How do remodelers measure their companies' financial performance? A relative few belong to peer groups that allow them to compare their numbers to those of similarly situated companies around the country. Others have more informal relationships with colleagues who trade information over a phone call, lunch, or a beer at a local watering hole. But the great majority can only compare themselves to, well, themselves, evaluating current financial performance relative to performance in previous years.
With our 2007 Business Benchmarking survey, we hoped to provide remodelers with a baseline for comparing themselves with similar companies. We asked our readers to open their ledgers and share with us how they spent every penny in 2006.
We didn't get exactly what we wanted.
We did receive more than 400 responses from REMODELING readers. But because of inconsistencies in the data — some caused by flaws in our survey, others due to overly casual reporting on the part of some respondents — we're unable to provide reliable averages for annual revenues and gross or net profits. That also means that we don't have meaningful dollar amounts to supplement the percentages presented on the following pages.
That said, the data we do have is still quite useful. Dollar averages are less useful than percentages for these kinds of financial comparisons. It's not necessarily important to know the exact amount of money the average company spends on field labor, for example; this report instead provides the percentage of expenses that field labor represents. Again, we'd have preferred to express this value as a percentage of revenue, but could not due to the data problems mentioned above. As a percentage of expenses, however, the figures still provide a valuable baseline for comparison.
Companies of different sizes operate differently, so we've divided the responses into five groups based on annual revenues that are representative of our respondents: under $250,000; $250,000 to $1 million; $1 million to $2 million; $2 million to $5 million; and more than $5 million. Each of the following pages is completely devoted to one group, starting from the smallest and working up to the largest. The most useful numbers to you will be those on the page that corresponds to the revenue of your company, but looking at figures for other revenue groups will give you an idea of how a remodeling company's expenses vary as its volume grows.
UNDER $250,000 TOTAL EXPENSES
Remodelers with this level of annual volume are often overlooked, but we received more responses from companies in this revenue group than any of the other four. Given that the distribution of responses is indicative of the makeup of the overall industry, these small practitioners represent the biggest portion of the industry in terms of number of companies.
Respondents in this revenue group reported that 12.8% of their expenses went to subcontractors, about half as much as that of the other revenue groups. That speaks to the nature of these companies, most of which are one- or two-person operations. Some could be considered handyman outfits; others fit the profile of the skilled artisan who makes a modest living practicing his craft. The scope of the work and the reluctance among these remodelers to surrender responsibility for any part of their jobs combines to keep subcontractor expenses low and field-labor costs high. Only respondents from the $2 million-to-$5 million revenue group said that their field labor costs as a percentage of expenses were on average larger than this group's.
It's unsurprising — but noteworthy — that respondents in this group see less movement in their annual revenue than the others. As shown below, 30% said their volume stayed roughly the same from 2005 to 2006, and a like number expected the same stability from 2006 to 2007. The likely reason is that the owners of these companies are comfortable at their current size, and their expenses are low enough that a low volume is sustainable.
$250,000 - $1 MILLION TOTAL EXPENSES
This is an interesting and diverse group of companies. It contains remodelers who are content to stay at their current volume, as well as those who are in the midst of the often difficult and lengthy journey to $1 million in annual revenue.
Compared with the under–$250,000 group, subcontractor expenses as a percentage of total costs roughly doubles among this crowd, as companies do three and four times the volume while on average adding just a single full-time field employee. And although billable owners' wages, at 13.1% of total expenses, is a drop from the 19.2% of the smaller revenue group, the dollar amount equivalent is typically higher because of the larger volume.
Note, also, that remodelers in this group are doing several multiples of the smaller group's volume without a proportionate — or even significant — increase in office staff. Guess who takes on the load of the added paperwork? This is a revenue point at which owners of remodeling companies — particularly those looking to grow — tend to juggle their various duties and struggle with the decision to hire additional people, both in the field and as support for it. When people within the industry say that a remodeler “wears too many hats” or “isn't paid enough,” they are quite often talking about someone in this group.
$1 MILLION - $2 MILLION TOTAL EXPENSES
Hitting the $1 million mark is considered a major milestone in the industry, so it would make sense that reaching it brings about some fairly substantial changes in remodeling companies.
Billable wages for company owners is just 4.8% of total expenses for this group, compared with 13.1% for the $250,000-to-$1 million group and 19.2% for remodeling companies smaller than that. As company revenue grows, even this percentage gets smaller — 3.2% for companies doing $2 million to $5 million annually; 2.1% for larger firms — but nowhere is the decrease as pronounced as this.
This is also the first revenue group that shows a substantial jump in the total number of employees. On average, remodelers in this group have five people working for them in the field, and another two back in the office.
These also seem to be the least stable companies, at least in the current remodeling climate. More than a quarter reported a decrease in revenue from 2005 to 2006, with the same fraction anticipating a decrease when 2007 is said and done. Though many companies reach annual revenues within this range and choose not to grow any further, sustained growth can be difficult. Remodelers new to the “million dollar club” are often not well established in the community, which makes sustaining this volume while undergoing normal growing pains a bit of a roller coaster.
$2 MILLION - $5 MILLION TOTAL EXPENSES
Percentages that have gradually been growing larger as we move higher in annual volume — non-field labor, for example — peak with this revenue group before dropping in companies reporting more than $5 million in revenue. There are a couple of likely explanations for this. One is that companies in the $2 million-to-$5 million range are not as efficient as larger companies, so productivity in both the office and the field suffers. The other possibility is that the majority of respondents in this group are closer to $2 million than to $5 million, while respondents in the larger group trended larger than $5 million.
At 20.8% of total expenses, field labor is the highest here among the five revenue groups. One explanation for this is the large number of employees among respondents in this group — they average 9.8 field employees and 3.2 office employees, compared with 5.4 and 2.8, respectively, for companies in the next smaller revenue group. Payroll is a substantial slice of the total expenses pie, and with this large discrepancy between field and office staff, it makes sense that the bigger piece would fall above the line.
MORE THAN $5 MILLION
Unfortunately, we received so few responses from companies above $5 million in revenue that data from individual companies can have enormous effects on the average for the group. That's particularly true of a very large company, or a company that is different in nature from other respondents. For example, the average field staff for respondents in this revenue group was 56. This is likely due to a small number of responses from large replacement contractors, who employ several two- and three-man crews. You can probably count on your fingers and toes the number of full-service remodeling companies with that many full-time field employees.
Another oddity you may notice is that 12% of respondents said they did not know what the structure of their business was. That's almost certainly a sign that the person who filled out our survey was not the company owner.
Responses to questions about volume over the last two years, however, do provide some interesting insight into the current state of the industry. Larger companies tend to be well-established in their communities, with long client lists and a lot of repeat and referral business. As such, these companies tend to be most resistant to market fluctuation — evidenced by the fact that just 4% of respondents in this group reported a decline in annual revenue from 2005 to 2006. However, 17% anticipate a decrease in 2007, which may well demonstrate the effect of the current market slowdown.