The phone stopped ringing in Tom Davison's Sonoma, Calif., office in early 2001. Not a year after Davison Remodeling celebrated its best earnings ever, the unwanted quiet set off a two-year slide that almost killed the company.

Davison says he should have seen trouble coming. His growth, he says, was fed by just a few huge jobs, those the fruit of a booming local economy. "Marketing wasn't doing great. I should've realized we were riding the gravy train."

Sudden reversals like Davison's are common in remodeling. When business is good, observers say, few remodelers consider a time when it won't be. Fewer still take advantage of success to protect their companies against unforeseen events.

"Contractors only plan ahead 30 or 60 days, maybe a little longer," says Richard Kaller, a Philadelphia-based consultant to remodelers and replacement contractors. "They don't see very far in the future."

With industry growth so consistent in recent years, shortsightedness might not have cost a remodeler anything, at least so far. Most markets charged right through the recession. But Kermit Baker, of Harvard's Joint Center for Housing Studies, warns remodelers not to get complacent.

"It's easy to get lulled into thinking nothing can go wrong," Baker says. Remodeling is still a cyclical industry, he says, and the climate will eventually change.

Even the current forecast of continued growth could produce different market conditions (see "National Outlook," below). When those changes occur, companies that aren't prepared could quickly find themselves in trouble.

Solidify the core

Successful remodelers say they want, as much as possible, to insulate their companies from any market fluctuations, whether up or down.

The goal, says Peter Feinmann, owner of $4 million a year Feinmann Remodeling, is to "be resilient to the ebbs and flows."

Financial consultant Judith Miller says that means that even in good times, a remodeler's first priority needs to be solidifying his company's core business. Only then can a company grow safely.

"Find out where you make your money," she advises clients, "so you can protect your overhead."

Once an owner knows how his company profits, Miller says, he can pick and choose the most profitable jobs and grow at a safe pace. Rick Pratt attributes the recent controlled growth of Classic Homeworks, his Denver company, to that approach.

During a previous expansion in the early 1990s, Pratt hired faster than he could sell. "The numbers should've worked out," he says. "But we ate up our overhead faster than we could get it online."

Though it pained him to do so, Pratt cut his staff by nearly 50%. When the technology boom in the late 1990s provided another chance to grow, Pratt checked himself. By carefully analyzing past jobs, Pratt says, he had determined that kitchen and basement projects required the least manpower to produce the most profit. With the market strong, he prioritized those jobs and avoided others.

With only lead carpenters on staff at the time, Pratt says, "I specifically chose not to do a lot of additions because an addition takes at least two qualified men." Kitchens and basements require more subcontractor work and only one lead, lowering labor costs as a percentage of revenue. "I was able to get more volume for my labor."

Over the past three years, that strategy has produced a total of 75% revenue growth and net profits between 10% and 15%.

"We cherry picked the jobs we wanted," Pratt says. "That's how we increased profitability. We didn't raise prices based on market demand, and we didn't chase customers we thought would pay us a high percentage."

In resisting the temptations of what Miller calls "sexy jobs," Pratt showed uncommon restraint. Remodelers, the consultant says, often misread strong markets and the ready availability of higher priced jobs as a signal to race ahead with growth.

But as Davison found, the ability to grow in a thriving market doesn't prove that a company is healthy. Separated from San Francisco by just an hour's drive, the remodeler got caught up in the late 1990s technology frenzy. San Franciscans, flush with tech-derived market gains, flooded Sonoma with ultra-high-end vacation home remodels, and Davison cashed in. Between 1998 and 2000, his company's revenues grew by more than 400%.

Up to that point in his career, Davison had relied heavily on repeat customers and referrals. But in 2000, his best earnings year, he built only for out-of-town clients. "I needed to touch more people," Davison says. "We were simply waiting for the phone to ring."

When the 2001 technology and financial market collapses wiped out Davison's new clientele, the remodeler found himself with almost no work at all. The September 11 terror attacks, stunning consumers into a spending hiatus, dealt the company another blow. By October, Davison was reeling.

With no cash flow, reckless expenditures during the growth years grew unsupportable. Slow to make cuts, Davison piled up debts. "We were down to two guys in the field trying to produce enough to carry the overhead that included me, the trucks, the office, the office manager," he says.

Had he not twice refinanced his house to generate cash, Davison says, he would have lost the company.

Work out from the center

Davison's experience highlights the dangers in market-driven growth: Chasing a higher-end clientele, remodelers tend to put core relationships at risk.

Tom Avallone, owner of Cobb Hill Construction, Concord, N.H., says it's important to remember that the best customers aren't only measured by their willingness to pay margins. Avallone survived a severe contraction during the early 1990s recession and has since grown Cobb Hill into a $12 million company. As he's grown, Avallone says, he has always weighed long-term benefit equally with profit.

"You always have to think, with every single project, if there's a future with the project itself, the client, if there's a possibility of networking and further work," Avallone says. "If it's a sweet job at [a high margin] but there's no future in it, cut it out."

Though his jobs were profitable, Davison wasn't working for the right people. He let big money projects lure him away from his core customers, those in-town homeowners who could refer him new work. The lack of any real marketing effort compounded the damage: Having strayed from his referral network, Davison lacked the ability to reconnect.

With revenues in 2000 reaching $1.85 million, Davison estimates he should have spent at least $90,000 on marketing, or around 5% of sales.

