The New Reality

Most will agree that the remodeling market has undergone significant changes in recent years, and remodelers have had to adapt, but does that mean there’s a permanent new reality?

Let’s face it, markets evolve, and the history of remodeling is one of adaptation. So, yes, there are new parameters in the marketplace, but core business practices polished by remodelers over the years, in good times and bad, remain rock solid. Perhaps remodelers today confront less of a new reality than a reality check.

One of today’s realities experienced by most remodelers is smaller job sizes in terms of overall budget. More than 80 percent of those surveyed by Qualified Remodeler reported that non-handyman type jobs showed this trend. The decreases were substantial. Thirty-five percent said budgets were down between 15 and 25 percent, and a nearly equal percentage said budgets were down between 25 and 50 percent.

While a third of homeowners said lack of money or inability to finance were reasons for curtailed spending, a quarter said they were unwilling to take on any additional debt.

No Mystery

What happened? It’s not really a mystery if one looks back a few years. The housing industry, both remodeling and new construction, was riding a wave of easy credit and ever-increasing home equity. “It was almost like free money,” says Les Cunningham of Business Networks, Inc.

On a typical job the homeowners would refinance and get several hundred thousand for remodeling, he recalls. “The mind-set was that the house would appreciate so much, I’ll mortgage out anyway, and I’ll just get my money back,” he explains.

Not that it was uniformly smooth sailing. “In the 1981 recession we got slammed and money went to 21 percent, but then it came back,” Cunnigham recalls. “In the 1989 recession, we got slammed again but then it came back in 1991,” he says. “Right around 9/11 the dot-com bubble burst, but the market took off again.

“With this [current] reset of the economy, the money is gone, the equity is gone and there is no rapid replenishment of that equity, in my opinion, certainly not in the near future,” he says.

Where does that leave remodelers? “A lot of them are just sitting there thinking the bus will start running again, and they’ll just jump back on the bus,” Cunningham says. “I don’t think it’s going to happen like that. Yes, it’s going to come back, but what I see happening now is you have to be basically a small general contractor. If Mrs. Smith wants some steps put up, you put up her steps; if she wants some painting done, you paint; if she wants her siding repaired, you repair it.”

Another thing that has changed is that homeowners know much more about costs than ever before, thanks in part to the Internet. “They’re going to chose between price and quality,” Cunningham thinks, “and a lot of them are going to chose price, for better or worse.”

No Magic Numbers

Cunningham has long said that to be successful remodelers should “know their numbers,” but there is no magic number, he says. “The number you have to get is the number that covers your overhead and expenses plus a net profit.

That could be 30 or that could be 60. Unfortunately, there were a lot of remodelers that were charging 40, and it was costing them 50. In remodeling none of that ever shows up until the work flow stops. And when the work flow stops and you run out of jobs, you suddenly find out you weren’t making a profit but simply churning money.”

Asked what he would tell a remodeler who was waiting for the phone to ring, Cunningham says, “I would cut my overhead any way I could cut it — any way that is legally, morally and ethically correct. I would bid on real costs; I would figure a profit; and I would go call on all of my past customers and let them know I’m still around. I’d tell them, ‘Yes. I need work; things aren’t as good as I’d like them to be, but I’m still here.’ ”

Daniel Glickman, president of Sustainable Construction Services, Inc. in Sherborn, Mass., says his Boston-area remodeling business similarly is seeing smaller jobs. In some cases that’s because clients have slashed their budgets, “but you also simply see that jobs are smaller in nature, and the fact that they are smaller in nature doesn’t necessarily mean they would have been bigger,” he says.

Glickman also notes potential clients are more price-conscious than in the past and negotiations often are more price-focused. “The budgets we see are sometimes simply not realistic,” he says, “but often someone ends up taking that job for that budget, which is a huge mystery.”

Out of the Closet

The question, Glickman says, is whether the price-conscious people have come out of the closet or are the only ones left in the market because they believe they can get better deals.

Smaller jobs can be more difficult for some remodelers because they can take the same overhead or more than the bigger jobs, Glickman says. Smaller companies, particularly those geared to handyman-types services or which have strong service departments are better equipped for small jobs.

“If your process is set up to offer more of a custom service, the overhead for a $30,000 bathroom is probably the same as the overhead for a $50,000 bathroom. The management and design time is probably about the same. The fact that the homeowner has chosen more expensive fixtures, for example, doesn’t mean that you spend less time setting it all up and managing it,” Glickman says.

“We all have had to slash overhead dramatically, but still we need just about the same amount of management and actual costs as we had before. In fact, it feels like we need more because it’s getting more competitive and the clients expect more for their money,” he adds.

The Same or Different?

How a company responds will vary dramatically from one to another. The first thing we have to figure out, Glickman says, is are we gearing ourselves to the same kind of projects but just fewer of them or are we trying to adapt our company to a different type of project.

If you are going to do the former, say you used to do $100,000 bathrooms and now everybody is asking for $70,000 projects, you may want to stick to the same model, reasoning that you can survive on fewer jobs, Glickman says. “If you can keep your margins, what is the minimum overhead you need? Perhaps you’ll have one less project manager.”

On the other hand, you may end up adapting to a new type of project that involves a different sales and management process. “You may keep your margins or even raise them, but you package your product differently and streamline your design process,” says Glickman.

“The biggest issue I see is custom work vs. semi-custom,” he continues. “On a custom project we spend a lot of time with the clients, and that translates into real-time management costs, taking care of the details and selections. On the other hand, you can streamline the process and just let the customer choose from, say, five options.”

