Target practice

Revenues dropped in 2003. According to Professional Remodeler's annual business results survey, total annual installed dollar volume dropped by 24.5 percent, from an average of $3.1 million in 2002 to an average of $2,340,370 in 2003. Firm size shrunk too, from anaverage of 18 full-time employees to 12.

September 30, 2004
Sidebars:
Methodology
Case Study: ADR Builders
Case Study: Bueler Inc.
Financial definitions used

Revenues dropped in 2003. According to Professional Remodeler's annual business results survey, total annual installed dollar volume dropped by 24.5 percent, from an average of $3.1 million in 2002 to an average of $2,340,370 in 2003. Firm size shrunk too, from anaverage of 18 full-time employees to 12. That's the bad news.

The good news is that we fine-tuned our survey to provide readers with data on both residential and commercial remodeling jobs as well as new homes, recognizing that many remodeling contractors do some combination of the three.

In addition, acknowledging that a snapshot of what is does not necessarily provide an image of what could be, we talked to some remodelers who know how to keep profits and markups up even in tough years to find out how they do it.

One secret they share: participating in a benchmarking group. Whether for contractors in different regions or for local service businesses, these groups give you some idea of low, average and high performance, and help members to raise the bar. Do the same with these pages.

The many models of remodeler

There might be as many business models in the remodeling industry as there are remodeling companies. Think of all product and service offerings: the job types, the architecture and interior design work, the new homes and more. Then think of the different ways to incorporate, to report net profit and owner's compensation, to staff the field with full-time employees or to subcontract most work — it makes for a dizzying array of possibilities.

All of the survey's 225 respondents run or manage companies that do at least some residential remodeling. But 36 percent report doing some commercial remodeling and 41 percent report building some new homes. Pricing and margins on those job types tend to be lower than on residential remodeling, so we asked respondents to address their volume in each of the three areas separately. To improve the accuracy of the information, we only tabulated data for people who did at least 10 percent of their 2003 volume in that area. That left us with 86.6 percent of overall respondents providing data on residential remodeling, 43.6 percent for commercial remodeling and 49.3 percent reporting on new home building.

While the number of jobs per year averaged out at 139.6 for residential remodeling, 17.1 for commercial remodeling and 29.7 for new homes, some large developers raised those numbers. Only 15 percent of respondents did more than 50 residential remodeling jobs in 2003, and only 17 percent did more than 20 commercial jobs. On the new home side, just 19 percent built more than 10 homes.

Sales performance

To find out more about the typical salesperson, we asked some further questions of those firms — just 36 percent — that had an internal sales force besides the owner. Average annual sales per salesperson ranged from $697,230 in residential remodeling to $932,850 in new homes, with commercial remodeling falling in the middle at $762,490.

These firms report converting, on average, 40.7 percent of qualified leads — those where the salesperson met with the prospect face-to-face and/or went through a ballpark pricing exercise — to actual sales. Fourteen percent of respondents said they closed more than 70 percent of such leads.

Profit slippage

Gross profit target and actual gross profit are two very different things, as our survey testifies. Respondents report that on average, only 63.1 percent of residential remodeling jobs closing within 3 percent of gross profit target. That number doesn't improve much for new homes (66 percent) or commercial remodeling (67.6 percent).

Assuming our average total annual volume of $2,340,370 and slippage of just 3.1 percent (best-case scenario) on one-third of the jobs and volume, and you've lost approximately $23,942 for the year. That money could have gone for an entry-level employee, new office or field equipment or the owner's retirement.

Lead tracking

Referral and repeat business from former clients continues to be the largest source of quality leads for most remodelers. Least popular were broadcast advertising and outdoor advertising, which accounted for no business at all for 86 and 84 percent of respondents, respectively.

The digital world, however, is starting to make a real impact on remodeling, with 44 percent of readers reporting their company Web site as a source of business and 27 percent saying the same for online referral services.

Looking ahead

Insurance and materials costs continue to rise. Exceeding the average gross profit and slippage metrics will be essential to staying in business.

