Pat Burke and Jason Asmar are serious about numbers at The Burke Co., their Dallas remodeling firm. They understand the bottom line, how to price their jobs and how to keep costs down. They are aware that gross profit margin is just that: the gross before all the obvious and not-so-obvious costs of doing business and completing a project start slicing away at it. They know that shooting for a gross profit margin of 45% is not only reasonable but advisable to ensure the financial health of the company and, by extension, its employees.
So when they calculated a 45.5% gross profit margin for a whole-house remodel for Gary and Belinda McDonnellÆs Dallas home, they were comfortable with it. The McDonnells were pleased, too. They had talked to three other contractors whose bids were significantly higher, and they were satisfied that The Burke Co. was a well-run, high-quality remodeler.
|The sleek new interior is a far cry from the pre-remodel pink version. (Bottom) The project manager decided to gut the house unnecessarily.|
The project also had sentimental value. The 1951 ranch house was GaryÆs childhood home. He and Belinda bought it from his parents. The job involved expanding the 1,600-square-foot house to 2,500 square feet, adding a second floor and 11/2 bathrooms, and converting a garage into two home offices (Gary and Belinda work from home). The house is in an area where The Burke Co. does about 75% of its business.
A month into the job, Burke, founder and owner of the company, and Asmar, its president, realized there was a problem, and it was from within their ranks. The subcontractorÆs bill for the framing was much higher than the estimate, prompting Burke to make a rare visit to the job site. When he got there, the trouble was immediately apparent.
ôI discovered the project manager had taken it upon himself to gut the entire house,ö Burke recalls. ôAll the drywall, all the insulation, right down to the studs. I donÆt know why he decided to do that. It wasnÆt part of the job, and it wasnÆt necessary.ö
So suddenly, The Burke Co. was responsible for rebuilding all those walls ù a cost of more than $3,500 that had not been figured into the original estimate.
Of sand and rat holes
Burke says the unauthorized work was not the first of its kind with this particular employee, whom weÆll call John. However, he and Asmar respected JohnÆs abilities as a lead carpenter and wanted to give him another chance. They had talked to him at length and on several occasions about the importance of sticking to the project as specified in the contract and on the plans, and they hoped he had learned. After discovering the inexplicable demolition work at the McDonnell house, they talked to him again.
Yet even after they realized that John had again departed from company policy ù and on the biggest job heÆd ever managed ù Burke and Asmar were sure they could still salvage him and the good qualities he brought to the job. For example, he got along very well with the clients.
Maybe too well, as things turned out. John was so eager to accommodate the McDonnells that he went to considerable lengths ù and expense ù to do so. Asmar and Burke learned that John had built dummy vanities for all the bathrooms so the clients could check on the height. It was certainly extraordinary customer service, but it was another cost that had not been included in the estimate or the contract. Nor had John gotten signed change orders for the additional work.
ôHe thought, æHow can you say no to someone whoÆs spending almost $300,000 when they want a few extra things done?Æö Asmar says. ôHe just didnÆt want to follow procedures.ö
Burke and Asmar decided to let John continue on the project while they kept a close eye on the numbers. They had weekly meetings with him to discuss their concerns.
ôThatÆs where Pat and I made some errors in judgment,ö Asmar says. ôWe should have called a halt to it sooner, but we were so close that we decided to just get it done, ride it out and use it as a lesson.ö
It turned out to be a more expensive lesson than they had realized at the time. The McDonnells had hired an architect before hiring The Burke Co. Unfortunately, his plans turned out to be a problem, too.
Asmar explains that the dummy vanities incident, for example, stemmed partly from the architectÆs failure to specify the height of the vanities in the bathrooms. John was trying to make up for that, even though it wasnÆt his responsibility. Many other details were missing from the plans as well, such as any specification for waterproof backerboard in wet areas. The Burke Co. caught that one, too. Similar omissions meant that John and the subcontractors had to solve more design problems than usual. The result: much higher costs.
What part of ænoÆ donÆt you understand?
Despite renewed pressure to stick to the game plan, John continued to run the project his way. Belinda McDonnell kept coming up with creative additions to the original scope, and while Asmar is sure the McDonnells would have been willing to pay for the changes, John kept giving them away.
ôHe did so much running around and doing extra labor and wasting materials,ö Asmar says with a groan. ôHe put in an unbelievable number of hours on things like that, and we couldnÆt charge for them. This should have been about a $412,000 project instead of $324,000. It took $88,000 out of our bottom line.ö
By the time the project was over, Asmar and Burke were a little shellshocked. They accepted the fact that despite his other skills, John could not or would not adhere to company procedures on change orders and pricing.
Just as Burke was trying to figure out the best way to let John go, John quit to start his own company. Both his former employers were enormously relieved, but their joy was somewhat short-lived. JohnÆs first customer was one of their longtime clients.
ôJohn was very much a toxic employee,ö Asmar says. ôHe not only lost money for us, but he took from us.ö He adds, though, that the local grapevine reports that JohnÆs new business is ù not surprisingly ù running into financial problems.
Turning it around
Despite the turmoil within The Burke Co., the McDonnells were pleased with how smoothly the project went. Belinda, an interior designer, was impressed by JohnÆs passion for having everything done perfectly, and Gary liked the companyÆs organization and project management.
ôWeÆve recommended Burke to several other people, and weÆve been references for some of their customers,ö he says. ôOther remodelers could learn a lot from them.ö
Burke and Asmar learned a lot from this project themselves, and they have made changes at their company as a result. They interview potential employees more thoroughly, and they are considering adding psychological testing to their hiring process. They move new hires into the company slowly, making sure they understand each step of the process before moving on to the next. And theyÆve added more training to the mix, including annual training for their production managers through RemodelerÆs Advantage.
The production process has tighter controls now, too. ôWeÆve started to implement a lot more checklists, making the project manager a lot more accountable and reporting to us more often,ö Asmar explains.
They also have become more selective about the architects with whom they will work. Asmar says they stick with a pool of architects who they know will do a thorough job. ôWe donÆt use other architectsÆ plans anymore except in extreme situations.ö
Even considering the problems on the McDonnell project, Burke says the result is a beautiful house with which heÆs happy to be associated. He and Asmar have used it extensively in their marketing. The McDonnells also let them bring prospective clients by to see it.
ôIt wasnÆt a profitable job from a financial aspect, but it was from a marketing aspect,ö Asmar says. ôItÆs been a great marketing tool. It has won several awards for us.ö
Burke adds with a laugh, ôMaybe we should have just put it toward the marketing budget in the first place.ö