Managing overhead is increasingly important for firms in today's climate. Professional Remodeler's Tom Swartz talked to remodelers George Cleary and Bob DuBree about the challenges of cutting overhead but still delivering quality to employees and clients. Highlights of that conversation appear here. To listen to the full discussion, click here.
TOM SWARTZ: Bob, let's start with you. Define overhead. What would you consider to be overhead?
BOB DUBREE: At Creative Contracting, we view overhead as anything that is not directly attributable to a job. Just to put things in perspective, in 2008, our overhead — January through November — was about $450,000. In 2009, for the same time period, our overhead is about $150,000. Nothing is considered overhead that can be related back to the project.
SWARTZ: Including labor burden?
DUBREE: We burden labor, obviously all the taxes and the benefits. We burden fuels, we burden truck expense. It's all job costs and not overhead.
SWARTZ: George, how do you define overhead?
GEORGE CLEARY: Any labor burden that is directly related to a job would go to that job. Obviously company meetings, where we might be talking at a team meeting or taking about marketing or company growth, policies or procedures — anything of that nature would be overhead. Anything that has the guy's time or fuel time for a vehicle going to a job is allocated to that particular job and therefore is not overhead.
SWARTZ: George, do you know approximately the percentage of labor burden that you charge to a job?
CLEARY: I would say we're more along the lines of 40 percent.
SWARTZ: Bob, do you have a percentage of labor burden that is charged to each job?
DUBREE: I don't know it off the top of my head. I guesstimate that it's in the 30 percent range.
SWARTZ: What overhead is necessary and what decides what overhead can be eliminated or cut?
CLEARY: I guess it depends on the time of where we're at. In the current situation, we're really trying to dissect and look at where the monies are going, what overhead is needed and not. We go through the actual budget looking at anything obvious that would be easily taken out of it. Those would be simple things such as revising our cell phone usage charges; looking at deferring expenses on new trucks, tools and equipment; analyzing insurance and getting into revising our marketing; trying to do things that are more belly-to-belly and less promotional advertising; and things of that nature to try and reduce the general overhead.
SWARTZ: Bob, you took the overhead from $450,000 in the first eight or nine months to $150,000. How did you decide what was necessary in that and how did you determine what got eliminated?
DUBREE: We just went back to basics. I had a full-time office manager and an almost-full-time marketing person. We had two full-time designers; I had a production manager and a production coordinator. We had a part-time receptionist and a part-time selections person, plus myself. We just knew that there was no way that we could sustain all of that given the volume we were looking at doing. I mean, the phones for us just kind of shut off last October. We looked at the facilities. We had a really nice selection center. We had a really nice presentation room. We just felt that those were all things that were great and when times were great. But now people are in the bargain-hunting mode and we couldn't afford to maintain those kinds of things. A lot of our reductions came from salaries, staff salaries. In marketing, we were probably in the 5 percent range. We dropped it down to 2 to 3 percent. We moved out of the big, nice office that we had into something small and cozy.
SWARTZ: Bob, is managing and controlling overhead just up to the owners?
DUBREE: It's got to be up to everybody. It's got to start with the owner who sets the example and sets the tone. You've got to get everyone to see why. We've been an open-book management company for at least 10 years. Our numbers have always been open; we share where the money goes all the time. Not as much as we used to, because we don't have the same resources to do it, but we still talk about it. We ask people to look for ways to save money, whether it's on the production side of things or the office overhead side of things.
SWARTZ: George, how do you feel about that?
CLEARY: It's definitely more of a team acceptance. It can't be all on the owner's shoulders. I agree with Bob that the leadership has to come from the owners. What we try to do is to give each department some kind of idea of where they're going so they can dissect their area. They're not going to think like the company owner; they can't wear all those hats. They can at least dissect their division or their department and try and figure out ways that they can see more cost effective ways to cut their overhead or become more productive.
