The Design Builder's Blog

Typical Accounting Terms and Definitions for Design/Builders and Remodelers

 Early in my career as a remodeling business owner I struggled to learn about accounting and understand accounting principles.  One big obstacle getting in the way for me was understanding the language of accounting.  All too often I didn’t know the definition of terms seminar speakers and my accountant used when explaining things to me.  Worse, sometimes I was assuming the wrong definition.  What I came to realize was that I needed to learn the terms and the definitions if I really wanted to wrap my head around small business finances.

That learning experience and the difference it made for me sticks with me even today.   For example, every time I start working with a new remodeler or design/builder as their business consultant or coach I make it a first priority to be sure my client knows the difference between margin and markup.  Many a remodeler has made the mistake of figuring out the margin they need to cover overhead and profit only to assume they can then use that same number as the markup for establishing their project selling prices.  When I explain the difference the light bulb goes off; shedding light as to why they are not achieving their required gross profit margin and therefore have no or even negative net profit.

KEY BUSINESS CONCEPTS TO LEARN AND UNDERSTAND

1. The total amount of money that can be collected during one business year for work completed by the company should be determined based on past experience and/or the capabilities of the company. (Volume)
2. Gathering known business operation expense figures for the anticipated volume of installed sales, you can create an estimate for what it will actually cost you just to be in business even if you don’t produce any work.   These are expenses that cannot be assigned to a particular project.  (Overhead)
3. By being honest with yourself, rewarding yourself for the risk of being in business, and by planning for the future growth of your business, your business can plan for financial compensation.  (Profit)
4. Overhead and Profit added together make up the total Indirect Costs of the business.
5. By knowing your overhead and what you want for planned profit, you can determine how much you need to charge over and above the estimated project cost to be successful.  (Mark-up)  Markup is determined by dividing the total Indirect Costs by the total Direct Costs.
6. Predicting the cost of labor, cost of project related equipment, as well as material and subcontractor costs, you can determine what the production related cost should be to complete the project. (Estimate)
7. By increasing the estimated cost with a predetermined mark-up amount you can establish the price your company must charge to successfully complete a project.  (Sell Price)
8. By keeping track of actual production related expenses (Direct Job Costs), and comparing the expenses against the estimated project cost you can measure the success of your production performance as well as the accuracy of the estimate that was created. (Job Costing)
9. Through the use of job costing you will know how much money is left from the sell price after paying all production related expenses.  (Gross Profit)   This is expressed as the Gross Profit Margin. (GPM)    To calculate the Gross Profit Margin, divide the gross profit for a particular project (or time period) by the total sell price of that project (or time period).
10. After paying all overhead related expenses, from the gross profit, you can determine how much money is left to compensate the business. (Net Profit)
11. It is important to know how much business your company must complete in installed sales before it actually starts making a profit. (Break Even)    This is determined by dividing the known total overhead expense by the gross profit margin.

Suggestion

As a suggestion, post this list somewhere near your desk so it’s in view at all times.   Next time you’re reading a blog or magazine article that uses one or more of these terms you’ll be able to quickly find or verify their meaning.  You’ll be amazed how quickly you can commit this information to memory if you do so.  

Click here to download and print the list as a one page poster.

Do You Put Your Remodeling Business At Risk By Guessing At What Markup To Use?

Markup on anything you sell needs to be based on projected overhead costs and net profit requirements for producing a specified volume of work. Be careful using someone else's markup suggestions particularly if they have not done the math to figure it out.

Fact is about 9 out of 10 contractors eventually go out of business because they don’t know the true costs of doing business.  They are either guessing at what markup to use or guessing at which contractor’s markup they should copy.  If you’re going to risk copying the markup of another contractor, make sure you get your markup info from that 1 out of 10!

Think about it, it’s like asking how much money you need for gas to drive across county. Depends on where you start, cost of the gas, how fast you drive, how many miles/gallon, summer or winter, who’s driving...

Also, many magazine articles advise contractors to apply a “professional markup” to their bids. But what, exactly, is a professional markup? Does a 50% markup make you a professional, or should you apply 67% to qualify? The simple answer is, if you don’t know what markup your company needs to use, you’re not a professional, and therefore you’re not using a professional markup. But if you know the formulas for determining margin and markup, you have a working financial tool, rather than a magic number suggested by some remodeling guru or pulled out of a hat by another remodeler.

Different Markups, Same Price

To determine your company’s markup, divide your anticipated annual indirect costs (costs of overhead and profit) by your anticipated annual direct costs (costs to produce projects):

Therefore, if one company considered its field employees’ health insurance a direct cost, and another company defined it as an indirect cost, those two companies would apply different markups. In theory, if both companies had all of their other costs covered somewhere within their annual budget or estimate, they’d sell their projects at the same price, even though their markups differed.

