When Dale Crisp decided to add commercial work to his company's repertoire, he didn't leave anything to chance. He realized that in order to create a profit center and count on a steady 25% of revenue from commercial work, he needed help. Crisp, president of Kendale Inc., Jacksonville, Fla., hired Cary Whittier as project manager of the commercial division. Prior to this hire, the company's revenue from commercial work fluctuated between 5% and 30% year to year.
Crisp and Whittier had been friends for 20 years and had talked about joining forces. "This year, the timing fit," Crisp says. "It fit economically and with Cary's career."
The pair started out by researching the market. They interviewed existing clients, as well as local business owners, about their commercial needs. They also visited commercial contractors to find out about any local issues and met with their vendors and subs to find out if they wanted to expand into commercial work.
"We found most large commercial contractors are geared toward $2 million-and-up jobs," Crisp says. "We decided to focus on smaller jobs, in the $100,000 to $200,000 range."
Since starting up the division in 2002, the company has remodeled or built medical facilities, including doctor and dentist offices, restaurants, a school warehouse, and a car dealership.
Crisp says he would not have tackled this market without Whittier. "There are too many factors," Crisp says. "He has experience with fire marshals, water management, and permit navigation."
Like Kendale, many remodeling companies add commercial work to balance and diversify their income base. On the plus side, work for other businesses is more structured, less emotional, and allows for longer or different hours than residential jobs. But the work also has longer payment schedules, often requires travel, and means finding new subcontractors.
But both commercial and residential customers want results. "The residential clients want their lives and family time back," Crisp says. "The commercial client wants a better income-producing environment. Both want it to be delivered as seamlessly as possible."
Remodelers say the No. 1 advantage of commercial work is the straightforward business client.
With residential clients, the project is in their home and therefore is more personal. In addition, they live in the house during the remodel, so they, and their remodeler, have the added stress of balancing schedules with privacy and safety issues.
"The businessperson wants to know how much it will cost and how it will affect their business. In a sense, there is simplicity. How can you best assist the business?" says Bill Connor, CEO of Connor & Co. in Indianapolis.
On the other hand, Bill Medina finds it is the respect and care he shows his residential customers that commercial clients value. "Residential carpenters and PMs are more attentive to personal needs because they work in homes. If you can take that level of person and put them in a commercial setting, the client immediately sees the difference," explains the president of Medina Construction, Salina, Kan.
Medina sees many benefits to performing commercial work. He improved his systems to deal with detailed paperwork, additional work authorizations, and architectural plans. In addition, his crews appreciate the more complicated and interesting designs of some commercial jobs. Plus, Medina often receives free publicity as the contractor on high-profile commercial projects.
Remodelers have found that clients prefer to work with contractors who are familiar with their projects, because it saves them time and money. Once they establish a relationship, they are more likely to hire the contractor on a negotiated contract instead of bidding it out. Sheldon Fitch, president of Star General Contractors, San Antonio, says his hotel clients provide a list of updates for each room but always specify similar materials and fixtures. "I've worked with some clients for so long, I know their design philosophy," Fitch says. "Clients can benefit from your knowledge of their product."
Medina says this is especially true of his work in health-care clinics and hospitals. "They don't want the hospital to be a training ground for new contractors," he says.
It's not just clients who value the familiar. Virginia Will, president of Will Construction, Homosassa, Fla., is wary of working with new commercial clients because she doesn't know their work or payment schedule. If her work can't move along efficiently, it won't be as profitable.
A foot in the door
There are drawbacks to commercial work too. For example, clients can be difficult to woo. Fitch says it took him a year to get through the door when he began seeking out national retail chains and companies with multiple properties. He submitted countless portfolios and references. As with remodeling work, however, once he successfully completed a few jobs, his referral work increased.
David A. Anderson, president and CEO of DAC Remodeling, says many remodelers believe they have to be bigger to work on commercial jobs. He considers that a fallacy. "Just as in residential, the commercial side is a relationship-based business. There's a small number of decision-makers in commercial, so if you don't know one, you don't get considered," Anderson says. Instead of using a formal marketing program, the Hilmar, Calif., contractor identifies and introduces himself to company decision-makers.
Identifying and servicing a specific niche within the commercial realm helps some remodelers break into this market. To build their commercial handyman division, Connor & Co. is targeting 15 to 20 small to medium-sized firms that need maintenance help.
Medina's work on health-care facilities developed through his residential physician clients. Another lucrative area is government and military projects. "There is so much paperwork involved that a general contractor doesn't want to mess with jobs under $300,000. But they are complicated enough that small contractors do not want them," Medina says.
Work for national businesses could take remodelers outside of their city -- which could be considered a negative. Anderson's work with JCPenney extends to 34 stores within an area 300 miles north and 400 miles south of the Bay area. "In 2001, we spent 10 months remodeling a Penney's store 50 miles away. We consider that a local job," he says.
"Personally, I prefer to limit travel to one and a half to two hours per day," Will says. "If you go farther than that, it's not cost-effective to drive back and forth. For a repeat client, we'll go farther than for a new client."
