Setting fees is relatively straightforward. Knowing how and when to raise them, however, can be a bit tricky. Costs such as labor, insurance, and equipment tend to rise steadily with occasional sudden spikes; materials are more volatile. If your fees don't account for that fluctuation, your profits slip.
For many companies, the solution is diligence — tracking costs monthly or weekly. “Every week we get in and look at the numbers,” says Charlie Gallick, owner of The Gallick Corp., in Sterling, Va. “We're watching overhead costs, watching materials. We track everything closely enough that if inflation was pushing costs up every week we'd be raising our prices every week.”
But what if a sudden spike, say in lumber prices, throws your estimate off mid-project? Contracts often include escalation clauses that give remodelers the right to adjust fees in accordance with rising costs. Many remodelers, though, would rather absorb the cost hike than risk customer goodwill by invoking an escalation clause.
Ty Melton of Melton Construction, in Boulder, Co., is one who hesitates to use escalation clauses. If Melton anticipates a mid-job price increase before signing, as he has this year with the steadily rising costs of copper and drywall, he asks his clients for a small allowance. Melton says his wealthy clientele understands his reasoning. “They're financially savvy, and they're more concerned with the big picture than quibbling over the extra $1,000 that might get added to the $10,000 we budgeted for Sheetrock.”
Chris Withers of Old Greenwich Builders, in Denver, takes a different approach. Rather than take even a small hit or tweak his pricing as he goes, Withers insists that his clients agree to a contingency — equal to 3% to 5% of the entire budget — that allows him to hedge against inflation without using his profits to absorb rising costs. If the project is large enough, Withers concedes a point or two off the contingency; if there's money unspent, he lets clients put it into product or material upgrades.
Withers says homeowners agree to the contingency because he's open about pricing from the start. “Our estimating is completely open book for the client,” he says. “We throw all our bids and costs out on the table. We're very honest and upfront with clients, and that builds trust.”
David Zuckerman is a freelance writer based in Brooklyn, N.Y.