"I spent about $3,500, and I took a real hit because of it," he says.

By late 2002, Davison saw where he had erred. Still cash poor, he began investing $150 per month in marketing. As he's regained momentum, Davison's monthly outlay has grown almost tenfold. Jobsite signs, painted trucks, a redesigned Web site, and high profile ads in Bay area glossies now produce about half of the company's leads. Davison also regularly follows up with past clients, sending thank-you gifts and cards.

"We're enjoying the best time ever," Davison says. "The phone's ringing every day; there are more jobs in the pipeline. We're much more stable than we were."

In addition to standard marketing materials, the remodeler says, he's also attempting to "plant seeds" by donating time to local charities and community groups.

His contraction, Davison says, taught him to value client relationships. "This business is all about relationships," he says. "The longer your track record is with the right people, the more you insulate yourself from the economy."

Know the warning signs

Once a remodeler knows his core business, diligent self analysis is required to ensure he doesn't stray.

Paul Eldrenkamp has grown Byggmeister, his Newton, Mass., company into a $3 million operation since fighting through the early 1990s recession. Warning systems, he says, have played a key role. "You've got to pay attention to everything," Eldrenkamp says. "You can't let up for a minute."

Eldrenkamp tracks leads every month, studying the job type, quality, and source of each. He also keeps track of the dollar value of contracts he's signed. Studying past lead and contract records to see what they produced, Eldrenkamp can measure his current position against those results. By knowing what's healthy for the company, he can make adjustments at the first sign of trouble.

"If leads drop off," Eldrenkamp says, "I know I need to crank up the marketing. If contracts drop off, I know I'm going to have a slowdown."

Knowing what's ahead is especially important for growing companies, which are so commonly overextended.

Using warning systems like Eldrenkamp's to monitor his backlog, Pratt, the Denver remodeler, checked his own unhealthy, early-1990s growth before it put him out of business. "When I saw my backlog dwindling away, I cut my company in half," he says. "It was painful, but I did it immediately."

The speedy reaction paid off, Pratt says. "Not only did I double the backlog, but I had half the people to manage. It went from being very hard and very scary to very easy very quickly."

Shift on the fly

If they anticipate slowdowns, remodelers, as Pratt did, can dictate the pace of contraction and ease the pain of the process. In doing so, many owners find they can use slow periods to retrench and emerge ready to grow once the market picks up again.

After September 11, 2001, Michael Fast, president of MRF Construction, reacted to a shift in his Seattle market and ultimately strengthened his company. With uncertainty gripping the country at the time, Fast anticipated a decline in the larger projects that had been MRF's focus. Expecting that smaller kitchen and bath remodels would be easier to sell, Fast shifted his marketing efforts to those types of jobs.

"In the market where we do most of our work," Fast says, "we went from doing one or two projects to seven or eight projects, so our signs were everywhere. Now our market saturation is much better."

At the same time, Fast used the higher frequency of smaller scope jobs to bolster the depth of his subcontractor roster. He tried out a host of new subs, knowing that if the job went badly, the stakes were low and he could bail himself out.

"We weeded out bad subs we used to use just because we were busy," he says. "Now we're sure we have the depth when we need it."

Once the remodeling market picked up again, MRF was ready to capitalize on its upgraded efficiency. "We looked at what was happening and saw the economy slowing down. We said, 'We've got to react or we're going to be gone.' Instead off waiting for the rain to fall, we built an umbrella."

National Outlook

Generally, a strong national economy benefits remodelers. But recent economic momentum could actually shake up remodeling markets.

Most indicators point to sustained overall growth in the industry, but the forces driving that growth could very well change. Kermit Baker, of Harvard's Joint Center for Housing Studies, says an improving economy will drive up historically low interest rates. That will likely slow refinancing. Also, Baker says, strengthening financial markets may again draw consumers who in recent years found more security investing in their homes.

"A lot of the unique factors that have driven this industry in the past two or three years aren't going to be significant parts of the outlook over the next two or three," Baker says. "The things that have been really beneficial to remodeling recently aren't going to be with us."

As a result, local economic conditions will affect remodeling markets to a greater degree than in the past few years. Markets that might have thrived despite fundamentally weak economies could potentially see a downturn.

"It really depends on where you are and what local economic conditions are," Baker says. With market shifts likely, he says, remodelers need to reconsider who their customers are now and whether those customers will be there in the future.

Cash is King

For remodeler Peter Feinmann, financial security is a four-letter word.

"It's called cash," says the owner of Feinmann Remodeling. "The financial health of my company depends on whether I have cash."

Feinmann learned the value of security building his Arlington, Mass., company in the midst of an early 1990s recession that devastated New England's construction industry.

As soon as he came through it, Feinmann says, he began to save. Setting annual savings goals, he continued padding the reserve through years of double digit-growth.

This year, the company will take in almost $4 million in revenues, and Feinmann says he hopes to keep 10% of those sales in the bank. The cushion, Feinmann says, protects his company from bumps and jitters in the market.

"You need to make sure you can fund [your company] at a loss," he says. "After September 11, when the phone didn't ring for two months, I had enough to carry us through."

Feinmann says the savings also provide flexibility. He can avoid layoffs to offset the costs of hiring and retraining and stay flexible with customers.

"You have to ask, 'What's our goal here?' Our goal is to provide excellent service. If you feel you need the money, you get into defensive behavior. With cash, we can make decisions based on quality."