That said, Glickman acknowledges that many remodelers are not comfortable with reinventing themselves. “It’s painful and it’s risky,” he says.

Today, Glickman has developed a niche clientele composed of chemically sensitive homeowners, and has taken on a wider variety of projects. In addition, previous clients who in other times might have moved on to phase two or phase three of a remodeling project that involved finishing the basement or upgrading the master suite are instead opting to upgrade the HVAC system or replace the roof.

Glickman admits in other times he might have referred those clients to a specialty contractor. Now, he welcomes the jobs. “I’ve learned to sell a roof and make a profit on that. I have learned to accept smaller jobs and manage them profitably,” he says.

Musical Chairs

He likens the situation to a game of musical chairs. “We’re [remodelers] all just moving around and finding where we fit and belong. Some leave the game, and some expand into different markets. It pushes the guy who had that niche, but we’re all shifting and reshuffling,” he says.

Similarly, Abe Degnan, president of Degnan Design Builders in DeForest, Wis., has seen jobs shrink and actively has pursued jobs he might have bypassed at another time. He has adapted his business practices accordingly and sharpened those that have proven effective.

One of the things that helps Degnan produce smaller jobs profitably is the lead carpenter system. “When you’re working in a smaller space, it doesn’t make sense to have a second person there very often. Working with a lead carpenter system as opposed to having a project manager and two carpenters working there is preferable.

“I think you use every hour on the jobsite more effectively by just having a single person there with no downtime. The duration of the job may be slightly longer, but it definitely doesn’t double the length of the job. I believe I get more productivity per man-hour with the lead carpenter,” he says.

“I’ve never had a production manager system, so I never grew into that overhead system. I didn’t need to let anyone go to get my company to the right size,” Degnan adds.

Markup

Degnan has increased his gross profit margin on smaller jobs. “My typical markup is from 40 to 67 percent depending on the job size, but small jobs are at 100 percent markup. I use gross profit per day (GPPD) analysis to figure out, or double check, the needed markup on these jobs,” he says.

He says he realizes that there are two schools of thought on the subject but has several colleagues who successfully use a similar pricing model. He says he’s also found that reducing the markup on larger jobs can give him the competitive edge he needs.

But even as he’s making adjustments, Degnan still pays attention to the fundamentals of good business. He does systematic and professional customer satisfaction surveys, for example.

“It’s an extra tool for me and I use it liberally and strategically,” he says. “I use it liberally in the sense that I make sure people know about it several times in the course of my marketing and sales process and then strategically if I sense there is something making the customer nervous at all,” Degnan says.

“We particularly focus on one of the questions which asks if the remodeling job went more easily than expected. Right now we have a 93 percent ‘yes’ rating, so I think that helps the customers realize we meet or exceed expectations,” he adds.

Flexibility is another factor Degnan feels is important. “You work as fast as possible, but slow down if necessary,” he says.

Pushing Too Hard

“I recently had a job where I thought the customer was ready to go quickly but in fact in a conversation found the customer felt that I was pressing them too hard to finish their selections and to move to closing the contract,” he explains. “So we slowed down and took about two extra weeks in the process and then successfully signed a contract. I need to be aware of my needs to fill my schedule and to try achieve a backlog, but I can’t press too hard at the expense of customer confidence or customer comfort. I was pressing that customer too hard,” he explains.

But producing the jobs in as few days as possible and keeping productivity high is important to Degnan. Smaller jobs are problematic, he says.

“A small error can be more costly,” he explains. “That’s another reason to raise your gross profit to account for potential slippage. Also make sure if you’re doing a small job that is three and a half days, you round it up to four when you’re taking into account your labor. Chances are your carpenter is not going to get any more productivity out of that half day.”

It’s not that these principles should come as a surprise to remodelers who have been in business for more than a few years but perhaps they need to be revisited. “I think everyone has been made more acutely aware of it,” says Degnan. “There are so many low-overhead companies bidding now that you need to watch your budgets and costs to be as competitive as possible, but you need to sell your job at a price that works for you.”

Price isn’t Everything

Some remodelers aren’t ready to conclude that price is everything, however. Even as they sharpen their pencils, they insist that quality work and customer service still count. Leon Noel of Your Kitchen and Bath Design/Remodel in Roseburg, Ore., is one of those for whom that model continues to bring in work. Noel currently reports he has a backlog.

He’ll also admit that he’s fortunate that the typical client in his Oregon community is likely to be a retiree from California with an average age of 55 years. “We’re selling on quality rather than price,” Noel insists, noting that he’s maintained his margins.

Noel, with two designers on staff, isn’t just selling cabinets and fixtures; he’s selling design and interior decoration, he says.

“You have to be more efficient and organized than ever,” he says. “I’ve spent a lot of time on my overhead and have reduced it proportionately [to smaller job sizes and overall reduction in volume]. We’re not doing any foolish spending.”

Another thing that Noel feels is important is a detailed scope of work that states everything that is going to be done along with specifications for all of the products. Along with that, he includes a detailed schedule.

“The market hasn’t gone away,” he adds, but there have been changes. “It definitely makes you think about how you’re going to market and that you should stand your ground and do what you feel is right,” he says.

“I’ve been in this situation several times during my lifetime. This isn’t the first recession I’ve gone through. I just think if you [adhere to] good business practices you’ll do OK,” Noel says.

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