Remember this the next time you’re impressed or puzzled by what your fellow contractors claim to be using as a markup. 

Financial success doesn't happen by accident.  Knowing your real costs can give you the confidence to estimate and sell at the right price. Contact Shawn today if you need help!

Design Options for Design/Builders: Partnering for Design

Design/Build has caused a major role reversal.  In most Design/Build situations, the contractor is now choosing the designer, after the project or design retainer has been sold!   Finding a design professional who will work in this new role can be a challenge, but if the relationship is built for mutual benefit, all parties win, including the homeowner.

Typically, the hardest part about subbing is finding a good sub worth partnering with. High quality standards being a given, a good sub also complements your team and meets all the legal and insurance coverage requirements. The same will be true if you subcontract the design work for Design/Build projects. There are plenty of design professionals out there, but how many are working as subs, better yet work as project partners with general contractors?  

Agree to Agree

If you truly want to partner with a design professional on a subcontracted basis, start with the guidelines of the relationship. Contractors and design professionals can both have strong personalities and have been observed on occasion to let ego compromise the project or relationship. Working out what each expects of the other and how the relationship will work before partnering on a project will help avoid some of the disappointments typical to a blind date.

Topics to consider might include the ability to design within a budget, incorporating construction methods already familiar to the contractor’s team, who will pay to fix the plans if mistakes are discovered, and who will cover the errors and omissions insurance coverage in case of design failure.

Take Time to Establish and Evolve Your Design/Build Partnership

Consider a lunch meeting together with your designer to discuss expectations and workout any kinks before meeting with any clients. Blind dates may be fine if you have no expectations for a long lasting relationship, but don’t lose a client by double dating with a stranger.

Fortunately, in a true Design/Build setting, the contractor and designer are together at every meeting with the client. This provides a great way for both to observe and monitor the dynamics of the meeting and the contractor/designer relationship. Be sure to include time (maybe another lunch meeting) for a debriefing discussion right after leaving the design meeting to work out any issues and or confirm what worked well.  Doing so can help both of you advance and improve your process and your working relationship.

Successful Design/Build doesn’t happen by accident!

Read this previous blog post about doing design in-house

Be sure your business is ready when the market improves!  If you are looking for better results from your Design/Build business contact Shawn today.  

Design Options for Design/Builders: In-House Design

Design/Build contractors have come to realize the need for and importance of design as it relates to getting and producing the construction of a project. Typically, there are two options for getting the design done; In-house or out-sourced.  This article will discuss in-house design.  In my next blog I will discuss partnering with others to get the design work done.

The Designer Must be Qualified To Do The Job

Not all contractors or homeowners have creative design skills, but most can tell a good design from a bad one.  A drive through your local area may provide a few good examples of projects where the contractor completed the design, but perhaps should have stuck just to the build part.  The project could have met the client’s needs for space or function, but the end result may have been a T-1-11 box added onto a Victorian gem.

The first consideration before offering in-house design services should be an assessment of the designer’s skills and qualifications.  Depending on the type of projects you do or the design expectations of your clients, do you have the experience and skills on staff to complete the required designs and drawings?  Also, consider the legal requirements for the design or designer in the market area you work to be sure your designer and or your business can even offer such services.

In-House Design Considerations

If you are currently doing your design work in-house, or plan to, consider the following before it’s too late:

• Do you have the time in your schedule to add or keep up with the demand for design, particularly if your business or volume grows?
• If you bring a designer on staff, will you have enough work to keep him/her busy and productive?  If not, what other skills do they have or what other skills does your business need that this person could bring with them?
• Are you limiting your client’s projects and design desires to your in-house capabilities and experience?  Will that be a problem?
• What will happen if you or your only designer is injured or otherwise unavailable to do the design work?
• If you do not have a professional designation, what will you do if your prospect or client wants the prestige of a professional architect, or the project requires structural engineering? 
• Even if you plan to do the design work in house, should you find an additional resource or two as back-up to get the design work you need done when you needed it?

If any of the above could affect you or your business in a negative way, partnering with others may be the answer.  Watch for my next blog for some insight on partnering with others to get the design done.

Workers Comp Rates Likely To Increase; Budget Now For The Increase

Workers compensation insurance rates have already increased in many states and are expected to increase soon in others.   Often, increased medical costs are cited as a main cause.  Be sure to understand how rate increases will affect your overhead costs and estimating assumptions for labor costs.

Rate increases may be out of your control; but you do have some options to control your total cost.

