end of the job that Sapp charged an hourly supervisory rate, not a fixed fee.

"It added up to a significant number of hours," Miller says. "Had I realized, the meetings would have lasted only one-third the time." The time added up to $14,580.

Final negotiations

After Lauten completed the project and billed Miller, Miller called Lauten to request a meeting to go over the final job price, especially the supervisory charge. Wary of offending a client, Lauten and Sapp reviewed the job costs and determined how much they could cut the price and retain an acceptable profit margin. "Rob got me to admit that the weekly meetings were of value," Miller says, "but I didnÆt have to twist too hard" to get him to credit the full $14,580 fee.

"I donÆt have a problem with negotiating our gross profit at the end of a cost-plus job," Lauten says. "The production managerÆs time was a legitimate expense, but we somehow failed in our education process with the homeowner. In cost-plus work, a lot of customers donÆt realize that they have as much control of the cost as they are willing to accept. Most people still think fixed price. Our ongoing challenge is to make sure they are aware of job costs."

That was many months ago. Since then, Lauten has installed 200-year-old flooring in MillerÆs main kitchen. And Miller hired another contractor, a horse-barn specialist, to build a horse barn on the property. How do Lauten and Miller feel about things now?

Miller: "After building the horse barn, I realized how important those annoying meetings were. When Lauten was here, we had the weekly meetings, and they were asking me questions all the time. But when the barn was being built, nobody would speak to me for weeks. IÆd go out to the barn and see things I wished they had asked me about because I would have done them differently. LautenÆs company is not cheap, but they do good work and are very professional."

Lauten: "My goal is to keep clients once I have them."

Also See:

Old Style

The Financials

Time Line and Payment Schedule

New Floor Plan

A Virginia remodeler knows the direct relationship between a happy customer and a successful company.