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Getting Your Remodeling Business Ready to Produce More Work

Posted by Shawn McCadden on Sun, Apr 01,2018 @ 05:15 AM

Getting Your Remodeling Business Ready to Produce More Work

Remodeler estimating systemGrowth in consumer spending on remodeling during 2018, and beyond, is expected to skyrocket.  This means that remodelers will have the opportunity to grow their businesses, and if done well; will make a lot of money.   But is your business ready for the work?  If you are already working too hard for too many hours will increasing volume just end up with you in divorce court and or on blood pressure medicine?   Below I offer a vision, and some suggestions, for what you can do to be ready.  If you already allowed yourself to get in too deep, then perhaps my suggestions can help you create a plan to get things running better than you had ever imagined.

It all starts with estimating.

Estimating might as well be the center of the universe for remodeling contractors.  Using a defined process and key information, your production team can conquer that universe.  If you grow your business without an advanced estimating system you risk dropping into a financial black hole. Your estimating should not only help provide a profitable selling price, it should also create, document, and organize the information your production team needs to build independently, without constantly bothering you or your salespeople.  Done well, it should also help you predict your cash flow needs, and therefore your payment schedules. This way every job finances itself using your clients' money to pay bills on time, not yours.  Successful estimating will also help your production team identify and schedule all the resources needed to complete the project weeks, or even months, before they are actually needed at the job site.

A real estimating system includes job costing.

First, an estimate is not Remodler job costingwhat you give to a prospective client. That is called a price.  The estimate is really the contractor's best guess on what the project will cost their business to complete before overhead and profit are added.   That's right, it’s just a guess.  To continuously improve the accuracy of that guess, particularly as your business is exposed to new products and construction methods, or brings on new untested employees, job costing will be the only way to reduce the risks of estimating.  Imagine going six months or a whole year before realizing you were using inaccurate information.  Imagine the benefits of offering profit sharing if your team brings jobs in on budget.  But, what if your budgets are never adequate and there are no profits to share, and when your employees ask why you can't tell them?

This all requires a well set up financial system.

Remodeler financial systemEven if you are a good estimator and you never miss any of the sticks and bricks, if you do not know which labor rate and markup to use you may be buying jobs instead of selling them. Without a well thought out list of estimating and matching time card work categories (sometimes referred to as phases), you will never know how well your team did compared to your estimated labor assumptions in specific areas.  Also, without the right time card categories, how will you know and or confirm how many non-billable hours of pay you will need to add to, and cover, inside the burden labor rate you assume and charge for their billable hours?  

There are plenty of things to work on as you grow a remodeling business.  However, if you don't get the estimating of your jobs right growing your business will just help you lose money faster.

 

Don't Underestimate Your Estimating System Workshop LEARN MORE

If you would like to learn more about improving estimating at your remodeling business consider attending one of our estimating workshops typically offered in Massachusetts.   You can even get MA CSL Credits by attending.  Shawn McCadden can also come to your group, company, remodeler education conference, or remodeler trade association to conduct the workshop.  For more information contact Shawn today.   

 

 

 

Topics: Business Financials, Job Costing Considerations, Profit Sharing, Estimating, Business Growth, Financial Related Topics, Estimating Considerations, Breaking $1Million

Why Building a Backlog of Work Could Cost Some Contractors a Lot of Money

Posted by Shawn McCadden on Tue, Feb 10,2015 @ 08:44 AM

Why Building a Backlog of Work Could Cost Some Contractors a Lot of Money

Why contractors lose moneyBuilders, remodelers and lumber dealers often get in trouble with lumber framing packages by overlooking the obvious…the volatile lumber market. Most contractors and lumber dealers do not have the luxury of pricing a job today, signing it tomorrow and buying the required materials the next day. By the time a job is priced, signed and the lumber gets delivered to the jobsite 30, 60 or even 90 or more days may have passed and lumber prices may have changed as much as 20%. At the Estimating Workshops I offer this concern comes up quite often and attendees often share how their profits are affected as a result.

 

An educated guess is much better than a Wild Ass Guess!

Matt Layman is the publisher of The Layman’s Lumber Guide. I met Matt through LinkedIn. His expertise is forecasting “when” lumber market pricing will change. Having and using the information he assembles through his research can help contractors and lumber dealers price future jobs involving framing materials with precision.

 

According to Matt lumber prices are reported twice weekly.

Framing_lumber-wrHe says some weeks do not change at all. However he also points out that 70% of the time they do change by an average 2.5% each week or 10% per month.   Based on those realities a contractor who estimates a framing package using today’s lumber costs at $10,000 may end actually paying over $13,000 for that same package 90 days later. For those of you who understand how margins and markups work, not only will the contractor have lost the $3300 due to price increases, but also the gross profit margin on that difference. At a 50% markup that’s another $1650 of gross profit that could have been included in the sell price to help cover overhead and profit.

If as a contractor you buy a lot of framing materials you may want to consider subscribing to Matt’s monthly publication called the Lumber Market Blueprint. I also think lumber dealers serving contractors could share this information with their customers on a regular basis. Doing so would be a great service that could help differentiate them in the marketplace.

