Remodeling has always been a challenging business, made somewhat more difficult by prevailing economic conditions. While the economy appears to be improving, it’s critical to look at how to push more dollars to your bottom line.
Net profit can’t be controlled directly; it’s what’s left over after you’ve paid job costs and overhead. That leaves three things that you can control: what you spend on projects and overhead, and what you bring in for sales.
Most remodelers find labor the most difficult thing to estimate and track, especially for fixed-price work. Typical errors include overestimating crews’ effectiveness and efficiency. Requiring your crew to maintain time cards and tracking nonproductive time (material runs, drive time, meetings, etc.) can help you get a handle on both effectiveness and efficiency. Creating schedules and sticking to them will help you better manage your and your crews’ time. Managing material procurement will also help you spend less by reducing wasted time and materials on the job, and cutting fuel costs.
You can increase sales two ways: by either doing the same amount of work but charging more or by keeping your current markup but doing more work. Many remodelers balk at the idea of charging more because they feel they’ll lose sales. But if you’ve tightened your belt, increased production efficiency, and are still not making the profit you deserve, your best bet is to sell at a higher price. Remember that if you increase your price without changing production or overhead costs, 100% of that increase will go to your bottom line. Look into sales training to improve your sales skills.
The additional dollars you bring in by selling more jobs at the same markup do not automatically add to your bottom line. The reason: More jobs mean more management and the potential to introduce inefficiencies as crews or subs bounce from job to job. You may need to add a production manager or another lead carpenter to make it work. Even if you end up producing more jobs at the same margin, but increase overhead, you may actually end up with a lower net profit.
Look at your current jobs. Think about how you can better manage each one to improve profits. Consider reducing the quantity of work but increasing the quality (i.e. profitability) of work.
Look to your future jobs and consider what you can do today to improve your chances of success tomorrow.
—Leslie Shiner, owner and principal of The ShinerGroup, has more than 20 years experience as a financial and management consultant. Melanie Hodgdon works with clients to generate realistic solutions that reflect the resources and style of their companies. They co-authored A Simple Guide to Turning a Profit as a Contractor.