Bring It In

When asked to explain the advantages of hiring in-house designers, remodeler Michael Mc-Cutcheon doesn't hesitate. “It's all about control,” he says.

But control over what, exactly?

“There's more control over the design, more control over the budget, the work flow, everything,” he explains.

McCutcheon, owner of McCutcheon Construction, in Berkeley, Calif., is speaking from experience. For years his company outsourced design to a single architect. But when that architect suddenly decided to get out of the business, McCutcheon was left with no design capabilities and no one to turn to.

“We didn't have their source documentation, hand-drawn plans, design software, their printer. We were left stranded,” he says. So, to keep from getting burned again, McCutcheon decided it was time to hire a full-time in-house designer.

During the last decade, especially as public awareness of the design/build model has continued to grow, many remodelers have finally decided to make design a major part of their company's service offering. And for many remodelers, control is just the beginning.

As his company's design needs grew, Bob Fleming, of Classic Remodeling, in Johns Island, S.C., began subbing out some drafting and design work. But he found it was consistently difficult to get drawings back in a timely manner. So two years ago, he hired two designers to do the work for him. The decision has had a ripple effect within the company. “Because of our increased design capabilities, our job sizes have grown. Now we're not chasing the $50,000 jobs, we're getting $500,000 jobs. Our designers have enabled us to grow from [a $2 million company] to $7 million,” he says. “Clients come to us because they know we can produce quality plans and understand them.”

For remodeler Denny Conner, president of Conner Remodeling and Design, in Seattle, the move was simply a response to increased demand in the marketplace. “In the '90s, we had to educate people about the benefits of design/build,” he says. “We find more people today actually looking for design/build, and having an architect on our staff adds a significant amount of confidence in the minds of our clients.”

Like Fleming, Conner has also seen a shift in the types of projects coming his way. “Today we're focusing on larger projects — whole-house renovations and room additions — and the architect is a key player in those,” Conner says. “We were doing some of [those projects] before, but [our designers] have allowed us to do more of them and design them more quickly.”

Sometimes, the benefits are less tangible. “We brought [design] in-house to better serve our client base and to increase our professionalism,” says Jim Strite, owner of Strite Design + Remodel, in Boise, Idaho. “We wanted to make design a part of our company culture so that clients receive a more unified experience.”

Whatever the reason for bringing design in-house, the challenge remains the same: preparing your company for a dramatic shift in its business model while generating enough new revenue to cover the added costs of design labor.

The key to making a successful transition, according to Strite, is to thoroughly build the framework for the design position ahead of time.

“There are so many things to consider,” he says, “from the different methods of compensation, to the overhead associated with a new employee, to the details of the new job description.”

Of all these, deciding exactly what this new position will entail and developing a realistic job description may be the most important, not to mention — for those not familiar with the role of a designer — the most challenging.

“You're hiring people for a position you don't have much familiarity with,” says Gary Potter, of Potter Construction, in Seattle, who employs two lead designers and two associate designers. Potter's designers, like many others in the industry, take on a dual role within the company, doing both sales and design work. “Our first hire was fantastic,” he says. “She was very good at design and great with people.” After hiring and then firing about a dozen other people in succession to fill a second design position, Potter was convinced that the first hire was the exception. “We got lucky with that one,” he says. “But our hiring process was flawed. We didn't have a clear picture of what the position entailed.”

Many remodelers making this transition to in-house designers have difficulty finding individuals well-suited for both sales and design. According to Strite, the hiring manager must be sensitive to the need for a multi-talented individual in filling the position.

“There is a real lack of qualified individuals out there,” Strite says. “But because those individuals [are few], once you find them you are able to provide a unique service that goes way beyond client expectations.”

Both Potter and Strite agree, however, that any new design hire will need extensive sales training. “Many of us in the industry have transitioned from technicians to owners, and we've developed our skills and experience over many years,” Strite says. “When it comes time to passing that knowledge on, we're not always prepared. All the sales skills that seem ‘natural' now to us really aren't — and passing that on requires developing an extensive training program.” For newcomers, Strite suggests joining a local association or peer network to learn directly from those who have successfully made the transition.

One of the first — and most important — decisions a company must make after bringing design in-house is how to charge for the service. According to Strite, there are a few established models.

“Essentially, you can charge hourly, you can charge a flat fee by project, or you can charge a percentage of the total sale,” he says. For his company, Strite has elected to charge using the latter model.

“Tracking costs hourly is a burden on the company and on the client,” he says. “It is difficult for us to track overhead, and the client is constantly distracted worrying about how much time they are spending making design choices.” Using the percentage of sale model, Strite is certain to make a margin on his design labor, and is even able to credit some of the fee back toward construction if the design work is lighter than expected.

Many remodelers, says Todd Miller, of QMA Design + Build, in Ventnor, N.J., are tempted to use design as a “lost leader” — a means by which to secure construction, but not a revenue source in itself. “I've never understood this philosophy,” he says. “You would never give away remodeling services. Why give away design?”

Miller charges for his design much the way he would charge if he were subcontracting the service, charging market price and then marking that up as well. Otherwise, he points out, if there is a slowdown in the market, where does the money come from to get through it? He is able to weather market fluctuations by charging properly for design.

Potter charges hourly for work performed by his designers. To quell clients' anxiety over being on the clock, Potter tells them to expect to spend about 5% of the total job cost on design. By charging hourly, he is also able to avoid overcharging some clients whose projects require very simple design work and subsidizing others whose jobs are more complex.