Profile of an "average" remodeling firm
2003 2002 2000
Number of years in business 11.43 11.24
Number of full-time employees (besides owner) 12 18 11
Number of part-time employees 6 7 2.9
Annual total volume $2,340,360 $3,100,000 $943,000
Annual remodeling volume * $2,100,000 $723,000
Annual number of jobs * 40.27
Remodeling job size * $145,860 $65,690
* See "Three business models" table for a detailed breakdown.



Three business models
Residential remodeling Commercial remodeling New home building
Annual volume $1,441,390 $1,601,200 $1,687,730
Annual jobs 139.6 (median = 15) 17.1 (median = 6) 29.7 (median = 3)
Job size $85,960 $225,540 $404,000
Gross profit percentage 27.7% 23.5% 23%
Markup 33.1% 25.6% 22.1%
Averages based on respondents who do at least 10% of their volume in residential remodeling (195); commercial remodeling (98); and/or new home building (111). Responses applied only to their work in that area.
Contractors make better profits on residential remodeling jobs than on commercial projects or new homes, but typically have to sell more jobs with a lower price tag, as evidenced in the job size chart below. Nearly one-fifth report average residential job size under $10,000.



The work remodelers do
Full-service remodeling 70%
Design/build 45%
Kitchen/bath 41%
Exterior contracting 38%
Single-line/specialty contracting 17%
Respondents were asked to check all categories that applied to their business.
The majority of remodeling contractors continue to offer a full line of services for existing homes.



Construction quality improves
2003 2002
Number of punchlist items 5.46 6.21
Open warranty service requests 1.71 2.07
Days to complete warranty request 6.31 7.84
Numbers are averages.
Reducing punchlist and warranty items and decreasing the time to respond to client requests improves customer satisfaction.



S-corporation remains most popular structure
2000 2002 2003
No 30% 22% 22%
Yes 70% 78% 78%
If yes, what structure
S-corporation 52%
C-corporation 33%
Limited liability corporation (LLC) 15%
The high percentage of S-corporations undoubtedly accounts for the high average reported net profits — 15.5 percent for residential remodeling, 15 percent for commercial and 14.3 percent for new homes. Why? There's a tax advantage.


 

Methodology

In May 2003, the Reed Research Group conducted a study to gather business performance and financial information about companies in the remodeling industry. This study was conducted online. A random sampling of Professional Remodeler readers were sent an e-mail invitation to participate in this study. Results are based on 225 responses.



Case Study: ADR Builders

President: Gary W. Stokes

Location: Timonium, Md.

Years in business: 25

Staff model: 3 office, 9 field

Business model: Residential remodeling only

Average job size: $26,000

2003 volume: $1.67 million

2003 jobs:

Under $10,000: 25

$10,000–$24,999: 9

$25,000–$49,999: 1

$50,000–$99,999: 4

$100,000–$250,000: 2

$450,000: 1

2003 warranty costs: 1.43% of sales

Markup target: 65%

Gross profit percentage target: 35–37% of sales

Overhead target: 22.5 to 25.5% of sales

Marketing target: 2% of sales

Net profit/owners' salaries: 16% averaged over the last five years

Margin, markup and cost strategies:

President Gary W. Stokes, pictured, says ADR usually strives for a higher markup and margin on smaller projects. "We go for 40 percent margin on jobs under $10,000; we go to 34 to 35 percent on the great big ones," he says. Though his usual markup is 65 percent, he might go as high as 100 percent on a small job.

Even with material and insurance costs rising, Stokes doesn't cut costs. "Our overhead is pretty fixed. We don't have room," he says. "There's very little that we consider optional." The solution: add markup and improve sales skills. "We'll look at other options," explains Stokes. "If a project costs $200,000 and you want to spend $175,000, we'll suggest changes in the project to lower costs, but we don't cut costs."

