Finding Hidden Profits: A Guide for Custom Builders, Remodelers, and Architects
156
Finding Hidden Profits: A Guide for Custom Builders, Remodelers, and Architects
156eBook
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Overview
Product Details
| ISBN-13: | 9780867187557 |
|---|---|
| Publisher: | National Association of Home Builders |
| Publication date: | 01/01/2017 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 156 |
| File size: | 7 MB |
About the Author
Read an Excerpt
CHAPTER 1
Find the Right Clients and the Right Projects
A business relationship with a client requires two things: customers need to be confident that working with you is the right choice and you need to think the same way about them. Building that confidence in potential clients requires providing them information about your business. My advice to you is to assemble a list of references for potential customers. Get permission from three past clients to furnish their names and contact information. Also provide the name of your bank, your primary lumberyard, corporate information, tax numbers, insurances, and work comp policy info. Show how professional you are right from the start.
Choosing the right projects is the flipside of the same coin. You can check their credit, but there are some intangibles that will inform your decision whether or not to work with any given customer. Here is a profile of my ideal client:
•Client has previous experience in having a home(s) built and/or remodeled.
•Client has a good idea of what they want and don't want!
•Client knows what kind of professional services they are seeking.
•Money is not the primary driving force. Quality and professionalism is.
•Client is willing to let us supervise and manage the project.
Evaluate (Interview) the Owner/Buyer/Potential Client
Interviewing the client is the first step. If these answers are positive, then I proceed cautiously.
•Is the budget realistic for the project, the location, and client expectations? Are the client's expectations reasonable? Are mine?
•Are plans and specifications of good quality? How can we correct them?
•Is the timetable realistic?
•Can I prepare a cost estimate, bid, and contract price in a timely manner?
•Does my company have the skills, expertise, and experience for this project? How would this project affect our current workload?
Be realistic and honest. Do you jump at a project that is way over your experience but promises a huge profit? If you get a bad feeling from something or someone on the project, do you back away in a business-like manner? Working on a bad job prevents you from taking on a good one. Bad jobs take more effort and patience, and always have low profit centers. Being selective about projects, clients, and locations will evolve into profitable endeavors.
You can spend a lot of time seeking, estimating, and selling projects that your company might not be suited to do. Compile a project priority sheet from projects your company profited from and that you enjoyed (fig. 1.1). When you are invited to bid, make sure your goals, objectives, and priorities don't get lost in the shuffle. You need a set of guidelines to define what you do, your service or work, and your limitations. We restricted our projects. We had no desire to engage in adobe, rammed earth, straw-bale, or 100,000 sq. ft. commercial projects. High quality residential, single family, new construction, and remodeling were our specialties.
No one really understands the difficulties of estimating until they do it themselves. Your knowledge must extend to all the assemblies in the project, weather conditions, details that will be complicated to execute, and the accuracy of your subcontractors' and suppliers' quotes. It's a big job, but nothing you do is more important to your success in this business.
What is your policy on blueprints that are full of mistakes? If we found five major mistakes, work stopped until the plans were corrected by the architect, owner, or us. If you're going to do it, you should be paid for your time and effort. Be careful not to shift responsibility for the design to yourself from the originator.
Taming The Bid Beast
These are the most important things that I have learned about bidding on a project.
• Never bid a project that you don't want, are unqualified to bid and build, or that you cannot commit 100% of your resources to completing.
• Don't let anyone intimidate you into pricing a project with incomplete or mediocre plans. Ballpark prices often turn into contract prices.
• Ask for a retainer for developing an accurate estimate. Apply it to the contract should it be awarded to you. A Professional Services Agreement (PSA) can also ensure that you are paid for working with owners and architect to develop and complete plans.
• Seek projects you can handle. Growth is good, but a kitchen remodeler jumping into estimating and building a $2.2 M custom home is beyond a leap of faith.
• Make sure to insert the copyright symbol (&0169;) on your bid paperwork and on any and all documentation concerning the contract.
My Biggest Mistakes!
Here it is — my hard-earned wisdom.
• Listening, but not really hearing. My mind was made up before the discussion began.
