J.R. LeFaivre Construction Co., of Taneytown, Md., built about 85 jobs in 2006. Kitchens, baths, and additions were mainstays. Last year? Maybe 50. Many, if not most, were maintenance and repair projects, including window and siding replacement. “It was the worst year I’ve ever been a part of,” president Matt LeFaivre says.
George Christiansen, owner of Pequot Remodeling, in Fairfield, Conn., is pleased to be working on a six-figure project that “would have sold for $100,000 more two years ago.” The multistage remodel includes adding a sunroom, a master suite with exercise area, and a screened porch. One of the reasons Christiansen can charge less is because he is on the jobsite instead of in the office.
In two years, much has changed in the types of projects that many remodeling companies are doing. Projects are often smaller in size and scope. At many companies, there are fewer of them.
Costs on Hold
The “cost” category of this year’s Cost vs. Value Report shows that, of the 33 projects under review, there was a slight rise in estimated costs of 30 projects. (Three categories of entry doors are new to the Report this year, so do not have comparative data.) But the increases are a blip — typically less than 2% — compared with the rapid run-up of remodeling costs a few years back. In the 2008 study, for instance, the midrange bathroom remodel that today costs $16,142 — a figure that includes labor, materials, and markup — would have cost $15,915. The difference? A little less than 3%. But five years ago the cost was still less than $10,000. The upscale bathroom remodel that in 2008 cost $51,495 would today be priced at $52,295. That’s about 1.5% more. It’s also about twice the $26,052 that the bathroom would have cost in 2005.
Project costs, as determined by estimating software publisher HomeTech Information Systems, have held steady during the last year. HomeTech, by the way, establishes those costs by evaluating 74 variables. Sixty are for commodity materials, 14 are various types of labor. The company suggests a 1.5 markup — 50% in addition to labor and materials — so that remodelers can generate a 5% net profit on the job, after subtracting for overhead, or for general and administrative expenses.
But in today’s remodeling market that pricing structure is subject to economic pressures that often warp it out of alignment. “It’s always a challenge to make as much on a smaller job,” says Brian Altmann, president of Dutchess Building Specialists, in Poughkeepsie, N.Y. And then there’s the competition. Because there are fewer jobs, and the jobs are generally smaller, most remodelers have had to find ways to shave costs in order to respond to a belt-tightening consumer and to compete with the builders and “pickup truck remodelers” who have entered the market. “Instead of two or three working against you now, there are five or six,” observes John Shea, president of Callier Thompson Shea, a St. Louis design/build company.
Like real estate, remodeling has become a buyer’s market. LeFaivre, for instance, says that two years ago J.R. LeFaivre Construction’s kitchen projects typically ranged from $50,000 to $75,000. Last year, “if I couldn’t get the price in the 30s, we didn’t get it,” he says.
Remodelers everywhere report that demand for high-ticket projects with luxury features has waned. Tim Shigley, owner of Shigley Construction Co., in Wichita, Kan., notes that his company did about the same number of jobs — 35 or 36 — last year. But “they were down in size and scope,” he points out. “More in scope than anything.” Those projects tended to involve “reworking existing environments, people protecting what they had rather than getting frivolous and crazy with their money.”
To reduce project prices, remodelers design for less-expensive finishes, reduce their labor cost per job, or, in some cases, accept a lower gross margin while at the same time driving down overhead expense. The companies that REMODELING spoke with have done, and are doing, all three.
Labor and Overhead
Materials costs fluctuate. The price of dimensional lumber has dropped 12% to 14% in a year. So has the price of plywood. “Drywall that was $11 or $12 a sheet is now down to $7.50,” says Ronald Beard, HomeTech’s research director, who is in charge of collecting the data. Concrete, too, is down. But branded products, and especially anything sourced to petroleum, are likely up in price. The cost of asphalt shingles has climbed 40%. Vinyl windows and siding are up. Makers of those products, Beard notes, have cut back on production in order to stabilize or increase prices.
That has made for a modest increase in the overall cost of materials, which is good news for remodelers, who have no control over manufacturer pricing anyway. On the other hand, those softer product price increases mirror reduced demand. “I’m pricing a job now that’s about $300,000,” says Bob DuBree, owner of Creative Contracting, in North Wales, Pa. “That’s the biggest one I’ve seen in 12 months.” Previously, DuBree says, he could “count on” at least one $450,000 or half-million dollar project in a year’s time. A story many remodelers could tell.
What contractors can and do control is the way a job is built and the components that go into it. There is a “huge swing in finishes,” Beard says, and different selections bring job costs down. Many remodelers have no choice but to guide clients to a different appliance package, cabinets of a different species, or to quartz or solid surface countertops from granite. For instance, the master or shared baths built by Dutchess Building Specialists, typically started at $22,000 to $25,000. Competitors were doing bathrooms for $15,000. “We took a good, hard look at the reason people don’t buy from DBS,” Altmann says. “Cost,” he concluded, “is the reason.” So DBS came up with a bath that starts at $16,500, “using completely different products. And we’re ready to push that out to our existing clients.”
None of that affects the cost as reported in the Cost vs. Value Report, since these costs, Beard explains — $56,636 for a midrange kitchen remodel, $110,984 for an upscale kitchen — represent a range.
Slash and Burn
Labor is another area where remodelers have achieved some savings. Many report that with work slow, and jobs fewer, trade contractors are sometimes willing to help drive down costs. The $7,000 bid for electrical work on an addition that Shea was proposing came down $1,000 when the electrical contractor he uses came on-site, evaluated the situation, and went back and revamped his own estimating process to standardize it more. “My drywaller helped me out by dropping his cost per square foot,” Shea says. And where the company used to sub out demolition, “my project manager and laborer are doing that, so we save on some of the costs of the job.” Shigley says that trade contractors such as the framers he has used are “a little hungrier, so we can find some better prices with those guys.”
In September, Dutchess Building Specialists began holding training sessions so that project managers could more efficiently schedule subs, and Altmann says that DBS plans on scheduling sessions with trade contractors as well. A major objective is to cut down on multiple — unnecessary — trips to the jobsite.
For many companies, overhead reductions represented a big potential savings that could help keep project costs in line with current consumer expectations. “Most of us have slashed and burned our overhead,” Dubree says. He cut his company’s overhead expenses by 60% through personnel reductions and by moving out of leased office space and back into the basement offices where he started his company. He continues to offer design services, but now shares those services: a designer operating freelance, who also works for three or four other area remodeling companies.
Payroll cuts represent the biggest potential overhead reduction. Often those happen when an employee who leaves isn’t replaced. Remodelers are wary of laying off the core personnel who design, order, supervise, or build the projects on which their reputations rest. If staff reductions happen, attrition is the preferred mode. Employees who remain, including the owner, often find themselves doing double duty. Project managers who might have been supervising two jobs previously may now be responsible for four. Owners have pitched in and have made other sacrifices.
“We tried to keep the overall structure of our pricing as close to what it was as possible,” LeFaivre says. “But we restructured our overhead. We went through and trimmed it all. Dad and I took pay cuts. So did my brother.” Though the LeFaivres cut their salaries, employee pay has remained the same for two years. Two helpers at the company were let go.
Christiansen explains the reduced cost of the multipart remodel his company is working on on the fact that he went “from overhead to field.” He is on the jobsite daily, directing and pitching in. At Callier Thompson Shea, Shea fills in for a project manager who left. At Shigley Construction, a project manager stepped in to fill the shoes of a retiring production manager. “So we’re a little tighter,” Shigley says.
—Jim Cory is editor of REPLACEMENT CONTRACTOR, a sister publication of REMODELING.