Besides his native Texas, Fitch's hotel work has taken him and his crews to Colorado, New Mexico, and Florida. "Remember that if you are pursuing a client in multiple states, decide what states you're willing to get licensed in," Fitch advises. "In the beginning, go after closer-in clients. Determine your geographic area and look for clients in that area."
Another crucial point with these jobs is the initial cost of materials and crew. Fitch advises remodelers who are considering commercial work to make sure they can survive 90 to 120 days until the first payment.
Commercial clients "have a set-in-stone accounts payable system and are accustomed to dealing with vendors on a repeat basis that work on longer payment terms. They are not used to working on a multiple draw schedule," Will says. "You go into it knowing your terms are less favorable." She evaluates her projected cash flow for the length the project will take. If she needs to, she'll open a line of credit.
Medina says his payments vary from client to client. If he sends an invoice to his hospital clients by the 25th of the month, and the architect approves the invoice in a timely manner, he receives payment by the 10th of the following month. His government clients, however, take 60 days to pay. "You can't use your cash on large commercial jobs," Medina says. He suggests remodelers open a line of credit. "Start it low and add to it until you have a line of credit that meets your needs," Medina says.
Anderson writes his payment schedule into the contract for both residential jobs and the work he does for JCPenney -- and usually gets paid promptly. "But the first time you work for someone new or a new department, the money would come from a different department's budget; then it can take time to get paid," he says. For local commercial work, he asks for a deposit when he starts the job. "We have those funds and by the time we begin the work, we have gone through our billing cycle," Anderson says.
Some commercial clients require that contractors be bonded. Medina says it took him a long time to save the necessary cash to increase the assets side of his balance sheet so he could qualify for traditional bonding.
"We call our insurance agent when bidding. They ask questions about the project. I call in the morning and by the afternoon, I have bid bond. Once you get the job, you provide labor and materials payment bond," he says. Medina says being bonded is an advantage when competing against less-sophisticated contractors.
Anderson's main concern is the additional liability of commercial work. "You work in and around their merchandise, and the general public is walking by and through your construction site," he says. Medina says his insurance is job-specific. "I fax insurance requirements out of the spec book to my agency. They tell me if I'm compliant or if I need to add additional insurance for that job," he says.
Walking a fine line
Though a few remodelers find commercial work more profitable than residential jobs, most say the profit margins are similar. The work allows them, however, to diversify to ride out fluctuations in the market. In the 10 years prior to 2001, Anderson was able to maintain his preferred balance of 60% commercial and 40% residential. From 2001 to 2002, the retail business boomed, then dropped. He went from 95% commercial in 2001 to 20% in 2002. "It's been difficult," he says. "Three years ago we started toward the goal of running parallel tracks -- being available for large projects and at the same time developing the residential side. It's a challenge. That's why we have begun to market the residential side so heavily in the past few years."
Similarly, when Fitch's commercial work fell off because of cutbacks in the hotel industry, he began marketing more to the residential side. "When commercial picks back up, we can do more of both," he says. "I believe in being flexible. If you are tied down to one niche market, you are stuck."
But the niche isn't something that can or should be entered into on a whim. Commercial work takes a different set of skills for both the administrative and construction staffs, according to Connor. Diversification needs to be part of a long-term plan. "You need to be clear about why and what you want. What is the rationale behind it? How does it blend with your present skill set and company culture?" he asks. Connor also adds a warning: "You may lose your artisans if you do only commercial jobs."
But for many, the risk is worth it. Medina says having flexibility is the major advantage -- especially in his small community. "If we were just pursuing one market, we would be very vulnerable," he says.
Remodelers who pursue commercial construction often have to work outside of their immediate area. To do that, they have to evaluate their crews' skills and restrictions and, when necessary, find and build relationships with subcontractors in outlying areas.
Virginia Will completes most of her commercial work using subs. She finds them through local subs or by networking with builder associations. "For some trades we need more commercial experience -- for example, with installing sprinkler systems," Will says.
To keep control of jobs, David A. Anderson runs his commercial jobs using a lead carpenter system. His lead man travels with a small crew or hires local temporary help. He recently used a labor agency to supply 10 workers for a job 50 miles outside of his town. His plumbing sub, however, is willing to travel to the out-of-town jobs.
Sheldon Fitch says his traveling crews perform 40% of his company's commercial work. He uses local subs for framing, then brings in his crew for drywall and finishing. He is currently looking for a traveling project manager to oversee his on-site supervisors and crews. He shares residential and commercial crews as needed. "When things slow down on the commercial side, usually around Christmas, we can move crews to residential work," he says. Sharing crews also allows him to accommodate a worker who needs to stay home, temporarily, for family reasons. He has several subs who are willing to travel, but he prefers local subs for jobs that require licensing, such as mechanical, electrical, and plumbing.
Bill Medina says his whole staff, but especially project managers, is cross-trained. "Hospital work can require long hours and working weekends. We have certain employees who can do that," he says. But he still has a need for high-quality subs. Skilled subcontractors are critical for the company's hospital work. "You're dealing with life and safety issues. You can't have a new electrical sub in a hospital flipping breakers and turning off life support systems," he says.