It's no secret that while the entry barriers for remodeling are relatively minor compared to other industries, the rate of survival is low; the number of unfamiliar trucks that show up in your town — only to disappear within a year or two — is evidence enough of that. Many costs associated with a remodeling business aren't readily apparent to newcomers, and by the time they become apparent, it's too late.
However, these costs aren't completely invisible. Take workers' compensation insurance, for example. “The reason insurance hurts people in their first year is that they don't know how much business they're going to do, and what payroll is going to be,” says Robert Criner, owner of Criner Construction in Yorktown, Va. “A lot of people aren't prepared for a bill at the end of the year,” he continues, noting that monthly premiums are based on estimates of payroll levels, and that discrepancies must be reconciled at year's end. In his second year, a smart remodeler adjusts accordingly. If he's still in business, that is.
Unfortunately, there are still some costs that can ambush you years down the road. Every remodeler interviewed for this story said he still encounters surprise costs from time to time. It's impossible to compile a list of these “hidden” costs, but studying an example or two should give you an idea of where to look for them.
Open Your Eyes Some hidden costs may be lingering right under your nose, lurking in line items already in your budget. These can be particularly costly because they are so difficult to find; you think you're accounting for something, so you don't consider it a possible culprit. The good news is that once you do uncover such costs, they are relatively easy to take into consideration.
Labor is a prime example. Surely, you budget for that. But do you factor in the time it takes to set a job up in the morning, and to clean it up in the afternoon? If you calculate your labor based on eight hours of productive work per man, then you are shorting your estimate. If setup and cleanup take just half an hour per day, that's still 20 “lost” hours per man on an eight-week job.
And what about supervision time? Lead carpenters spend a significant chunk of their day arguing with subcontractors, talking to the homeowner, and instructing other crew members. Paul Eldrenkamp says he tells his clients that the lead carpenter “spends two-thirds of his time with his toolbelt, and one-third with his cell phone.” To that end, Eldrenkamp's company, Byggmeister Associates, in Newton, Mass., allows for between 8 and 16 hours per week of supervision time for leads, depending on the project's complexity.
Pinpointing these types of underestimated labor costs is difficult. You might eventually notice that a job wasn't as profitable as you had planned for and that the work took longer than you anticipated. But until you figure out why, you'll still be guessing when you go to estimate labor for the next job.
An Even Break Another instance where remodelers commonly lose money but don't realize it comes when they hire a new office employee. It's not enough to increase your volume by the amount that the employee costs you; to maintain your profit margins, you need to increase gross sales by enough to absorb all of the new overhead costs.
In short, you need to find your “break-even point.” It's a relatively easy calculation to make, and it applies here because you are trying to determine the volume you need to add to keep a consistent profit margin. Simply divide the amount your new office employee costs you (salary plus all taxes and benefits) by a decimal representation of your gross margin percentage.
For example, if you plan to pay your new office manager $20 per hour, taxes and benefits could bring the total hourly cost to, say, $28, or about $56,000 per year. If your gross profit margin is 25%, divide $56,000 by 0.25. The answer is $224,000, which is the amount of additional revenue you need to generate annually to both cover the costs of the new employee and maintain your gross profit margin. Adding less revenue than that reduces net profit, and can even lead to operating in the red.