Mark Richardson is an authority on the topic of targeting profitable remodeling jobs. His company, Case Design/Remodeling in Bethesda, Md., expects to complete around 4,500 projects this year through its design/build firm and its 60 Case Handyman franchises that cover 100 territories nationwide. Case strives to generate net margins of between 7% and 10% on all projects, but Richardson emphasizes that profit is always hard earned because “there is a certain percentage of customers that will let you make money, and a certain percentage that won't.”
Separating the wheat from the chaff within that customer plain is how remodelers reap profitability. Case, for example, relies on computer-aided analyses of its extensive project database to predict future customer buying patterns. Other remodelers take the more basic route of screening potential customers to determine everything from the limitations of their budgets to how easy they would be to work with. These interviews help remodelers avoid customers who might impede their companies' productivity objectives.
That screening process is only one of several steps that lead remodelers to sustainable profit. Another is having a firm understanding of their niche and its attendant operating costs, which has compelled some companies to expand into different businesses that can serve a broader range of homeowners in order to protect their margin structure and preserve their market share. How much remodelers pocket after each job also depends on how efficiently they can manage labor, material costs, customer expectations, and risk; and on their latitude to control projects from contract to completion.
That control is usually a function of the reputation a remodeling company has cultivated in its market. Rhode Island–based Patrick M. Crowley Inc. focuses exclusively on remodeling medical offices and facilities and is often boxed in by the schedules of its doctor and dentist clientele. That means a lot of night and weekend work that sometimes needs to be done quickly. A 10,000-square-foot cabinet shop provides fabrication and warehousing support that gives this remodeler scheduling flexibility. “What [clients] are paying for is convenience,” says owner Patrick Crowley, whose $1.8 million company does between 18 and 25 jobs per year and whose gross margin goal is between 44% and 50%. “Our best profit comes from jobs no one else wants. ”
Crowley is about to test whether his business model can work in other markets. For nearly two years, he's been “documenting our processes” in anticipation of expanding his brand to as many as 30 territories across the country over the next five years by licensing contractors to remodel offices using his company's design specifications.
Crowley is adamant about retaining control over his designs, and other remodelers agree that their ability to attract lucrative projects starts with the appeal and adaptability of their plans. “We're not looking so much at what customers want, but why they want it,” says Jonas Carnemark, owner of Carnemark Systems + Design in Bethesda, Md. “Is a window for light or for a view? We're trying to solve a problem, and solutions bring high-end jobs.” This firm runs its design department as a profit center that generates about $350,000 at gross margins that exceed 60%, compared to the mid-40% range that Carnemark captures on projects that bring in $3.6 million in annual revenue.
Know Thy Clients
Carnemark Systems + Design gets about 80% of its jobs through referrals, which are the marrow of many companies' growth and keep them out of the margin-eroding rat race otherwise known as job bidding. “I get scared when someone calls and says he picked us out of the yellow pages, because we are by no means the lowest price in town,” says Lori Jo Krengel, who owns Kitchens by Krengel, a $2.2 million firm that has operated in the Minneapolis-St. Paul market since 1959 and now gets more than 85% of the 20 or so remodeling projects it does each year through referrals. “In Minnesota, money knows money, and if you do good work for high-net-worth individuals, and take care of customers when something goes wrong, they will come back to you.”
Prime Construction in Burlington, Vt., targets jobs that can produce net margins of between 12% and 15%. “For our design/build and DreamMaker businesses, we don't bid any work,” says owner Michael Gervais, who adds that the initial consulting fees alone that his companies charge scare off one out of every seven potential customers.
DeCiantis Construction generates around three-quarters of its $2 million in annual sales from referrals within the small affluent community surrounding its headquarters in Stonington, Conn. Still, owner John De-Ciantis finds himself filtering a lot of unprofitable business by screening potential clients based on their budgets. “If they are hiring on dollars, we usually take a pass,” says DeCiantis, whose company's gross margins average 40%. “I also prefer to stay away from clients with deadlines, because a $300,000 to $500,000 job can take three to five months.”
Todd Perry, who owns Leading Edge Homes, in West Palm Beach, Fla., a design/build firm that specializes in additions, meets with fewer than half of all callers, whom he charges $200 for an initial visit that can last more than two hours to discuss floor plans and estimates. He then charges a nonrefundable fee of $350 to draw up the plan, which he submits to his suppliers for more accurate costing. About two-fifths of the customers reach this point and sign an agreement, Perry says.
Leading Edge, which generates between $750,000 and $800,000 in annual revenue, operates on gross margins of between 33% and 40% — that's high, says Perry, considering that his projects range from $75,000 to $150,000.
Perry's point, which other remodelers made too, is that smaller jobs can produce higher payoffs.
Oak Design and Construction in Oak Park, Ill., has remodeled “hundreds” of small kitchens and bathrooms, and gross margins on those jobs are generally better than the company's 30% average because “nothing is left unpriced,” explains owner Dave Brady. “We design, specify, and select every product. We know how long the job will take to complete. It's very defined, and there's almost no room for extras.”
