Show Me the Money

Know what I like best about design award competitions? Listening to the comments of the remodeler judges as they gauge overall value, first evaluating cost versus price, then weighing price against scope of work, amount of detailing and quality of finishes.

"He didn't make any money on that one!" at least one judge exclaims, at least once, every time. That's something of an overexaggeration, and no, we're not rating projects on a profit scale. In fact, I suspect that some remodelers deliberately make profit concessions on a project every year or so, intending to make it a picture-perfect, high-profile marketing showcase. The immediate profit is exchanged for the long-term return on investment. Either that or the home belongs to the remodeling company owner or an architect with which the firm partners.

What I know is that some remodelers value quality design, materials and craftsmanship to the point that they sometimes give away the store. Maybe the client could only afford the mid-level product, not the top-of-the line model, but the lead carpenter or the salesperson or even the owner just knows the premium version would look so much better, and hey, the customer's spending a lot of money with us.

Other times, confusion over scope of work or specifications crops up, and the remodeler errs on the side of caution and gives the clients absolutely everything they want. That's usually an expensive lesson on the need to use detailed contracts.

Then there's the change order: not using one, not getting a customer signature, forgetting to file it, not realizing the full impact of the change and not pricing accordingly.

All of these are examples of slippage. You set a profit target, and you miss it, for one reason or another out of the infinite possibilities. We all fall short of our goals sometimes. Besides, 2 percent off on a $7,000 project is only $140. Even on a $70,000 project, 2 percent only equals $1,400. But on a $700,000 project - or $700,000 annual volume - that 2 percent turns into $14,000. And that's starting to hurt.

You know how I know this is common? Not just from conversations and reporting but from hard data collected from 225 of our readers. This month's cover story analyzes the answers we received on our annual business results study that benchmarks the industry. It shows that on average, less than two-thirds of remodeling projects close within 3 percent of gross profit target.

Truthfully, there are times when slippage is unavoidable. But more often than not, it's utterly predictable, and the result of poor planning, poor estimating and lack of communication.

The other "evil" evidenced both in this survey and in all design awards competitions, is low gross profit targets. Granted, for a company with low overhead and fast turnover, 27.7 percent gross profit may not be low.

For a firm with in-house carpenters and designers, however - one with a selections room and clients who need a lot of handholding - 27.7 percent margin will not cut it, let alone the lower numbers we sometimes see.

The problem here lies not in slippage but in pricing - in recognizing the value of one's own work and charging appropriately for it. When you're remodeling your own house, it might be OK to cover just the overhead and not worry too much about net - if the firm's an S-corporation, that's coming back to you anyway. And your family values you already. The rest of the world needs to learn to do so too.