One in 10 remodelers, experts say, earns more than 40% gross profit and 10% net profit. Finding that one isn't easy, and finding that one who's willing to explain how he does it is tougher still.
But the secret is no longer secret. Paul Winans of Winans Construction, Oakland, Calif., agreed to reveal the methods he employs to produce high margins. Winans' success didn't happen overnight. Together with his wife and partner, Nina, Winans has taken more than 25 years to build a company that consistently earns high margins. "I think most people look at 40% as some great idea, but not as something that would work in their market or with their clients or against their competition," Winans says.
Indeed, most consider the idea of earning 40% to be radical, despite consultant Walt Stoeppelwerth's exhortations over the past 20 years to mark up labor and materials 1.67 for a 40% GP. Clients and architects still price shop. They don't understand overhead, and remodelers don't know the best way to communicate their long-term business needs. They slash margins in weak economies because they feel margin is a competitive or economic issue. They don't understand that standing firm is the only way to meet company and personal goals.
High margins aren't guaranteed for Winans, but they occur consistently because he not only carefully watches cost and schedule but he employs comprehensive communication, a reasoned sales strategy, and a guiding philosophy about why his company is worth the money. A full 17 of the 20 jobs he does each year produce the high gross and net margins he considers vital to his success.
To demonstrate how it all comes together, Winans agreed to examine a single project, Job X. The clients' names have been withheld to protect their privacy. The job produced 40.27% gross and 13.2% net profit (see "Job X," page 76).
Winans has learned that it's possible to stick to your guns. But the client, the message, the presentation of price, the delivery of the job, and the service all have to be nearly perfect. Problems have to be handled quickly and with ease.
His blueprint for meeting profit goals covers the following:
- Planning business and personal goals
- Having an overriding philosophy
- Client profiling and detailed lead processing
- Estimating and presenting the price
- Production that allows room for delay and error
- Follow-up and project review
The job being considered here ultimately cost $550,281 to complete. That's $250,000 more than the clients' original budget. It ran seven weeks longer than the 25 weeks projected because of client-generated change orders and problems with a cabinetmaker Winans no longer uses.
Winans handled the disparity between the clients' original budget and the final price by being up front, telling the couple he wouldn't know true cost until he completed a thorough scope. "There's always more work than you see," he says.
Winans' most experienced lead carpenter also contributed to the high profit margin. The carpenter asked the selected subcontractors to rebid their work once the job was sold and the project was under way. Trades often don't read plans well and once they see what's built, they have a better idea of cost, Winans says. Like in all jobs, there was the possibility that the numbers would increase, but in this case, bids came in lower on painting and roofing, and Winans pocketed the difference. There wasn't much contingency money in the proposal; he added 15% to his takeoffs for materials he might miss.
Winning high margins starts with a business plan. To determine margin, Winans says he answers questions like, What do I need to succeed? How many years will I work? How will I accumulate what I need to retire?
To offer profit sharing, you need to figure it into pricing. And you need to evaluate the effects of capital expenditures.
Philosophically, Winans doesn't think his is a high-end company. "We're a company that provides a level of service, communication, and attention that any person would want," he says. His approach is based on the principle that clients benefit from knowing true project cost before the job starts.
If clients know the job is complicated but can be handled simply, that's valuable. "If they're looking for what we sell -- predictability, honesty, detail, the ability to service only a certain number of clients a year -- then maybe there's a potential to work together," he says.
"We invest a lot in creating credibility in our community," Winans says. He writes a local newspaper column and gives seminars on how to make your remodel a success. His efforts pre-sell clients and build value.
Clients who call his company already know Winans Construction. If they're soliciting bids, they're told Winans won't bid jobs. The company tells prospects that it's good at figuring out how to get the job done, and that although it's going to come up with a higher price than most, the price is more likely to remain stable.
For Job X, the architect knew the company from Winans' community activities. The clients had worked with other contractors but on the architect's recommendation wanted Winans to build a family room addition, with changes to the kitchen, bath, and laundry.
How you position your firm in the marketplace -- as a trusted adviser, not simply a contractor -- creates value. In this case, for instance, the client, once he received marketing materials from Winans Construction, appreciated that the company had pushed itself to its operational edge and won a National Remodeling Quality Award. "Pushing the edge is part of what you need to be paid for," Winans says.
Planning business goals helps a company discover who will pay for its services. "Shouldn't an exceptional company go for an exceptional return?" Winans asks.
The characteristics and qualities of clients help make Winans' firm successful. "The trick is to let your potential clients know about your company's goals and sense of possibility -- expectations we bring to how a job should go," Winans says.
Winans' client profile includes two core groups: retired, active, and intellectual couples and younger couples who have children, often with one very active, stay-at-home parent.
A lead sheet should help pinpoint ideal jobs. Winans knows he does well with architects and on kitchens, master bedrooms, and additions. He also does well on jobs that involve many subcontractors and suppliers, because that allows markups for work management.