• Proactively control your claims history
• Provide safety raining relevant to the work your employees perform
• Maintain a safe working environment for employees and subs
• Make sure to report and handle claims in a timely manner
• Create return-to-work programs where practical.
• Make sure your subs have their own coverage

The following information was found in an e-newsletter from Tom Messier at Mason and Mason Insurance.  

Many expect Workers Compensation rates to increase significantly this year. The MA Workers Comp Rating and Inspection Bureau has recently applied for an average rate increase of 19.3%. According to the Insurance Journal, Commissioner Joseph Murphy will be holding a public meeting on March 30th on this request.

Whatever rate increase is approved by the insurance commissioner will be effective September 1st, with the negotiations for the final rates continuing through most of the summer. We believe the final rate increase this year will be in excess of 10%. The rate for residential carpentry is currently 8.68. If the commissioner approves the increase of 19.3% the new rate would be $10.30. This is significant. If you have a payroll of $100,000 this will increase your cost by more than $1,500.  

You might wonder, "Is it possible to avoid these rate increases?" The answer is "yes." There are some insurance programs that are available today that will guarantee your maximum rate for three years. This program is not available to all employers in MA. It is available to the best contractors that have had good experience. So long as your losses are under control and you have premium of over $5000, you may qualify. By making the switch today, you can avoid the increased rates, at least for the next few years. You do not need to wait until your policy comes up for renewal, you can start saving now. 

Remember, Workers Comp costs are controllable, and every dollar you save in Workers Comp premium goes straight to your bottom line as profit.

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The full article can be found here

Email Tom to see if he can help you control your Workers Compensation costs.

Read more about the proposed increase here

Need help understanding workers comp costs and how to budget for them?  Contact Shawn to discuss how he can help

I’m Afraid To Hire Production Employees For Fear I Would Run Out Of Work For Them

While at JLC LIVE last week in Providence RI Many remodelers shared with me that they were seeing positive signs like increased leads and project budgets, and are now booking more work recently than they have experienced in the last several years.   Having scaled back their staffing due to the recession they expressed concern about hiring production employees to meet the demand only to have to let them go if the demand softens.   They were looking for solutions for their businesses that help keep good employees working full time.  There are no guaranteed solutions.  However with some planning and committing to some changes about how you do business, you can make it happen.   Here is some of the advice I offered these attendees:

Such a problem to have!

It’s a good problem to have, provided you can find a solution.  Unfortunately there is not a single silver bullet solution. Success with this challenge requires the remodeler look at and adjust several areas of his/her business.

One thing I recommend is finding a real lead carpenter who can actually manage the job onsite with little interaction with the business owner after a proper hand-off of the project.   For this to be successful the remodeler must look at what information needs to be collected and prepared before the hand-off from sales to production, conduct a successful hand-off, and actually empower and allow the lead carpenter to be a lead carpenter. 

Unfortunately many remodelers are challenged by this because in the past the hand-off after the sale involved the owner handing off the project to himself; so the business never developed processes and project information packages adequate enough to successfully delegate to someone else.

Can you go it alone, or will you need help?

This change in business style is understandably difficult for someone who has in the past been in total control of everything in their business and has relied on micromanagement to get things done.  Making the change requires new business practices and the changes can be fast-tracked with some mentoring/coaching to help the remodeler get through the structural and emotional adjustments required.

The main reason I suggest adopting the lead carpenter system and hiring a lead carpenter as a major part of the solution to this challenge is because if successfully implemented, the system allows the business owner the time and ability to concentrate on doing more marketing and selling, thus making sure there is adequate work coming in to keep the new hire(s) productive and continually employed.   

If you are looking for help with this or similiar challenges contact Shawn about his Consulting, Coaching and Mentoring Services to discuss how he can help.

Don’t Confuse Bad Cash Flow With Under-Pricing

First, it’s important to define what cash flow is. 

Good cash flow is the ability to pay your bills on time because you have collected enough money from your customers in advance of having to pay those bills.    

It’s called cash flow because the money flows in to cover bills and only flows out if and when you can pay them.  Therefore, to have good cash flow, you need to know how much you need to collect and by when.

Bad cash flow or cash flow problems happen when the business fails to collect enough money at each progress payment and or doesn’t bill and or collect the money from customers ahead of when it is needed. The key here is that the money used to pay those bills comes from your customers, not from other sources.

Good cash flow for remodelers happens on purpose

If you don’t charge enough money for the jobs you sell you will experience what seems like cash flow problems.  The difference in this case is that you will never be able to pay your bills using just the money collected from customers because you have under priced your work and there will never be enough money coming in to cover what needs to go out. 

When this happens, it should not be referred to as bad cash flow.  The problem isn’t with flow.  It should be referred to as buying rather than selling jobs.

