I have been in the home remodeling business for 44 years and I maintain at least a 33% gross profit margin. When, in “Sales Alchemy” http://www.remodeling.hw.net/sales-leads/sales-alchemy.aspx [Feb. 2012 issue], Mike Davis, owner of TWIG Development & Renovation [in South Orange Village, N.J.] says that in his “construction management” role he works for a flat fee of 12%, I am concerned that remodelers reading the article may decide to try this.
A flat fee of 12% [...] won’t work. TWIG must make this a small mix of its overall business, or is Davis selling clients marked-up labor or material?
—John Newmyer, Newmyer Remodeling, Walled Lake, Mich.
Michael Davis responds:
Your concerns are valid. I, too, have been at this for well over three decades, yet the past three to four years have proved an increasing challenge to generating business. As you’ve surmised, “construction management” (CM) represents a small portion of our overall revenue. It supplements our main business, which is predominantly high-end residential remodeling and historic restoration.
During a CM job, my responsibilities are that of a general contractor. I usually run a CM project concurrently with several smaller-scale, contract jobs. On average, I would spend about 15 hours per week managing the CM project and meeting the client and his professional staff. Besides my time, I incur no cost, other than a professional liability insurance policy and minimal office expenses.
We hire and manage all subtrades, but the owner pays the approved invoices directly. We also provide general labor (mainly for the gray area that exists between mechanical subs) at our standard rates (no discount), and we collect on weekly invoices paid to my company as a separate line item. The CM fee is added below the line after totaling all subs/suppliers/labor payments for that week (no retention) including our charges for labor. Accordingly, our core business model makes money on supplying labor to the project as well.
If CM was to be our full-line service, a fee of between 20% and 25% would work for us. Your markup is certainly justified given your showroom and staffing expenses. But those overhead costs are not essential to the CM model and should not be considered in their carry when you factor the numbers.
With the CM project, the intent is for the owner to control expenses. Clients believe mutual value has been established, and they can monitor expenses and tangible results, all of which factor into their comfort level and perceived control. The reality, however, is that once a client begins paying the subs, he becomes more comfortable with my guys and that portion of work expands, increasing our billables, which is more in line with our GC model.
Unfortunately, the article does not convey the subtleties of this type of transaction. The main objective of the story was to get our struggling fellow remodelers to tweak their approach to selling prospects.