Untapped Resources

A high-stakes design/build project yields big returns for the client

July 31, 2004

 

Architect Scott Belford of Archwerks Inc. in Scottsdale, Ariz., (the designer for all J.R. Designs' projects) says the flat roof is important to the home's style, which is why he was happy with the client's decision to raise the roof over the center of the home. "It was the only area with a lower ceiling," he says. "That's the beauty of design/build, giving the client the information to make the best decision." Photos by Jerry Portelli

Roofing: flat roof with polyurethane foam finish Cladding: synthetic stucco with cantera stone trim

Snapshot
Jack McDade and Jason Monczka

J.R. Designs LLC

Location: Scottsdale, Ariz.

Type of company: full-service design/remodel firm, a division of J.R. McDade Co. Inc. *Staff model: 4 sales, 7 field, 4 office/support
Sales history:
2000
$500,000
2001
$1 million
2002
$2 million
2003
$3.5 million
2004*
$8 million
* projected

Annual jobs: 30

Workweek: McDade and Monczka work 50+ hours; sales and field personnel work 40-50

Software: ACCPAC Pro Series, AutoCAD 2004, ACT!, Adobe Photoshop

Contact: www.jrmcdade.com, jmonczka@jrmcdade.com

*numbers for J.R. Designs LLC only

When drafting this split floor plan, Belford says the flow of the home was crucial. He focused on creating big, open areas - mainly the kitchen and its adjoining family room and sitting room, the homeowners' main gathering place - to facilitate communion while keeping with the open, grand spaces and clean lines of the home's contemporary, Southwestern-influenced style.

Cabinets: Canyon Creek Flooring: Columbian Revere Countertops: granite (Gold Leaf) Backsplash: Peruvian tumbled stone

When redesigning the bathrooms throughout the home, window openings were often left intact so natural light wasn't compromised. The work went toward widening passages and upgrading materials.


Up until four years ago, 31-year-old J.R. McDade Co. in Scottsdale, Ariz., focused on new home design and its four retail showrooms, which offered product and installation services for consumers and trade contracting services for home builders and remodelers. The company had all the trappings of a full-service remodeler - a plethora of in-demand, hard-to-find, skilled trades all under one roof - and simply wasn't.

For owner Jack McDade, this plurality - coupled with the fact that since opening to the public five years ago, 95 percent of consumers who come to the showroom opt for installed sales over simple product - made going into design/build remodeling an obvious progression for his company. J.R. McDade now has 12 divisions, including cabinetry, floor coverings and granite and marble fabrication.

"It made sense because we had more and more clients ask if we'd do all the other trades," he says.

Putting money in the client's pocket

J.R. McDade vice president Jason Monczka, director of the remodeling division, quickly saw the importance of a full-service operation. In a short time, J.R. Designs built a substantial niche in affluent Scottsdale and Paradise Valley, Ariz., cities that are almost completely built out. Monczka estimates that 30 percent of the homes in Paradise Valley are more than 30 years old, with a lot of 1950s and 1960s ranches. Working from the premise that renovating in this market can give homeowners enough instant equity to recover the cost of the project quickly, J.R. Designs has attracted white-collar professionals, entrepreneurs and retired executives who covet one of the area's 1-or-more-acre lots and have the money to do a gut rehab or demo most of the home and rebuild from the existing footprint.

"We know the price to produce new construction down to the square foot," Monczka says. "We've taken that knowledge and made it applicable to our remodeling division. By buying and then remodeling, our clients are often gaining $100 per square foot instantly. In this project, the homeowners easily gained $500,000 in equity, and that saves them money quickly."

The homeowners, a couple who prefer to remain anonymous, had been seeking a home in Paradise Valley for more than a year. Motivated by the potential economic savings, they preferred to buy at a premium and renovate rather than buy new. They looked for flat lots that would be conducive to young children playing but would not compromise their privacy.

However, the homeowners were underwhelmed by what the husband calls "shoddy" remodels in the area. After seeing some of J.R. Designs' job signs and checking out the company's work, they invited Monczka along with their real estate agents to view the Paradise Valley lot they wanted to purchase. "We knew the market: We paid for the land and wanted to see what we could do with a remodeler," says the husband. At the end of January 2002, before actually purchasing the home, they entered into a design agreement with J.R. Designs, attracted by the proposition of having a contractor whom they felt "wielded influence with the trades." They also liked the company's customer focus and the value per dollar it had achieved on other projects.

Two months after the on-site brainstorming session with Monczka, the homeowners bought the 4,300-square-foot house for more than $750,000. After spending another half million on his remodel, the homeowner still estimates that he spent 25 percent to 33 percent below market value for his home.

