Part of using business systems is collecting data and validating that the information you have is correct. This month, remodeling industry consultant Shawn McCadden, CR, CLC, CAPS, offers the second of a three-part NARI recertification series on using business systems to control cost and grow profits.
McCadden says that remodelers should be collecting information on all of their business expenses, including information on how costs are determined. For McCadden’s example, he focuses on workers’ compensation costs. A remodeler might shop different insurance companies to see where the best value is, but it’s a pointless comparison unless they know how they determine the costs.
Importance of data
Workers’ compensation is based on rates for different work activities. What dollar amount of labor did the policy assume when the agent told the remodeler what it was going to cost? If one policy included $250,000 of labor for carpenters and another included $175,000, it’s an invalid apples-to-apples comparison of the total price unless you, yourself, then go in and say, “What is the rate you’re charging me for those carpenters because you assumed my payroll would be $175,000 for those carpenters, but I’m budgeted for $250,000 of payroll.”
So it’s not only tracking the costs, but understanding how they are calculated. Liability insurance can be similar. “It can be based on your payroll, but I’ve heard in some states it can be based on sales volume and in other cases, if a contractor is small, say below $400,000 to $500,000, then its just a flat rate that they’re charged,” explains McCadden.
The advice would be for remodelers to check with their insurance agents on how these things work and find out what the numbers are that they need to have in their budgeting process. These include workers’ compensation rates, liability rates, the rates for subcontractors and the rates on subcontractors that already have their own liability insurance.
“These are all factors that need to be considered to determine your costs and then you need to control it,” adds McCadden. “If you want to stick within your quoted liability insurance price and it was quoted based on all of your subs having liability insurance, then it should be a no-brainer to you that if you don’t get certificates of insurance from them because they don’t have any, your cost of insurance is going to go up as well as your liability.”
Collection and validation
One way to validate expenses on a project comes back to job-costing. This lets a remodeler look at the estimated cost of a job vs. the actual cost of the job. If a remodeler is in the budgeting stage, it’s important for him get on the phone to collect and validate the overhead expenses for the company.
“Call your insurance agent,” says McCadden. “Find out and verify if your rent is going to stay the same. Do you have an agreement with your landlord? If you want to make sure it stays the same, now would be the time to negotiate or even get it lowered. You’ve got to do the due diligence.”
At a recent seminar, McCadden discussed using software to manage a business, including estimating software that when done estimating, with a click of a button, would write a proposal based on the things picked during the estimate. Someone, who has shied away from using business systems because of their perceived complexity, brought up the question of what to do if the pricing changes. How would one update the database?
“Although most databases will automatically update local costs with some sort of service, it occurred to me, here is a guy who doesn’t use a budget, has no idea what mark-up he should use, has no idea what he should be charging for labor inside his estimates, but he’s worried that the cost of a 2x4 could change by a nickel or a quarter,” explains McCadden. “The message to me is that they can wrap their hands around counting sticks and bricks in an estimate, but they can’t understand or won’t bother with this financial game that they’ve involved themselves in. If you’re in business, you’re at risk for yourself, your family, all the employees you have and even your customers. It’s my opinion that what separates a professional from the rest is that a professional knows their cost of being in business and doesn’t guess at it.”
A common mistake that McCadden sees remodelers make is allowing a workers’ compensation auditor to come into a company without the business owner understanding how the audit works and then just accept that they owe more money.
“When I was in business, my auditor told me nine out of 10 contractors don’t question their audit and don’t have the know-how to question their audit,” adds McCadden. “That would be a big mistake.”
Employee raises are another area of mistakes in a company. McCadden says raises should be based on productivity at not based on how long a person has been with the company, or because an employee makes a big-ticket purchase and could use the extra money.
“If you know your real cost of labor, you can look and see that if you budgeted for $10,000 in labor and it cost you $12,000, you could argue that you actually need to lower their wages or let them go,” explains McCadden. “A lot of contractors are finding that people they were overpaying in the housing boom just to keep labor are actually costing them a lot of money and are letting those people go now in the downturn.”