Lesson 1: A Kitchen and Bath Remodeling Budget Process

When I arrive for my interview with a potential client, I first spend time looking at the space while asking them what they have in mind for products, placement, and treatment, etc. Soon I have good idea of the price range they are in.

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There are two tools I like to use at this point. First, I show them a copy of the current Cost vs. Value report. I compare their project to the model from the report, and talk in general about the differences in size and products and how that might affect the cost of their project. This gets them into a price arena, and it lends a third party endorsement. Second, I talk about projects I’ve completed that are similar in scope and price range.

Now that I have set the table to establish the investment figure, it's okay to go ahead and ask how much they want to invest. When I get to the point of negotiating the final price, clients invariably ask how they can save money. Unless I change the entire scope and layout, the only place to save is to select less-expensive products. This has always been difficult. Clients will balk at mark-ups and our selling price vs. what they think they can get it for. Contractors try to hide these figures in various ways, and it just becomes uncomfortable. I was tired of playing that game.

Part of my initial interview is to go through a sample contract. In my contract, I've added two clauses to address this issue. First, I wrote a paragraph explaining my mark-up policy. Second, I added a section that addresses what happens if a client supplies any products or materials. My only responsibility is to schedule their delivery.

Benchmarks for profitability in remodeling have been the subject of many articles over the years. A solid benchmark is 70 percent cost to produce or cost of goods and 30 percent gross profit. Overhead should be kept at 20 percent or less, and a net profit target of 10 percent is the goal. If you are accurately job costing, you should be able to retrieve these numbers from your accounting program reports.

I have spent, and it does take, a lot of time studying these reports so that I can hit these numbers. As a result of knowing and understanding my numbers, I have been able to determine average costs of major cost centers for my company's kitchen remodel projects, i.e. cabinets, appliances, counters, etc. The chart above was developed from the averages of 10 projects completed over the last 12-14 months, ranging from $50K -$140K. Having this information allows me to break down any stated investment figure a client gives me and then show them how much they have to spend in any one cost center. If the client says they have $60,000 to invest in their kitchen, I can show them that, based on the explanation of my business profit benchmark, we have $35,294 to produce this project. Of that figure, 16.5 percent is typically spent on cabinets. That equates to $5,823. I can now start the discussion of what type and quality of cabinets can be had for $5,823. If they want better finishes, they now know they can cut back on other products or spend more money.

There is another discussion to be had about these numbers. Obviously, 70 percent of $60,000 is more than $35,294. 60,000 x 70 percent = $42K. What you are seeing is the difference between markup on cost and profit margins. In order to maintain any profit margin, you must determine how much to mark up your cost. In my case, I must mark-up my material and labor burden by a .67 factor. This gives me a 40 percent profit margin on these costs, which is what it takes to realize the 30 percent gross profit figure.

Study the columns under the $100,000 investment and sell pric headings. When you are talking to the client, you want to tell them how much these items cost you. I ran out all of these costs to include my mark up factor of .67. Then, I added them all to show that it doe indeed get to $100,000. The extra $242.00 is due to rounding.

I have seen outright shock on fellow contractors faces when discussing this sales tactic. I've been told "You can’t do that" or "You'll never sell that way." I can tell you that it does work. My close ratio h improved almost 10 percent since started doing this about 12 month ago. People have actually thanked me for explaining it, and I have no had any arguments or uncomfortable moments talking about costs and budgeting.

Proceed to the Test