SWARTZ: George, you haven't been hit as hard, but you have re-evaluated a few things in your expenses. Where did you start?
CLEARY: Again, the budget and what's in there that's slush? Is there entertainment in there that we could take out and things of that nature? Copiers, new computer systems, hard costs that we could just defer and deal with at a later time? Buying a new vehicle and analyzing the insurance? Are we over-paying for something? Are we over-paying monthly for insurance because we're still set on our previous budget that might not be met? Analyzing things a little bit more monthly or quarterly rather than waiting until the end of the year to settle up things? We did have a health savings account, just to try and reduce some of our exposure. We wanted to be able to provide health insurance, but couldn't afford some of the rates that our policies had gotten up into. I chose not to get rid of our non-producing person, which was our office manager, to take the time to try and grow the business and to use her expertise to figure out how we could fine tune the business and keep from getting caught in an upside-down situation. We looked at what we could do to further enhance our marketing and to use our fewer marketing dollars more wisely. How can we better define and get back to the basics? How can we better define our job descriptions to make everyone just that much more productive and responsible?
SWARTZ: Do you assign the overhead to the whole company? How do you manage it?
DUBREE: We have a department setup. We'll look at the income for each department and put an equal percentage of the overhead to each department based on its income. It all gets lumped in together. Then we go back and look at the end of the year or midway through and re-evaluate.
SWARTZ: You're specifically saying that where you were at $2.4 million and you had a slightly negative percentage of profit. This year you've slashed expenses, albeit that you did cut your salary, but you cut the whole expenses by perhaps 1/3 for this eight month period we're talking about. And you're showing a percentage of profit. How do you explain that?
DUBREE: Just paying tighter attention to the numbers, paying attention to the job costing. Just being aware of everything is the most important thing I can say. When you get busy, you get fat. You get fat on the overhead side. One of the things that has been hard, though, is it gets hard to offer the same level of service that we offered before. It's hard to have all of the ducks lined up and ready to go when you start that project so it's almost seamless.
SWARTZ: Has that hurt you?
DUBREE: It's psychological more than anything. I'm a non-confrontational type of person, so I try to go out of my way to make sure that we've got everything tight and squared away. We just don't have the same resources that we used to have to do that. I'll go out and I'll get frustrated when something's not going the way I'd like, but when I step back and think about it, I know that the people that are still here are doing the best that they can with the resources they have, and I'm providing the best that I can with the resources I have. Frankly, what it costs to do a project today ... it would have cost more yesterday and a lot more last year. The consumer is getting what they pay for. They may not realize it, and you may not realize it when you're estimating it, but it is a fact.
SWARTZ: George, if you had any advice to give to a remodeling contractor out there when it comes to overhead and managing it and what to do about it and how to control it and how you decide what to do with it, what would you tell him?
CLEARY: I would say just start with your team of people. Make sure you've got the right people on there. What I tried to do forever was to do it all myself. You just can't do it and wear all those hats. When you hire people, rather than hire them basically on their skills or their experience, hire them and train them to be the person for the position that you want. We've always hired people with remodeling experience versus trying to hire someone with a pretty resume. We want someone who has hands-on experience with the type of work we're going to ask them to do. Having somebody with the right attitude that has the owner's type of mentality. That's my first and foremost advice — just make sure you have the right people so that you're not trying to do it yourself and everyone thinking along the same lines with the same goals in mind.
SWARTZ: Bob, what would be your advice to a remodeling owner and company and manager out there who is struggling with what to do with expenses and overheard?
DUBREE: Just get back to basics: Do you really need it? Is it critical to the mission? And pay attention! It's easy to hang on to people far longer than you should. You need to watch that pipeline. We all know that once you go on that first sales call chances are it's at least two months before you're starting that work. What tends to happen is you keep people around longer than you should and that gets expensive. It's the hardest thing for a lot of people. It's really hard. In 21 years, last year was the first time I ever laid anybody off and I don't ever want to do it again.