• Getting too involved in minutia and spending 35 hours a week in the field directing construction instead of managing project budgets, line item by line item.
• Thinking that as experienced professionals we know best. We don't need any help or suggestions. Help, suggestions, and new ideas should always be welcome.
• Being stubborn. No flexibility. No adjustments to my policies, procedures, methods. My advice: Lighten up and add a little Gumby flexibility to your attitude.
• Trying to save money by eliminating an experienced subcontractor or tradesman and doing the work with company employees. Silly. Ineffective. Inefficient.
• Making assumptions about clients, projects, and circumstances before all the facts are in. Always be objective and the bigger person. Don't let gossip or criticism get in your way.
• Not adhering to "three strikes and you're out" with regard to employees, subs, and suppliers. Being lenient came back to haunt me many times.
• Not planning into the future. I never thought first-time customers would become repeat customers, but they trusted us and came back for maintenance, new projects, remodels, repairs. Maintaining your customer base is easy when the customers are happy!
Saving Money with No Red Tape
Every custom homebuilder has rules to follow, and there are very good reasons to do so. Here's why. A couple purchased a lot in a subdivision but had not built before. Next door was a project under construction, so they met the contractor but couldn't agree on price. They also befriended the lead carpenter, Jim Dandy, with years of experience. He wanted to go out on his own and offered to build their house on a cost plus basis for cash and save them money. The clients were overjoyed. They bought a canned house plan to save more dollars. All went well until Jim, working alone, fell off the roof 35 feet to the ground and was knocked out. A security guard for the community saw his truck and discovered Jim, who was taken by ambulance to the hospital with head, back, and neck injuries. Jim recovered 90% of his health, but only after 16 months of intense recovery efforts.
Jim was not licensed by the state and had no insurance or worker's comp. In Arizona, the property owner is liable for all injuries, medical costs, lost wages, and permanent disability expenses for an unlicensed worker. This amounted to $350,000, at last count. The accident led to lawsuits between the owners and their insurance company, subcontractors, suppliers, the IRS, the state tax agency, unemployment, workman's comp, Jim Dandy, the numerous entities that rendered services for his injuries and rehabilitation, and the subdivision homeowner's association. There are no shortcuts to quality work.
Reprinted with permission from "Buyer Beware: Hiring a low-ball builder can be a costly mistake." Custom Home, Hanley Wood Publishing. July 31, 2006.
CHAPTER 2Know Your Numbers: Overhead, Salary, Profits
Profit is the amount of money remaining after all overhead expenses such as salaries, rent, employee benefits, management fees, and sales taxes are paid. This is why it is so important to have accurate numbers for overhead costs and job costs — if you bid too low based on a sloppy estimate, there won't be any profit. You should be able to pay the project costs and a proportion of your overhead and your salary and still have money left over. That's the profit!
Many builders, contractors, remodelers, and subcontractors do not start their businesses to become managers. They have a marketable skill, trade, or expertise and figure they will learn the rest along the way. This is a formula for failure. The management of your business and keeping detailed paperwork is just as, if not more important than, the fieldwork.
So, right from the start, be a professional. Pay yourself a salary. Pay any family members working in the business. The amount of pay does not have to be market value, but you need to pay everyone something. Paying yourself a salary forces you to become market savvy.
Save for your retirement. Years ago I met a recently retired contractor. He asked my age (33) and told me to start planning for retirement. For every job, include a line item for contractor's retirement. He said initially the amount doesn't matter; it is the principle. I started including $100 in each bid for the retirement fund. Later, on larger projects, I bid $500 or $1,000. The amount of money in that account now is staggering. Do the same courtesy for yourself, your family, and your employees.
Overhead Costs
When businesses don't make a profit, it is because the owner does not know how much it costs to operate and sustain the business. A construction business must be based on facts: actual expenses, actual invoices. The old builders' tale that contracting overhead is 10% of the project is as old as the hills and twice as dusty. It means nothing! The real formula for calculating overhead uses the information listed below. Break it down in parts. Then add up the parts to know what it costs to run your business.
1. Determine the annual cost to run your office by summarizing these expenses: rent, insurances (all), vehicle expense, office equipment, utilities, janitorial, telephone, internet, website, and advertising.
