The economy is still stalled, but some remodelers report that leads are trending up and tend to be stronger. And some homeowners have the cash they need to see their projects through. For remodelers who have reduced their overhead and their workforce, profits will surely rise as the greater volume sends more dollars to the bottom line.
But an increase in the number of jobs could require hiring additional personnel, both in the field and in the office. The big question is: How much can the company afford to spend? And how much new work is needed to cover the cost of the hires?
For administrative hires, gross margin holds the answer. Here’s a formula to calculate the increase in volume needed to pay for an additional salary in overhead — it’s the same “break-even” formula used during annual budgeting to calculate total sales needed to cover total overhead:
Salary ÷ produced gross margin = additional volume needed
For example, if you’re adding an office staff person at a salary of $40,000 (including all labor burden), and your produced gross margin is 25%, you’ll need $160,000 ($40,000÷0.25) in additional volume to cover it. Be realistic and use produced gross margin, not estimated gross margin.
In the Field
Will you need additional field crew to produce that extra revenue? To find out, you need to know productivity rates, and they can vary depending on how much subcontracted labor you use and whether or not you have full- or part-time employees.
One solution is to use average productivity: divide annual revenue by the number of full-time equivalent (FTE) field employees. (Remember that a full-time carpenter hired midyear counts as 0.5 FTE with respect to annualized volume.) In the example in the table above, you don’t quite need a full-time person. Keep in mind, though, that it typically takes at least six months for a new hire to become 100% efficient on your jobsite using your procedures.
If you find you need less than half an FTE, consider using temp help. You could also introduce training and improve systems to make existing field crew more efficient.
—Judith Miller is a Seattle–based remodeling business consultant and trainer. remodelservices.com.