Paying the bills for yesterday’s project using the deposit money from a job you haven’t started yet may seem to solve the cash flow problem; however it only temporarily puts off the eventual reality that you are buying jobs instead of selling them.  Due to the recession many contractors discovered this reality when the new job deposits dried up and there was no money in the bank to pay the bills for work already completed.

To avoid under pricing what you sell you need to know what it costs your business to do business.   First, you must properly estimate what it costs to produce a project.  Second, you need to know what your business’ overhead and profit costs are (I assume profit as a cost of doing business) for a certain volume of sales so you can determine what markup to use on estimated costs so you can get to the right selling price.  Without knowing this information, when you quote a price to a prospect, you are probably using what is referred to as a WAG, a Wild Ass Guess! 

Bad cash flow is sure to follow. 

Remodeling Trends for 2012 For Design/Builders

One way Design/Builders separate themselves from their competition can be the design talents and knowledge they bring to the overall process.   Many remodeling customers are looking for help with taking advantage of new product offerings and trends in the marketplace.  The list below is a collection of links to articles and information regarding current remodeling trends for 2012.  Please suggest any additional links you feel I could add to this list.

8 Smart Budget Curb Appeal Makeovers

Remodeling Improvements That Entice Buyers

Garage Remodeling Ideas And Tips

9 Unconventional Ways to Improve Your Home

25 Manliest Homes in America

Next-gen universal design for bathrooms and kitchens

Interior paint trends for 2012

Top Trends in Home Renovations

When to Implement The Lead Carpenter System?

Many contractors have asked me what volume of sales they should achieve before they implement the Lead Carpenter System. Like many other business decisions, it depends upon the reason you want to do it, but it also depends upon the company and the current condition of that company’s business systems. Without that information, answering the question based on assumptions could lead to disaster. Unless you and your company are properly prepared, failure of the Lead Carpenter System might be blamed on the system itself, rather than the business systems that are required to support it.  The key is to adjust your business systems to support a true Lead Carpenter System, not adjust the lead Carpenter System to work within your existing business systems.

Best Time to Implement

Overall, my best answer is to implement when you start your company.  Initiating the company using the Lead Carpenter System allows the system to grow with the company, and when done well, the company grows because of the system.

Unfortunately, particularly for many of you who might be reading this article, this is not an option because you have already been in business for some time.  If this is the case, consider the following before you implement

Get Your Support Systems Ready

Some systems may not yet exist within the business and may become new requirements to successfully support implementing the system.  In reactive mode, it is difficult to find the time to create and implement the changes.

Think Profit Before Volume!

I suggest you implement the system to improve the efficiency and profitability at your current volume, regardless of what it is, before you plan to grow.

When Will It Pay Off In Personal And Financial Benefits?

Use of the “already tested” system at my company increased our 1996 sales volume of $980,000 with a total of 8 office and field employees to a 2000 sales volume of $1,700,000 with still only 8 employees. During this time net profit margins remained the same 10% plus each year.

Never Stop Implementing

Implementation of the system is an ongoing effort. Even if your system is the best you have observed in the industry, there is always room and the need for improvement.

For more information about implementing a Lead Carpenter System see:

When to Implement the Lead carpenter System (full article)

Checklist For Implementing The Lead Carpenter System

Checklist For Implementing The Lead Carpenter System

Many Design/Builders have found the Lead Carpenter System for production to be a very complimentary best practice when paired up with the Design/Build delivery system.  When I owned my business it certainly proved to be the way to go for me and my employees.  

Using Lead Carpenters a Design/Build firm can reap many cost saving and efficiency benefits over the typical production manager driven system of production.   For more on these two system options for production and some reasons why I think the Lead Carpenter System works best for most Design/Builders, check out this article I had written for Professional Deck Builder magazine titled “Managing Production”.

If you are considering a lead carpenter system for your business I also suggest you read my article titled “An Overview of the Lead Carpenter System”.  If after reading the article you want to implement the system at your business I offer the following as a checklist of suggestions and considerations for how to implement a Lead Carpenter System:

• Create a written plan for implementation, including a realistic timeline.
• Determine what the costs to implement will be and adjust your markup/margin accordingly.
• If just starting a business, begin now.
• If already in business, consider if you are ready to let go and delegate?
• Get your business systems ready to support Lead Carpenters and the Lead Carpenter System.
• Do not modify the system to reflect any limitations of your existing business.
• Train your employees and yourself on the system, including the benefits.
• If looking to hire a Lead Carpenter, use this job description for a lead carpenter to determine if the candidate really is a Lead Carpenter.
• Start implementing a piece at a time; assume it could take 1-2 years.
• Get feedback about the system from your employees and clients.
• Monitor the system’s performance right from the start.
• Achieve a volume and mark-up that profitably supports the full system.
• Constantly discover ways to improve the system.