Nearly two years ago, Michael Menn, AIA, CGR, CAPS, and Andy Poticha, partners in the design/build remodeling firm Design Construction Concepts, Northbrook, Ill., faced a detrimental loss for their business — to the tune of $3 million.
“A $3 million remodel doesn’t come along very often,” says Menn. “So when we had the construction contract in hand, we began turning down projects, eased up on our marketing efforts and started scheduling our subs.”
With the blueprint laid out, subs scheduled and months of hardwork ahead of them, Menn and Poticha were completely shocked when the homeowners decided to back down. This devasted both Menn and Poticha, personally and professionally.
“What were we to do?” asks Menn. “We had no projects scheduled and little cash flow coming in.”
On top of that, they had angry employees and subcontractors left with no work. To make matters worse, as the world came tumbling down, Menn and Poticha had no choice but to let three of their employees go.
But as they say, we learn best from our mistakes and in this case, the best lesson Menn and Poticha learned was how to build and manage their backlog.
Building Job Security
Backlog is basically contracted work that hasn’t been done yet. It also means job security. A backlog of work allows remodelers to safely forecast company finances and also schedule office and labor work needed. With the highs and lows of the remodeling industry, it’s a good feeling to know that if a low point arrived tomorrow, you have a few months of backlog covered.
The one thing that Menn advises is to never turn away work. “We learned that most people are willing to wait until you are ready to give them your undivided attention.” With the outstanding reputation of DCC and its word-of-mouth success, most of their clients are looking forward to working with DCC and not relying on the lowest bid.
“As long as you are completely honest with your clients, they have no problem waiting a few weeks or months for your services,” adds Menn. “However, if they aren’t willing to wait or complain about the time frame — you have a better understanding of what type of client they will be.”
Menn also says the recipe for a happy customer is to be upfront and never lie about how fast or slow things will go. It reassures clients that when it’s their, turn, you’ll be 100 percent available for them.
Never Stop Marketing
Another important area that Menn recognizes as essential in building and managing backlog is a continuous marketing effort.
“Never stop marketing and branding yourselves,” says Menn.
This may seem like Business 101, but a continuous marketing plan means always being in the minds of potential clients.
To this end, DCC established a database of 75 influential interior designers and architects in their local market. With that, they have aggressively developed a marketing campaign as a basis for referrals.
“We identified that the existing interior designers we worked with were one of our greatest sources for referrals/leads,” explains Menn. “So, we decided [in committee with our marketing company] to market directly to other interior designers that were associated with higher end work. We talked with several sources for referrals, as well as Chicago magazine’s: Home Guide to narrow down the list to a comfortable 75 names. We sent direct mail pieces to all 75 names under four separate mailings that were two days apart.”
The message behind the barrage of mail was simple: DCC wanted to establish strategic alliances with designers because they could offer them architectural, budgeting and construction services; usually something they do not or cannot provide. The campaign was three separate direct mail pieces, followed by their brochure, followed by a phone call to set up an appointment.
With that unique marketing plan, DCC developed a stronger alliance with those in their high-end niche — ultimately resulting in new business and a comfortable backlog.
What is YOUR number?
After speaking with numerous remodeling firms across the country, the almost impossible question to answer came up: What is a comfortable backlog? Six months? Three months? A year? With a multitude of responses, it’s safe to say that each company has its own magic number.
According to Randy Ruzanski of Distinctive Design-Build, Remodel, Roselle, Ill., “To answer your question regarding backlog, you will probably get several responses that six months is the magic number,” he says. “Personally I am comfortable with that and know that we can produce the work within a reasonable amount of time with the same staff. Larger backlogs certainly can be nice on paper; however, usually we’ll have to consider modifying the recipe of how the work will get done. And if you add people, the backlog will be pulled down to offset that overhead expense accordingly.”
Agreeing with Ruzanski, Steve Plenty of Sweeney Construction, Madison, Wis., says that there really is no standard amount of backlog that each company should follow as each remodeling organization has a different business structure and goals.
“Each business structure would support their projects in a different manner,” adds Plenty. “However, under our current business structure we set a goal of eight weeks of backlog. This allows us to manage our projects at the highest efficiency to support our clients’ needs and expectations. Our communication for each project is the most efficient at this level with our subcontractors and clients. We find the end satisfaction is higher with an eight-week backlog vs. a 12 or 16 week backlog.”
Establishing a good amount of backlog for your company not only allows you to predict incoming cash flow, but it also reduces the risk of keeping your employees idling.