What the client wants, the client gets

Requesting a home with more open rooms, higher ceilings and contemporary finishes, the homeowners spent nearly six weeks in the initial design process, then signed a construction contract on March 14. J.R. Designs then took them completely through the design process again to finalize selections. This project stripped the existing home down to the exterior stud walls, added 1,000 square feet (most of it non-livable space), raised all ceilings from 8 to 12 feet and brought all of the finishes, from the flooring to the cladding, in line with up-to-date luxury standards. According to Monczka, the homeowners had finalized 95 percent of selections when construction started in June.

The resulting home - 4,500 square feet, 7,500 when considering outdoor living spaces and landscaping - was completed six months later. During that time, the homeowners logged 51 total change orders on this project, including a sizeable one that involved the roof. This set the production schedule back by two months, completely shutting down the site while J.R. Designs waited for the appropriate permits to move forward.

Senior project manager Brad Christensen (who has done warranty work on this project since the prior project manager left the company) says the real difficulty was removing the roof and leaving the exterior walls intact and then adding 4 feet on top of them. Raising the ceilings required extra engineering of the outside walls to factor in storm considerations and camouflage the intersection between the old and new, ensuring that there would be no bowing. New construction would have required a shear wall; in this case, the walls required additional framing and bracing with more hangers. Plumbing was salvageable, but all of the existing electrical had to be removed. Christensen says the end result and transition is "seamless."

With regard to the finishes and material choices, the company gives the client free reign to choose whatever they like without limiting them to the product offerings of J.R. McDade's other divisions. However, Monczka says because the other divisions have such a variety, clients rarely choose to go outside of J.R. McDade. This translates into dollar savings for both the client and the company - clients don't pay additional markup on product, and the company's coffers benefit from the dollar value associated with the time saved in the process. "We control all of the expensive trades. Each year, we've grown by 100 percent," says McDade.



The Financials

 

  Budget History
Initial Estimate
$300,000-$350,000
Final Estimate
$426,750
Change orders
$56,036
Final price of job
$482,786
Cost to produce
$388,938
Gross profit
$93,848
Budgeted gross profit
25%
Actual gross profit
19.4%

The varied resources under the J.R. McDade umbrella and its targeting of high-end design/build projects affords J.R. Designs three luxuries in its business operations. One is the four expansive showrooms that streamline the selection process for the company's wealthy, time-limited clientele. Second is an insider's perspective on subcontractors with respect to scheduling projects: Once his projects are scheduled, vice president Jason Monczka likes to give the respective J.R. McDade divisions responsible for the necessary labor at least two weeks notice, so his jobs are first on the board.

Finally, there is a healthy, multi-faceted company that was capable of bolstering J.R. Designs' expansion from inception, thereby eliminating cash flow concerns. "It comes down to overhead," says Monczka. "We didn't have the upfront expenses of other companies, so we basically started in the black because we had all the infrastructure." This comfort level trickles down and offers breathing room with regard to individual remodeling projects.

Design Agreement: The retainer fee is 1 to 2 percent of a loose estimate that's based on numbers projected from the company's historical experience. Estimates done before the construction contract are not line-itemized. The potential clients received a bound proposal (in this case, 100 pages) complete with colorized drawings.

Payment Schedule: The company's deposit and draw system stays ahead of the project's value by 10 percent to 20 percent, guaranteeing that what is sold is "in the black," says Monczka. Based on the type of job and its phases, J.R. Designs schedules four to seven payments based on project milestones. In this project, there were eight: a 10 percent deposit at contract signing and a 10 percent draw at completion of demo and permit approval; followed by six equal payments after framing; after building inspection; after delivery of cabinets and flooring; at completion of granite; at completion of mud work, or all tile that's applied vertically; and at completion of punchlist. Payment for change orders is due at the next scheduled draw. Monczka says this is more agreeable to clients than immediate payment. "If you had to write a check every time you wanted to change something, you'd stop asking; people are more conducive to buying things when you charge them down the line," he says.

Profitability: Monczka admits that on this project (one of the earlier projects in J.R. Designs' relatively short history), J.R. Designs lacked truly formalized systems for estimating and purchasing, and Monczka didn't manage the change order process well. Since then, he's put the responsibility on project managers to present change order estimates to clients and also switched from time-and-materials to cost-plus change orders.

"When you overestimate your pricing capabilities, you don't realize your profit," he says, citing both labor and product cost as areas where money was lost. "But since then we've vastly improved those systems, and we're much more efficient. But what's most important is that, in the end, we had a happy customer and a great referral source."

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