Tips for high-performance business results:

  1. Focus. "We're very focused on what we do. We don't do a lot of different kinds of work, and we don't work in a very big area," says Stokes. "Since we're doing these kinds of projects over and over, we have a good system and know what's going to happen."
  2. Organize. "We're very organized. We have very good record keeping, we're really on top of getting things ordered properly and promptly."
  3. Eliminate layers of management. "We have excellent project managers — they're the equivalent of a lead carpenter. We don't need a production manager," says Stokes. "We have no middle management. That keeps costs down."
  4. Get third-party input. "The whole support staff that Remodelers Advantage Roundtable have, and the other remodelers you're in the group with and get feedback from, that's been a huge help."
  5. Review jobs in progress. "I review jobs biweekly," he says. "What I'm looking for is, here are five jobs in a row where we're under on floor framing or tiles. We have to adjust to reflect that."



Case Study: Bueler Inc.

President: Fred Bueler Jr., CKD, CGR

Location: Des Peres, Mo.

Years in business: 20

Staff model: 9 full-time, 1 part-time

Business model: 100 percent residential remodeling

Average job size: $35,000 to $40,000

Annual volume: $1.3 million to $1.4 million

Gross profit percentage target: 37.5% of sales

Markup target: 60%

Repeat and referral business: 80% to 85% of sales

Margin, markup and cost strategies:

Like Stokes, Fred Bueler Jr. has a margin target that rises as the jobs get smaller. "On a real big job, where it's more competitive, I might go a little under, but not much," says Bueler. His company uses fixed-price contracts but occasionally does a time-and-materials change order when it's for a repeat client.

Tips for high-performance business results:

  1. Create a cash cushion. "Have money in the bank so when things do slow down, you're not taking a job where you can't get the right margin," advises Bueler. "Bueler keeps an amount equivalent to 10% of annual revenues in the bank in money markets and revolving CDs. He admits he didn't always have that luxury: "We started with nothing other than two big jobs. We just gradually put the money away as we've been able to."
  2. Set a minimum margin standard and don't drop below it, no matter how tough the market. "When things were slow early this year, I wasn't underbidding myself to try to pick up work," says Bueler. "I might have used a 1.55 markup multiplier instead of 1.6, but I wasn't going any less than that. I told the guy who sells for me the same thing."
  3. Hang on to your employees. "The longer your employees are there, the better you know how to cost a job to produce a profit," Bueler advises. He pays a bit more than the competition, offers paid holidays, and offers medical insurance as part of the total negotiated compensation package.
  4. Job cost, job cost, job cost. "Good job costing is pretty darn key," says Bueler. He uses CDCI's Basic Builder program.
  5. Hold the company owner(s) accountable through an outside board of directors or peer group. "When I go to Business Network meetings, I don't want to be the low guy on the totem pole," says Bueler. "It forces me to do things I might just let go of otherwise."



Financial definitions used

To encourage respondents to calculate their results in the same way and to improve the accuracy of the overall findings, the survey included the following definitions. We used the same accounting standards used by NAHB's Builder 20 and Remodeler 20 Clubs, which were provided by Steve Maltzman & Associates, the company that monitors the 20 Club financials, and further honed by Alan Hanbury, CGR.

Gross profit (margin): Sales dollars minus labor minus building materials minus other direct costs

Labor: direct labor, burden, subcontractors

Building materials: all products used in a project

Other direct costs: rental equipment for specific jobs, small tools consumed on specific jobs, and professional design fees for a specific job

Net profit: Gross profit minus operating expenses (overhead)

Operating expenses (overhead): indirect construction costs plus sales and marketing expenses plus general and administrative expenses

Indirect construction costs: Construction costs not charged to a particular job. Examples: small tools and equipment, construction vehicles, mileage reimbursements, callbacks and warranty

Sales and marketing expenses: sales manager compensation, sales staff compensation and commissions, estimating personnel compensation, and marketing

General and administrative expenses: Owner compensation, production management salaries, office and clerical salaries, design personnel salaries not directly charged to a job, payroll taxes and benefits, retirement, pension, profit sharing, bonuses, general office expense, rent, utilities, computers, vehicles, liability, property taxes, licenses and state fees, and professional services

Markup: the percentage added to direct costs to get the sales price on the job


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