“You never want to leave your employees with nothing to do,” says Menn. “I know some companies are taking advantage of this by having their employees work on spec homes or other real estate investments.”
Diversifying Your Options
During a very hot remodeling market, companies were reporting backlogs of up to 18 months. Now that the market has slowly cooled, and backlogs have become more realistic, Menn suggests remodeling companies look at other opportunities within the industry to capture a predictable cash flow.
“With the peaks and valleys we have all experienced in this field, looking to diversify your offerings is something many companies are researching — everything from handyman services to speculative home remodeling,” says Menn.
Taking some of their own advice, Menn and Poticha took the further step of merging with a newly established exterior renovation and multi-family company Mosaic Construction, led by Michael Frazin.
“This is a completely separate entity from DCC,” says Menn. “However it does allow us to give all of our clients, whom may not fit DCC’s profile, a great referral.”
With an intact backlog, scenarios such as the one Menn and Poticha faced can be more easily avoided.
In the aftermath of their experience, Menn says that they are only stronger because of it. “I can admit that we are a little jaded from this experience, but it’s made us more careful and better business owners.” |
Fast Facts About the Company:
- Design Construction Concepts
- Established: 1991
- Headquarters: Northbrook, Ill.
- Company Tagline: “Combining Architecture and Construction to Redefine Remodeling”
- Total 2005 Revenue: $2.4 million
- Total 2005 Jobs: 3
- Recent Industry Awards:
Chrysalis State Remodeler of the Year: 2003-2004
Chrysalis Regional Remodeler of the Year: 2003
Better Business Bureau Torch Award: 2004
How are you Building and Managing Your Backlog?
Direct marketing postcards are strategically sent throughout the year to provide optimal backlog volumes. The beginning (January) spring (April) summer (June-July) and fall (September-October) to target following customer segments: new prospects in select areas, demographic criteria income, and house values, family composition, CCH past customers (lowest transaction costs due to established relationship which translates into shorter sales and design cycles).
A recent direct marketing postcard campaign created urgency for homeowners by announcing, Don’t wait for spring...timing is everything...Jan. & Feb. are good times to schedule....avoid price increases, lock in best crew, beat the busy season, enjoy your newly remodeled home now, before the warm weather hits.
— Bjorn Freudenthal, CAPS, general manager
College City Remodeling, Inc.
Keeping your pipeline full and timing it out for production is a tricky balancing act. Oversell and it is hard to deliver; under sell and guys / gals are on the couch.
We use Microsoft Project to Gant chart out all of the production managers and the jobs they are running. It shows you when you will want to have the next project ready for a particular manager. That keeps you more focused on when and directs you to types, size, complexity given the manager’s ability.
Weekly meetings with the project managers keeps you aware of how they are doing on their timelines for the work that’s in progress and allows you to adjust delivery dates on your Gant chart. As for pipeline, we are a design/build company so we use design as the first source. We track the project’s size, speed, etc and predict the delivery time of the individual projects. We will lay out rough scenarios in Project to see where we have other gaps in production for the coming year. Second, we work with a few local architects and stay in touch with them to hear what they have coming up. If possible we offer our services to the architect’s clients to do rough costing and budget work so that we can get to the client. If we can create a relationship during design and are brought onboard, that helps fill other gaps.
Last, we are looking at plans and requests from referred clients with designs. The trick is that you never stop selling or talking to prospects about their projects and always know where your group stands, what you need and what you are capable of delivering.
— Brett Schiller, vice president
Mountain View, Calif.
We have a labor force cross-trained for example (painting, drywall, carpenter’s helpers, demolition). This allows day or week layoffs to be at an absolute minimum.
— Billy Guerrero,
“As the owner of Armor-Deck, Inc., I rely heavily on a planned marketing approach using many different types of media. We also establish a referral program that rewards our current customers for referring new customers. All of our salespeople are required to attend network groups at least once a month. Our pipeline is always full.
We base our dedicated marketing budget on 6 percent of our anticipated revenues. We refine our mix of marketing based on response factors.
Last year we produced over 5000 leads in the Phoenix market — at a closing rate of 33 percent and an average job cost of $4000.
We can anticipate revenues in our Phoenix market at $6,600,000. This would mean an anticipated marketing budget of $396,000 to keep our pipeline filled and our crews and subs busy.
Any sales closing average above 33 percent would give us better numbers with no greater marketing budget.
— Tim Maas, President