Extras, though, are where other remodelers are mining profit. “My ‘niche' is to get clients to add things,” says Joe Bellingham, owner of Bellingham Built, a $1 million remodeling company in Erwinna, Pa. “My clients seem to like when I suggest ideas, and the more jobs where you can do less and can sell more, the more money you make.”
Perry says Leading Edge “makes a killing” on additional work beyond the original plans. But he notes that clients accept his suggested changes only because of the credibility he worked so hard to engender during the project's planning phase. “They love me to death and trust me implicitly,” he says.
Partner For Profit
Design/build and remodeling firms aren't always set up to handle large and small projects with equal proficiency. Kitchens by Krengel sometimes gets calls from past customers who want, for example, a sink replaced, a job that this firm cannot make money on. So Krengel uses a local contractor to handle “handyman” jobs that take less than a week to complete. “We want to take care of past clients who may be spending more money with us in the future,” she says.
Other remodelers handle smaller jobs through separate divisions or franchises whose overhead is scaled for this work. Prime Construction's design/build business will complete 55 jobs this year with gross margins averaging 40%. Its DreamMaker franchise, which Prime bought in 2000, will remodel 100 kitchens and baths at margins that average 50%. And its handyman division, which Prime started in 1999, will handle 1,000 jobs at gross margins that average 100%. Gervais says his company, which he projects will do $4 million in total this year, expanded into these businesses because “we had been turning away wealthy clients who were asking us to do a lot of smaller stuff.”
Minneapolis-based Monson Interior Design pursues homeowners who will pay $100,000 or more for custom kitchen design and remodeling. Owner Lynn Monson says his firm does six to 10 jobs per year that generate $850,000 in revenue at gross margins that “far exceed” 40%. But seven years ago, Monson acquired a DreamMaker franchise, which handles “the other 90% of the market that doesn't fit the profile of my design/build business.” He now calls this his “retirement business,” and he expects it to grow to $3 million in 2005 from $2 million in 2003.
At the same time, he will shrink Monson Interior Design to around $250,000 in sales. A typical DreamMaker job is $35,000 at margins similar to Monson's design/build business. But the franchise gets only two-fifths of its clients from referrals (including some from Krengel), and must draw customers through more overt marketing such as the Internet and home shows.
This diversification gives remodelers another buffer against risk, which lurks in the background of any project, ready to pounce and cut into margins. Brady speaks of change orders that “will kill you” if his company doesn't watch their pricing “like a hawk.”
Richardson observes that remodelers are playing a numbers game, trying to find that “sweet spot” where a project's price tag trumps its overhead to produce maximum profits. For Case, that point is $175,000 for its design/build business, and $7,000 for its handyman business.
Locating that spot, however, is still too much art and not enough science, says Les Cunningham, president of Business Networks, a Springfield, Ore.–based consulting firm. “The most important thing is to know your numbers, and a lot of remodelers don't.” Cunningham is a staunch advocate of using integrated computer software to monitor all aspects of a project's costs and to analyze those costs against past jobs. Remodelers who don't embrace these systems, he insists, are just guessing about how much profit any job can yield and may miss opportunities where they could tweak their operations or cost structure to make those jobs more productive. One Cunningham disciple, Paul Eldrenkamp, says his design/build firm, Byggmeister Inc. in Newton, Mass. — which works on between 40 and 50 homes per year and generates $5 million in annual sales at gross margins that average 35% — churns out job-cost accounting reports every two weeks with the goal of calculating estimates that fall within 2% of actual costs.
hen it comes to sustaining profit, Eldrenkamp observes, “most of the problems that companies face come down to the remodelers themselves, not their customers.”
In a speech he delivered during the Remodeling Show in October, Case Design/Remodeling president Mark Richardson outlined “criteria” that remodelers should follow in order to find clients who will allow their companies to “maximize profit and reduce risk.” Here are some highlights from the session.
Does the client have past remodeling experience? Those who do usually have a more realistic perspective. Those who don't will require more education about the remodeling process.
Is the client honest? If a homeowner balks at pulling a permit, walk away.
Will the client let your company control the job? Without that control, “chances are you'll never be able to make money,” Richardson warns.
How do they communicate? If spouses disagree about a project's direction, “you can get caught in that valley.”
Is the client emotionally stable? Richardson says remodelers need to be particularly wary of homeowners with unpredictable mood swings.
“The issue is not to blackball people,” Richardson says. “But you need to get a ‘yes' to all of these criteria. If you get ‘no' or ‘maybe,' you need to fix it or walk away.”
Richardson notes that remodelers should be honest with themselves, too, and not get pushed into projects that fall outside the scope of the work they typically handle (for example, a suburban-focus remodeler taking on an urban project) or are larger than their operations can manage.
Richardson is a big believer in following policies and processes to ensure consistent profit. “The more you can get into a formula and process, the better.”