Knowing Your Costs Is Not Optional

Knowing the costs of doing business and controlling those numbers is at the root of nearly every remodeling success story. Conversely, not grasping numbers and not managing those costs is a near recipe for certain failure.

“The death of [most remodeling businesses] occurs not because [the remodeler is] not talented; it’s simply because he’s not a good businessman. Most people go into this business because they have a skill set and can build things. They just lack the skills needed to manage their companies,” says Robert Criner, GMR, GMB, CAPS, CGP, president of Criner Remodeling in Yorktown, Va.

Assuming a remodeler knows his numbers, The Remodelers’ Cost of Doing Business Study, 2012 edition, which is conducted periodically by the National Association of Home Builders’ Remodelers Council, provides a useful benchmark against which to judge a firm’s performance. The latest edition is available for purchase as an e-book at Nahb.org.

The study also provides a glimpse at the state of the remodeling industry as it has evolved in recent years. “Back in the ’90s, profit margins were two and three times what they are now,” Criner observes. (Table 1) “We’re operating on a great deal of risk for very little reward these days.”

Average net profit margin in 1990 was 11 percent and in 2011 was 3 percent. “Granted, 2011 was a challenging year for everyone, as was 2012, and 2013 is starting out the same way for some,” he says.

Another fact that caught Criner’s attention was how poorly the larger design/build companies did. “It appears the larger they were the more they lost, and the smaller and leaner they were the more they made,” he says. “That’s a broad statement, but that was one of the things that jumped out at me.”

Indeed, bigger is not always better, and volume of business as total revenue does not always equate with profit. In fact, the bottom 25 percent, ranked by net profit, were doing twice the volume of the top 25 percent, the study shows. The cost of sales and operating expenses for the bottom 25 percent, not surprisingly, were considerably higher than the top 25. (Table 2)

Sales and marketing costs for design/build remodelers, the study shows, are nearly double those for general contractors, a fact that Criner notes. “Design/build contractors have [to make a greater effort] to go after the client who wants that higher level of service versus [a remodeler] who is just casting a net broadly and trying to get any work they can,” he says. “It’s not a bad thing,” he adds. “As a design/build contractor who is not trying to be all things to all people, I find myself working harder to find little ponds to fish out of because I don’t want to be popular to everybody — I want to be popular to the kinds of clients who can best utilize our set of skills and talents.”

Advertising costs have almost doubled, Criner says. “I used to be very proud back in 2005-2008 that we could advertise on less than 1 percent or our gross, but fortunately when I saw the downturn starting, we were smart enough to triple our advertising budget. It helped us get through the lean times. Of course you really market to your existing clients, but we had to go outside and find new people. That kind of thing comes through the numbers [of the study].”

As mentioned earlier, most remodelers have a strong construction skill set but are not born business people. Education is the key to learning those skills, Criner asserts. “I’ve done all of it,” he says. “I’ve gone back to college, back to community college, back to reading more about the business, but there were a couple of ‘ah-ha’ moments in my career. One of the earliest was when I attended my first Walt Stoeppelwerth seminar. It was kind of like, ‘oh my gosh, you mean I’m supposed to mark it up that much? You’ve got to be kidding me.’”

(Walt Stoeppelwerth, who educated a generation of remodelers about estimating, job costing, markup and other remodeling topics through seminars and publications, passed away in February 2013.)

Criner favors remodeling-specific education as opposed to general business education “because our little industry is very unique, although some of the principles are the same across the board. I think that’s the best place to go because they speak your language, and they tell you directly what you need to do,” he says.

“I think the best thing the study does is give you a benchmark to compare yourself to, Criner says, reminding remodelers that the latest data covers some not very good years. “You really have to go to the back of the book and look at [history] because in 1990 net profit was 11.4 percent and in 2011 it was 3 percent; that speaks volumes.”

Source, charts and tables: The Remodelers’ Cost of Doing Business Study, 2012 edition, National Association of Home Builders

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