For those just starting out offering design services, more than likely the design fee will be an evolving figure. Paul Eldrenkamp, of Byggmeister Associates, in Newton, Mass., began by subsidizing his design services. “We started out with charging a flat fee for design,” he explains. “It gave us a bit of leeway to make mistakes. We had the resources to do it. Eventually we got our fee up to around 8% to 10%.”

Whatever method you ultimately choose, your office staff will now be charged with the added task of tracking design costs, related overhead, and revenue. McCutcheon tracks all design costs and revenue separately so that he knows exactly what his design margins are. “We track all of the overhead separately as well,” he says, “from labor burden right down to the number of square feet the department takes up in our office. We set a monthly [gross profit margin] goal and manage to those.”

Miller goes a step further, dividing his construction and design departments into separate legal entities, each with a unique tax ID number. “Using this method really allows us to track our costs and to see if we're making money,” he says. “It's difficult to have two companies in terms of keeping up with taxes, benefits, and the books. But we think it's worth it to have a clear picture of our numbers.”

Fleming, for whom design is not a profit center, doesn't price design separately but does track it as its own line item. “We don't show it to the client in the cost of the project, but there's an additional 10% margin for design,” he says.

In-house design will not be a perfect fit for every company looking to offer the service to clients. For many, outsourcing will still make the most sense. For one thing, when design work is not coming in, you don't have designers on staff waiting for a paycheck. For another, you can avoid the hassle of tracking the extra costs, labor burden, taxes, revenue, and everything else that comes with additional employees and services. Furthermore, you're free to use a variety of architects or designers to match special skill sets with the needs of a particular project.

But for remodelers willing to take on the added workload, adding designers to their teams can be the perfect way to enhance the total client experience. And remodelers who have made the move report finding plenty of useful things for designers to do during slower times. “When there's not enough design work, my interior designer will go out on sales calls,” McCutcheon says. “She'll also drum up leads through her own contacts, which is a great asset. And she photographs all of our jobs and manages our [photography portfolio.]”

Others report that relations with vendors have improved thanks to their designers, who are able to spend time working with suppliers to establish mutually beneficial business relationships. And with improved vendor relations comes a beefed up bottom line.

Perhaps more than anywhere else, the benefit is most evident in building relationships with clients.

“I really like the synergy that our designer brings to our team,” says Aptos, Calif., remodeler Jeff Talmadge. “She has lots of ideas, and it's great to see her talent and excitement show through, especially during a [sales] presentation. If you can put a potential client in their new kitchen with 3-D drawings and samples, it starts the sizzle,” he says. “Sizzle sells.”

Double Team

Design is a psychologically taxing endeavor, says Berkeley, Calif., remodeler Michael McCutcheon. “In any kind of creative field there are a lot of emotions involved, especially in dealing with rejection.” McCutcheon, whose design team was once composed of two architects, learned this the hard way. “Their egos clashed a lot,” he says.

McCutcheon has since restructured his design department so that he has an architect and an interior designer on staff. “I think this combination has the best chance to succeed in terms of chemistry,” he says. “And they complement each other well. It really reduces the clash.”

The architect-interior designer model is one with which other remodelers have also found success. As with any type of growth, though, building a design department is usually a gradual process.

“Our first move was to hire an interior designer who could do floor plans, 3-D renderings, and product selections,” says Denny Conner, of Conner Remodeling, in Seattle. As his design needs increased, Conner added a draftsperson and eventually an architect. “I might have started with an architect,” he says in hindsight, “but it was much easier to find a suitable interior designer who could work at a rate I could afford, to meet the immediate demand.”

Jeff Talmadge, of Talmadge Construction, in Aptos, Calif., went the opposite route, hiring an architect from the start. The architect currently is responsible for all design duties as well as product selections. “It's turning out to be too much for one person to handle,” Talmadge says. “There's not quite enough work to justify bringing on an interior designer full-time, but we're looking at working with an outside resource.”

Aside from the way their talents complement each other, McCutcheon has found other practical reasons for sticking with the architect-interior designer model.

“If a client comes to us and already has an architect picked out, then we can offer our interior design services to complement their architect, and vice versa,” he says. Being so flexible has enabled him to add additional design revenue on projects where design opportunities would otherwise have been nonexistent.

Bob Fleming's design department is made up of two lead designers and two associates — essentially two architect-designer teams. “It's great,” he says. “The associates take care of all the detail work and putting things together, so that the lead designers can focus on the bigger picture.”

The architect-interior designer model is by no means the only way to operate a design department, but it has proved to be a winning combination for many remodelers looking to expand the breadth of their services. —C.K.

Hidden Costs

With bringing aboard any new employee comes the need to generate enough revenue to justify the new hire.

Gary Potter, owner of Potter Construction, in Seattle, offers an equation to determine just how much extra revenue you will need to account for the new employee, labor burden, and gross profit margin.

Say your new designer costs you $60,000 per year (including labor burden) and you aim for a 35% gross profit margin on all of her time, Potter explains. To determine how much extra revenue you will need to generate to cover both the employee and the profit margin, simply divide the cost of the employee by the desired gross profit margin percentage.

In the above case, that would mean that the new designer would need to generate an additional $171,429 to justify her position. So a company that was doing $800,000 of volume before hiring a designer would need to be doing $971,429 afterward in order to operate on the same margins. “That's a figure that any remodeler making this kind of decision should have in mind ahead of time,” Potter says. —C.K.