Another point of information you must learn on your lead sheet, Winans suggests, is whether the clients have remodeled before. If they have, they know how bad it can be. If they tell you what was wrong with their last remodel, that's what you have to do well.
Doing so justifies your margin. On Job X, the clients' previous experience was that their remodelers hadn't communicated well. Winans overcame that preconception with weekly meetings, managing interaction without wasting time. He also concentrated on follow-up, particularly when the cabinetmaker wasn't delivering on time and then when finishes or grains were inconsistent on drawers and doors.
Knowing your numbers sets your price, Winans says. He's used Master Builder software for years to track his company's performance. He compares job costs weekly for every job and reviews his profit and loss statement and balance sheet monthly. Quarterly, he checks to see how the company is meeting his personal goals.
A key piece of the extreme-profit formula lies in presenting sales numbers in a way that ensures they're accepted and understood.
While the Job X proposal generated a 40-page estimate, the sale price was presented with 25 major items, with six items at the end for overhead, along with a 10% expected return (see "How Winans Construction Calculates Costs," page 78). "If you put all those things together and actually expressed a 40% gross profit, it wouldn't work," Winans says. The real issue is selling price, not profit. "We don't give them a direct cost. What we do is lay out the job specific costs by category, with no subtotal of direct costs. The underlying assumption, when you have a subtotal, is that everything from the subtotal down is negotiable."
Gross profit is expressed as margin, not markup.
"Whatever you can deliver and have them pay for and have them feel really happy with you," Winans says, "that's the right price."
Get clear about what the work is, Winans says, otherwise you're going to talk about it during the job -- and that's not the right time. "What drives me crazy with trade contractors is you talk to the salesperson, he gives you a written proposal, and the craftsperson shows up and says, 'What am I supposed to do?' That costs money."
Winans has always scheduled on Microsoft Project and has found that the key to achieving predictable GP is focusing on how you meet commitments, schedule, and results week-to-week.
Managing change orders also is crucial to GP. On this job, eight change orders added about $67,745. Typically, if scope stays the same, Winans can come within 5% of estimated cost. "But these were active people," says the contractor. "They kept tuning things in the design; they expanded the scope."
Winans maintained margin by writing change orders before the work and asking for the money in the next payment schedule. "We have the same GP goal for change orders," Winans says. Clients are presented with a fixed sum for changes, priced the same way as the overall job.
Production always produces a problem, and then a story, hopefully, about how the client was pleased with its resolution. This should not be at the cost of putting the company out of business, Winans says. Part of an exceptional return allows you to give something for free when things run amuck. Winans plans for this in his estimates.
Winans had his opportunity on Job X in the finish stage when one of the clients came to him in tears saying she didn't like the trim that had been added to match adjoining rooms. Winans switched from what was selected to what she now wanted and returned the trim to the lumberyard. "Maybe it cost $500, but this job was $500,000. Do you want an argument over something like this, with tears in someone's eyes? No. But if you bid the job incredibly tight, have a low GP goal, and you're hit with something like that? Stress city. For everybody. That's part of what we sell -- flexibility."
Winans believes the end of the job makes the job. He recommends starting a completion list as soon as possible. Using the estimate, when you finish a task, cross it off. If you forget items, your GP will erode.
Every job Winans does is wrapped up with a job completion review that includes the crew. "We look at job costing, the length of the job, the client survey. We talk about what went well and what could have been done better. You adjust the estimating template accordingly, or change practices. That's one of the ways to integrate information. If there's been an exciting learning experience, we share that." At the completion review for Job X, the crew was told to never use the cabinetmaker again. "It's all about helping the company stay focused on the overall goals -- in our case, beautiful work, done with care, on time and on budget."
The last penny
Winans says cutting margins isn't a business solution; it's you convincing yourself you can't sell the margin you've chosen as your business plan. Oftentimes it's sales skill. Clients say, "That's a lot of money," Winans notes, but that shouldn't trigger an answer why. It should help you explore why they're saying that. You need to find out what they think is a reasonable price long before you provide the proposal. Your proposal is then relative to their goals. Perhaps they ended up buying more than they thought. Or they didn't know what a reasonable budget was. Or they don't know the challenges and costs of running your company. Educate them early and often, long before you present price. And then, when you do, you'll be worth every penny.
Original budget: $294,347
Contract amount: $482,536
Final billed amount, including eight change orders: $550,281
Labor and materials: $323,207 (58.73%)
Gross profit: $227,074 (41.27%)
Minus overhead, not including owner salaries, benefits, and taxes: $88,430 (16.07%)
Minus owners' salaries: $66,033 (12%)
Net profit: $72,637 (13.20%)
How Winans Construction Calculates Costs*
The overall cost of the job includes the following, all calculated as a function of the total fixed price:
Office/administrative salaries and burden: 14.54%
Tools and equipment: 2.2%
Employee training/education: 1.7%
Other office/shop expenses: 7.45%
Estimated return: 10% * Winans credits this breakdown and terminology to Jim Strite of Strite Design + Remodel, who regularly logs 40% margins in Boise, Idaho.