2. Summarize the annual costs for office labor: salaries, 941 withholdings, Medicare, FICA, unemployment, benefits, perks, and vacations.
3. Determine the annual costs for supervisory field employees including salary, labor overhead (taxes and insurance), field equipment, computers, cell expenses, vehicle expense, benefits, perks, and vacation.
4. Determine the annual salary for you. Plug in $5,000 to $20,000 per month. This is in line with the compensation of other professionals running a business grossing $1M or more per year. Include an amount from each project to be placed in a retirement fund.
5. Add up the cash costs for items 1 through 4. Divide that number by the number of weeks per year (52) to determine your out-of-pocket cash costs per week. That is the amount you need each week just to keep the lights on and your doors open. And, you haven't built anything yet.
You can convert overhead expenses (OVH) to daily costs by dividing the weekly cost by five days or divide by 40 working hours per week to determine your OVH per hour. Knowing your hourly, daily, weekly, and monthly expenses is crucial in making strong bids. It is a measure of how well you manage your company. Time really is money!
Consider this example of annual overhead expenses:
Accountant $3,500 Advertising $5,000 Legal (misc) $3,000 Liability insurance $12,500 Project fire insurance Project Expense Office equipment $500 Office furniture $1,500 Office insurances $2,850 Office labor $67,887 Office miscellaneous $2,500 Office rent $18,225 Office supplies $3,600 Office telephones/Internet $6,000 Office utilities $2,465 Office vehicles $2,465 Office vehicles $18,785 Tool Expense/Maint $1,145 ________
Annual OVH Costs: $149,957 Round this up to $150,000/year
Annual OVH $150,000/year Owner Salary $144,000/($12,000/month) Payroll Expense $17,280(941, FICA, Medicare, Unemployment, etc.) Retirement Fund $12,000 ________
Smith Builders Annual Expenses $323,280year
Subtract 104 weekend days and 5 federal holidays from 365 days in a year to get 256 working days per year. The numbers you need to know to make accurate bids are:
$323,280 annual expenses ÷ 256 working days/year = $1,263/day
$1,263 per day ÷ 8 working hours/day = $158/hour
Quick Managerial Use
If Smith Builders is anticipating 5 projects per year, the annual expense will be an average of $64,656 per project ($323,280 ÷ 5 = $64,656), $253/day, and $32/hour.
When any sort of delay (weather, a change order) occurs, you can calculate the cost of the delay (COD): 2 days added to Dixon Project × $253/day = $506. There will always be weather, mistakes, and factors beyond your control. Review your past history of delays and their causes so you can make common sense projections for delays in upcoming project estimates.
Producing 10 projects this year would lower the annual expenses per project to $31,128 per project. If your company can handle that many projects, there are opportunities for profit here. Each contracting company has a comfort zone for the amount of work that can be produced in a 12-month period. Striving to lower your overhead costs per project by taking on additional work could be a mistake because of the time required to manage the additional jobs. Chances are you can make more money with providing more personal attention to fewer clients and projects, because the client misunderstandings, mistakes, errors, and oversights are minimized.
Profit and Your Overhead Costs
Knowledge is power. Facts and figures allow you to estimate, bid, and budget accurately. You must know what it costs you to operate the company and to perform each professional service. Those numbers provide support for the percentage of profit you want to make this year. Profit projections should also be part of your OVH (fig. 2.1).
I strongly recommend an annual checkup with your accountant to review how you assemble, track, and calculate your OVH costs in case there is a better way for you to do it. Take a look at the following questions and decide which work best for you:
•Should I assign each project an OVH amount?
•Should OVH be divided equally among projects?
•Can I use a flat percentage for my OVH amount?
•How can I adjust job costing and profit projections when office OVH costs vary?
•Is there an accounting method I could use to gauge a general OVH percentage per dollar volume? That would account for dollar variations in large vs. small projects.
To answer that last question, we will use the numbers in the earlier example and add a projected 10% profit.
