By relating owner compensation to total revenue, the Risk Quotient (see Benchmark, January 2003) helps a remodeling company owner balance risk with reward. This ratio does not, however, take into account how the size and number of jobs a company undertakes affects overall risk. Which is less risky: a few big-ticket jobs or many smaller jobs? And how do risks differ as the type of job changes?
Is small smart?
At first glance, there appears to be less risk in a small-volume job simply because less money is at stake. Start, completion, and payment are all so close together that the homeowner never gets too far ahead. If the job has few moving parts, there is less chance for something to go wrong. And if it does, the financial damage is minimal.
That said, because the scope of work is limited to begin with, it's more likely that unforeseen conditions or owner-initiated add-ons will require some extra work. But there is also less time to get a formal change order signed, which opens the door to misunderstandings around cost overruns. Making a bad situation worse, a single major change order can easily add 20%, 30%, or more to the original cost.
Job duration is also worth considering. A limited scope of work raises client expectations for on-time completion, and a short-term job doesn't allow for much wiggle room in the schedule. If something goes haywire, there's no way to make up for lost time. Mis-timed or late deliveries, damaged materials, or a single delayed subcontractor can sink the whole project.
Bigger projects tend to take longer, which allows more time to absorb delays and handle change orders properly but also makes it easy to wear out your welcome. With the start of demolition, the homeowners' emotional barometer drops sharply from the high achieved during the sales and design process. Morale slowly rises through the end of rough carpentry, when clients can easily measure daily progress and can begin to see the project take shape in three dimensions. But emotions plummet again when subtrades begin rough-in work -- it's difficult to measure progress, there are lots of strangers on the site, and conditions are generally more chaotic.
It's during this time that most change orders occur -- some due to unforeseen conditions, but many initiated by the owner, who has by now had plenty of time to regret earlier decisions. Remember, too, that payments, which are typically for larger sums, are spread out over longer intervals, which can adversely affect cash flow.
Long projects also create more lost opportunity than smaller, shorter-term jobs. This includes jobs that could have been undertaken while the large project is under way, as well as jobs never pursued while the large project was in development. Even worse, when a single large project is postponed or canceled, it can leave a sizeable hole both in a company's schedule and its revenue stream.
Finally, complexity creates risk in and of itself and is often compounded by job cost and duration. A project involving multiple owners, an inordinate amount of special-order or exotic materials, a larger-than-usual number of specialty trades, or long travel distances creates many more potential problems than smaller, straightforward jobs close to home and employing familiar materials and well-known subtrades.
In the end, there is no single number that adequately measures all of a remodeler's risk factors. The best strategy may be to strive for a mix of dollar size, duration, and complexity. Then monitor these factors regularly to ensure that no one element is growing out of balance.
Cost. Low cost means fewer payments but less chance to make up for mistakes. High cost generates more revenue but constrains cash flow.
Duration. Short jobs provide less time for problems to occur but no time to make up for them when they do. Postponed or canceled jobs have minimal affect on planning. Longer jobs allow for more wiggle room in the schedule but make it easier to wear out your welcome. Lost opportunity cost is also higher and a postponed or canceled job does more damage.
Complexity. More interrelated pieces create more cracks for success factors to fall through.