Remodeler's Exchange: Protecting your profit

This month, the Remodeler’s Exchange focuses on how to effectively protect your profit margin in an increasingly competitive marketplace.

January 06, 2014

TOM SWARTZ: Do you have a specific profit percentage in mind for the year, or is there a specific profit percentage you want to achieve for each project?

TIM LAWRENCE: I typically have a net profit of 10 percent in mind each year. I’ve done this for a number of years; it’s a good round number and a recognized industry standard.

ROB HAJEK: We have a net-profit percentage we look at achieving before owner’s compensation, which is approximately 5-to-7 percent. We look at each project separately because they both have different margins. Our service division has a lot higher margin than our remodeling division. When we get down to the bottom, we are shooting for 5-to-7-percent net profit after owner’s compensation. We don’t look at each project separately; however, when we do estimating we do talk about margins, but just for the larger-size jobs.

SWARTZ: Can you explain your definition of expenses and gross margin or profit?

THIS MONTH FEATURES:

Tim Lawrence, CGR, GMB, CAPS, CGP
Blue Ridge Home Improvement Inc., Blacksburg, Va.

Opened in 1979, Blue Ridge Home Improvement is a home repair and maintenance contractor that also offers custom design and remodeling services. The company has 10 employees and generates $1.5 million in annual revenue.
 

Rob Hajek, CGR, CAPS, CGP
HRT Building & Remodeling/Home Repair Team, North Liberty, Iowa

In business since 1988, Home Repair Team offers full-service residential and commercial remodeling and handyman services. The company currently has 10 employees and generates approximately $2 million in revenue annually.

HAJEK: In our gross margin, we have certain line items that are “above the line” as we call it, and that is the gross expenses it takes to do operations—that’s the field operation work that we break out separately. When we do our P&L statement, we have about 15 line items that are set up on top and those provide our gross margin based on what really happens in the field. Our expenses, the G&A for us, includes some of the overhead building costs such as insurance, advertising, or things that we as owners can really affect as opposed to what really happens in the field. Our net profit is what’s left over at the bottom. The owner’s comp is in the G&A section.

LAWRENCE: We operate our business in a similar manner. We figure anything above the line would be direct job cost such as labor, sticks, and bricks—everything that’s included in the cost of the job. Below the line is the gross profit. Any office expense, insurance, and anything else that may be considered an overhead expense is also below the line. The owner’s compensation is mixed in with bottom category and the 10-percent net profit is left over at the end.

SWARTZ: Is there an approximate number you want to keep your expenses at during the year?

LAWRENCE: Our goal is, at a minimum, to have the job costs to be at 60 percent of the total cost. That leaves 30 percent for overhead, which includes the owner’s compensation, and 10 percent for net profit. It’s a very simple model.

HAJEK: Our expenses are a little higher for our handyman business because we have a larger staff to handle the phone calls that come in for the handyman business. We have a gross margin at the top, an average between the two divisions, and overhead is usually around 33-to-36 percent. We are budgeting 42-to-45-percent gross.

SWARTZ: How do you protect that gross margin on each of your major projects?

HAJEK: We have a scheduling department and what they do is manage a software program that helps us oversee our expenses. The software program gives the guys in the field exactly the amount of time in terms of hours as well as costs budgeted into a project. So not only are they in charge of controlling that budget, so is the project manager that runs the software through the office. One of the things we did a few years ago that helps manage time is that we purchased cell phones that allow us to do all of our timecard tracking. The cell phones with this service allow us to manage the employees in the field using work codes and how long they spend on each work code. The control of our job costs has been very good over the last few years because of the implementation of this software and technology. From that report, we run Sage software, which is coordinated with our accounting system. The cell phone/GPS tracking work codes basically operate in a manner where no one manually fills out a time card. They punch in codes associated with that job number. So, if they are going to framing work, they punch in the code associated with that work. The reports tracking each of the specific jobs are phenomenal as it helps us maintain more control in the field.

LAWRENCE: First, you have to have gross margins so you have to estimate correctly. There are a number of people in our industry that don’t estimate correctly to start with, so if you don’t have any gross profit you cannot protect it. My first point is to estimate the job right—you need to know your numbers and know what your overhead is for each project. After that, you have to pay attention to those numbers. There are people out there that get a number, then go produce the job, and don’t pay attention to the numbers until the job is done. Like Rob was saying, you have to pay attention to those numbers, and he’s got a method that enables him to do that effectively. We do the same thing, maybe not to the extent that Rob is doing. We don’t use the time-tracking programs through the cell phones, although we’ve considered it in the past. We use XactRemodel software for estimating and we export reports from that into QuickBooks for the accounting side of a project.

SWARTZ: How do you keep your margins competitive and how does pricing come into play for the sales process?

LAWRENCE: I’ve been in business almost 35 years, so we have a tremendous number of previous customers that come to us for repeat business as well as referrals. For those jobs, rarely is price the main consideration. To be competitive when we are not typically going to be the least expensive contractor, we offer more to the customer. We offer the incentives that a lot of professional remodelers think are industry standards if you operate on a professional level, but they may not be so common for someone that operates out of the back of a truck. For example, this may be a clean job site, regular communication, or feedback that may be a surprise to the homeowner that has never worked with a professional remodeler before. We are trying to offer more benefits to our customers to offset the fact that we may be a little more expensive.