Annual OVH Costs $150,000 Annual Owner Salary $144,000($12,000/month) Annual owner Payroll Expense $17,280 Annual Anticipated Company Profit (10%) $120,000 ($10,000/month average) ________
Total Annual Expenses $431,280
Smith Builders needs to generate $431,280 for annual expenses from the four projects they plan to complete this fiscal year. It can assign its annual expenses in two ways, in an equal amount for each project or as a proportion of the total cost of the project. Which method would you use?
A. An equal amount can be assigned to each job. Divide total annual expenses of $431,280 by 4, and the allocation amount is $107,820 per project. This method is fine as long as the jobs are similar in scope, work, effort, time to complete, and gross dollar amounts.
B. A proportion of gross project amount may be more accurate for most builders and remodelers. To find the proportion, divide the annual expenses by the total contract amount. (431,280/1,725,120 = 25%.) Multiply each contract amount by 25% (.25) to find the annual expenses paid by each. The amount varies from project to project.
Project 1 Contract Amount $480,000 x 25% = $120,000
Project 1 Contract Amount $530,000 x 25% = $132,500
Project 1 Contract Amount $463,520 x 25% = $115,880
Project 1 Contract Amount $251,600 x 25% = $62,900 _________________________
Total $1,775,120 x 25% = $431,280
Now let's look at a project contracted for $420,000 with Smith Builders, whose annual expenses are $120,000.
$420,000 – $120,000 = $300,000
Smith Builders total cash outlay for subcontractors, suppliers, materials, freight, cleanup, errors, permits, sales taxes, etc., must not exceed $300,000. Every dollar spent over $300,000 comes out of the projected profit or the contractor's pocket.
The cost category and line-by-line cost estimate for this project has to be accurate. How many cost categories are usually necessary to get an accurate estimate? Experience has taught me that I need 90–100 cost categories, each supported by 1–10 line-item footnotes and calculations. If you want profits, you must pay attention to the details.
An Estimating Protocol
Somewhere, someone started a rumor that contracting estimates include 10% profit and 10% OVH. If corporations operated like this, there wouldn't be any corporations. We produce one project at a time, so OVH plus profit has to be figured on actual costs. The key to protecting your profits is to assign every possible expense and allocation as a job cost, including administrative expenses. Do not give away your managerial and supervision services. The nine components of an estimating protocol are:
1. Compute management OVH costs to estimate and sign-up the project.
2. Detail production costs (70–120 cost category line items).
3. Compute OVH costs before, during, and after construction.
4. Include equipment and tool costs.
5. Factor in supervision and management costs.
6. Using historical insight, compute the possible costs of errors and omissions (1–11%).
7. Determine your profit as a percentage of the project cost, time duration, risk, etc.
8. Double-check and review the completed estimate.
9. Always use the same personnel, methods, and techniques to estimate.
Preparing an accurate cost estimate is part of being a professional. Using square footage or ball parking to estimate costs is poor management. A good estimate requires a minimum of 100 cost-category line items or more. The more detail, the more accurate your estimate will be. If you cannot do a proper estimate due to time constraints, poor plan quality, too many open-ended issues, or whatever, then pass on the job. There is a profitable difference between guessing and estimating.
If your company does both remodeling and new construction, adjust the OVH allocation per project considering the administration work for each. Most remodeling work will require more office time and onsite supervision than homebuilding does. Adjust your overhead assignment costs accordingly.
(Continues…)
Excerpted from "Finding Hidden Profits"
by .
Copyright © 2019 Dennis A. Dixon.
Excerpted by permission of National Association of Home Builders.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
List of Figures,
About the Author,
Acknowledgments,
Introduction,
1 Find the Right Clients and the Right Projects,
2 Know Your Numbers: Overhead, Salary, Profits,
3 Playing with Profits,
4 Professional Estimates,
5 Selling Skills and Negotiations,
6 Managing the Project: Authority and Responsibility,
7 Manage Your Allowances as a Profit Center,
8 Change Orders,
9 Specifications Make or Break the Project,
10 Communications,
11 The Myth, Math, and Use of Cost per Square Foot,
12 Develop Your Own Contract,
Appendixes,
A Professional Services Agreement,
B Draw Schedule,