Plan Well A remodeling business incurs other “hidden” costs annually. Newcomers will be able to include them in their budget with relative accuracy once they get a few years under their belt (or if they talk with enough veteran remodelers when they first start out). Criner knows from experience, for example, that call-back work averages one-quarter of 1% of his annual volume, so he incorporates that — and similar expenses that are consistent from year-to-year — into his markup. A younger company might not have an exact number, but it’s important to “put something in, because a lot of things can go wrong,” Criner says.
On the other hand, a remodeling business may not encounter some costs for many years. Criner, for example, had a new hire take advantage of a company charge card. It’s impractical to include a line item in your yearly budget that specifically covers employees stealing from you (something that may only occur once or twice, if ever, during your career), but it is possible to bump up your markup to accumulate a cushion of capital in case it ever does happen. In fact, a cash reserve can come in handy for a variety of unforeseen circumstances, including insurance claim deductibles and even economic downturns.
Paul Winans, of Winans Construction in Oakland, Calif., says that although he’s “desperately looking for perfection, there’s no way to get it perfect. If you [budget] from the point of view that it is, you’ll have hidden costs that will bite you in the butt.”
This underscores the importance of thorough job costing. Every expense incurred on a job must be accounted for. Estimating at Winans Construction is done on a spreadsheet that fills more than 3,000 rows, including instructions. It wasn’t always that lengthy; it’s a fluid document, Winans says, with additions made based on meticulous job costing that tracks time down to half-hour increments and includes line items for things such as time spent placing orders.
To make such a detailed job costing system work, however, you need to impress upon your employees the importance of carefully tracking their time. It will probably seem odd to a lead carpenter when you ask him to track his time like a lawyer would, but it’s vital to effective job costing.
Eldrenkamp says that in his case, as in many others, it took some time for his estimating to catch up with his slippage. At Byggmeister, Eldrenkamp insists on continuing job costing throughout the full course of a project, no matter what. “There are people who will do job costing until the job really starts tanking, then stop doing it,” he says. One key was bringing in his lead carpenters to assist.
“It’s valuable to get their feedback on the actual estimate as the job is in production,” he says, “so we can talk about what led to overruns and take advantage of that information for the next estimate.” This process has led to revelations that have in turn spurred adjustments in estimating, such as including more management time for a bathroom that has no staging area.
Look Within Along those same lines, you, as company owner, need to be honest with yourself about your role. It’s tempting for a company owner to simply “take what’s left over” at the end of the year as pay. But doing this has consequences beyond your personal financial risk. “If you don’t pay yourself, you have an invalid picture of the health of your business,” says Clai Porter, president of NCP Design/ Build, in Anchorage, Alaska. That includes paying yourself for — and charging clients for — your time. It’s a good idea to bill as much of that time as you can as direct costs, but some of it inevitably will fall under overhead.
In fact, time you spend that would fall under indirect costs is another “hidden” profit leak. Porter says it takes him six months to a year to get a new lead carpenter up to speed with the company’s systems and processes. It’s obvious that the lead won’t produce at full capacity during that time, but many owners forget to budget for the hours they spend doing that training.
Even more conspicuous is the time spent on implementing new initiatives. “Getting an idea out of someone’s head and onto a form that someone else can be trained to use is very valuable to the company,” Winans says. But it takes time, is inconvenient, and, Winans adds, “the people who know the most are the least likely to have the time to stop and write it down.” So you need to budget for it, even if that means putting it off for a little while. Criner, after nearly 30 years in business, is still budgeting time this year to work on putting into writing the company’s best practices and procedures. “It’s not so much the time it takes somebody to write it,” he says, “but the time it takes to have the whole company meet [regularly] to go over it.”