HAJEK: My answer is pretty similar to Tim’s. We don’t typically spend a lot of time thinking about margins with the competition level and our pricing methods. We have a certain margin we want to maintain on a job, and so we are not ever really reducing our prices to get a job. The screening process starts with us on the initial phone call. Our sales process is pretty intense when that first call comes in. We try to screen that customer and answer questions to figure what they are doing and how many other contractors they may be getting bids from for a project. We also charge for estimating, so that weeds out people that are not that serious about their remodeling project. We try to take care of this on the front end, before we actually spend a lot of time putting an estimate together only to find out we are double the price of the competition. It’s the process we go through. We bring clients into our showroom to go over that contract, we have pictures, we have jobs on the computers, and they can meet our employees, which is huge for us. We want customers to call here and get a live person on the phone; you can walk in the door and find three people in our office at all times. We are not working out of a truck, and these are the expenses we have to offer professional remodeling services. When it comes to the job process, it’s the cleanup, the procedures we go through for a job, including scheduling as well as the time it’s going to take to complete the job—those are all things we try sell to our customers.

SWARTZ: When you charge for an estimate, if the client ends up doing the project, does that cost go toward the total job price?

HAJEK: For new customers, no it does not. There is a fee that is upfront for us to come out and look at the project and put together an estimate. That does not get credited back toward the job if they end up doing it.

SWARTZ: How many people actually end up paying that fee as opposed to hanging up and calling another remodeler to get a free estimate?

HAJEK: We probably get about 60 percent of the people that call in to pay for the estimate. The interesting thing is that after they pay that fee, which is only $75 to come out and view the project within a 15-mile radius, our closing ratio on those homeowners that pay the fee upfront is twice as high as our normal closing ratio. We have just found that we are not running around, spinning our wheels. Our closing ratio has gone up, from our total leads to our total jobs coming in, after we put in that fee. For us, it’s been huge. You have to remember with our handyman division, people are calling us out to do an estimate for a $150 job. We can’t do that so we push them through our service department as much as we can. If they don’t do that, we have the fee process. If they pay it, we will be glad to come out. They are paying for a service, a professional, to come out and give them some advice.

SWARTZ: Do you ever discuss with a client what a fair profit margin may be for a project?

HAJEK: No, we never do. The only thing we talk about sometimes is the cost of us doing business—employee costs such as insurance and medical benefits, for example. We don’t give out specific numbers and we never talk about profit. I won’t do a job to include a profit at the end.

LAWRENCE: Virtually never. My response is very much like Rob’s as we operate very similarly. I also charge a fee for what we call an initial consultation, which is $110. I started that fee years ago, and it’s the best screening tool we’ve ever had because if a homeowner won’t pay for a professional to come out and discuss their project, they are going to nickel and dime you all the way through the project. If we get out there and the homeowner wants any kind of a project that would require design, we won’t collect the initial consultation fee but we will charge a design agreement fee. If it’s a small job, they will pay the initial consultation fee and we will do an estimate for them. If it’s a larger job, we won’t charge the initial consultation fee but we will collect for a design agreement fee to develop the design for them.

SWARTZ: What is your design agreement fee?

LAWRENCE: Usually, we do a percentage of what the budget calls for the project. This is approximately 5 percent of the projected budget.

SWARTZ: What percentages of the clients take you up on the design agreement fee?

LAWRENCE: We’ve already gone through the screening process on the phone, and they’ve agreed to pay a fee. Most of the time, the client is very familiar with our company and many have called to say they are going to have us design and build their project. We close a very high percentage of those clients. The fees are figured into the estimate, so they are basically paying a deposit on the job, but it covers us in case they don’t move forward with the job.

HAJEK: We don’t do a lot of design-build work. Most of our design work involves a kitchen in-house, and we have a flat rate for that work. When we have a larger project, we use outside design for that work.

SWARTZ: Do you have a contingency plan in case of unexpected change-orders or even if a project is canceled?

HAJEK: We try to protect ourselves with the change-order process because our estimates are so detailed, they come out as a line item through our software program—every single item is listed. It doesn’t show the price for each item, but it shows a total for the project. For a bathroom remodel, there might be 70 line items that print out to get you a total price. We know what’s in every line item; the customer knows what’s in every line item, so if we run into something unexpected we know it’s not included in our estimate.

LAWRENCE: Our estimating program also does the line-item listing—the scope of work we call it. This is more detailed than what most people think of in terms of a scope of work. It includes details of actually what is going in to the project—windows, linear feet of baseboard, crown moulding, square feet of paint, etc. We also add a contingency for each project. Our software has a base service charge, and we have always used that as a contingency amount. Obviously, the bigger jobs we will put a little more in than usual. For the smaller job, that amount is reduced. There is no set percentage that we use right now.

SWARTZ: Are there specific areas where you invest your profits that might be better for the future?

LAWRENCE: I am a firm believer in making a profit and the owner getting rewarded for owning the company. Investing back into the company is good, but I also think it can be short-sighted because owners need to diversify outside of the company. We have a 401k and profit sharing for employees, which is a good way to retain employees. Beyond that, owners should look at real estate because it is a natural investment for someone in the remodeling business. Diversifying your investments is key because none of us know what the future holds; some investments may do better than others.

HAJEK: We offer 401k profit-sharing plans for employees. As owners, we try to max out our 401k programs to plan for the future for yourself. As for real estate, it is a natural in this business to have rental properties. When it comes to our employees, we have incentive plans that, at the end of the year we try to invest back in those programs.

SWARTZ: What advice would you give a remodeler who wants to invest their company profits?

LAWRENCE: Again, diversify your investments because we can’t predict the future and if you put all of your eggs in one basket, that’s not a good thing in terms of investments. A multipronged approach with investments is very prudent. Obviously, you need to reinvest in your company to keep it strong. Also consider investing in opportunities outside of the construction industry.

HAJEK: You have to diversify your investments much like Tim said. Look for ways to create personal wealth as well. If you’re in the remodeling business to make a living, you’re probably going to have some rough times. You need to look at saving money and putting money away for bad times. You can look at diversifying, spreading your money around, but make sure you have a little stockpile of cash because you never know when you are going to need it. PR

 

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