 

Lumber Market Blueprint

The image above is an excerpt from the February issue of Matt’s Lumber Market Blueprint. Notice that the information not only includes his predictions for the next 30, 60 and 90 days, he also offers some insight as to why he makes his predictions. I suggest by knowing the why’s behind his predictions you can consider your own pricing adjustments if for any reason conditions change dramatically during the month.

 

I appreciate Matt allowing me to share this information with you.

If you are a contractor do any of your lumber dealers share this kind of info with you?   If so, it would be great if you shared the name of the dealer with us as well as an example about how the information has helped you.

 

Topics: Job Costing Considerations, LBM Related Topics, LBM Dealer Topics, Estimating, Cash Flow, Production Considerations, Estimating Considerations, Keeping More Money, Business Planning, Plans and Specifications

Two Ways Remodelers Can Predict and Measure Good Cash Flow

Posted by Shawn McCadden on Fri, Sep 14,2012 @ 06:00 AM

 

Judith Miller

 

 

 

Guest Blogger: Judith Miller has worked with remodelers nearly 30 years; she writes for Remodeling Magazine, facilitates for Remodelers Advantage and consults with remodelers around the country with particular focus on the importance of good financials!  Visit her website at www.remodelservices.com

 

Two Ways To Predict and Measure Good Cash Flow

In his excellent blog post on cash flow, Shawn mentioned direct costs, overhead and net profit as all potentially contributing to good cash flow.  And, as he so rightly pointed out, the potential for good cash flow begins with accurate pricing for the job.  Shawn also mentioned the importance of working on ‘accrual’ accounting rather than cash.  When you’ve got these important elements of good construction accounting in place, you can lay out a couple metrics which will be useful in understanding cash flow.

First, get all your costs in the right place on the Profit/Loss:

Income = revenue from construction projects

Direct Costs = expenses, including ALL labor (even that production manager who doesn’t keep a time card) AND associated labor burden, related to jobs for which you receive the income.  Don’t include work on your own house or you Mom’s in this category because you’ll skew (and screw) the numbers.

Overhead = all costs it takes to run an office, including a construction office, but not related to jobs – those costs go into Direct.  This includes marketing expenses, rent, office supplies, professional fees, owner and admin salaries and related burden, general insurance – not liability or workers comp which go into Direct.

(List of Typical Accounting Terms and Definitions)

 

Second, establish a good system for job cost analysis

 A good system for job cost analysis lays out the true estimated cost of the job – no SWAGs or ‘guesstimates’ – and allows you to post costs against the estimate as they are incurred.  Remember that a cost is incurred WHEN THE WORK IS DONE not when the bill is received.

 

Third, reliable reports are accurate, complete and timely

Prior to calculating these metrics, be sure to review all reports for reliability. 

 

Now you’re ready to develop these two useful metrics:

slippage1: Slippage/Grippage:  this metric calculates the difference between your estimated gross profit and the produced gross profit.  Slippage is negative, grippage is positive.    This is of critical importance because if you’ve got slippage either your estimating is wrong or your production is not working up to expected efficiency.  And if you’ve got grippage, you might be leaving money on the table from estimating too high.  Control of production allows for profits which can then be managed to ensure good cash flow.
    • The calculation is: Estimated gross profit margin MINUS Produced gross profit margin
    • The goal should be no more than 2 percentage points slippage – or grippage.

slippage vs grippage

AR Turnover2: AR/AP Turnover Net: this metric calculates the difference between the number of days it takes to RECEIVE your cash from customer’s invoices (AR Turnover) and to PAY your customer’s expenses (AP Turnover).  If you receive money from your customers in 10 days and pay your expenses in 15, you’d have 5 days “float” – a good thing!  However, if the reverse is true, you might have to borrow to pay the bills.

The calculation is three part:

 AP/AR Turnover calculation

Once your accounting system is set up correctly, information is entered accurately, timely and consistently, you’ll be able to see where the money comes from, where it goes and how to control the all important cash flow!  This is a set of gears which all work together to produce profits and protects cash!

 

Topics: Business Financials, Job Costing Considerations, Financial Related Topics, Earning More Money, Cash Flow, Guest Blogs, Estimating Considerations, Business Planning, Definitions

Benefits of Rethinking Your Estimating and Job Costing Approach

Posted by Shawn McCadden on Tue, Jun 19,2012 @ 05:00 AM

Melanie Hodgdon, Business Systems Management

 

 

Guest Blogger: Melanie Hodgdon is a Certified QuickBooks ProAdvisor who has been providing financial analysis and QuickBooks training for contractors since 1994. She’s the author of A Simple Guide to Turning a Profit as a Contractor.  Melanie and Shawn often coordinate their efforts when helping remodelers develop financial systems for their businesses so they serve the contractor, not just their accountant.


Benefits of Rethinking Your Estimating and Job Costing Approach 

What functions should an estimate serve on a fixed/contract price job?

Estimating for remodelers

 

Pricing
The cost of the job determines the price of the job, so knowing the costs allows you to generate a sale price.

Job Costing
The estimate can function like a budget for both time and costs.


In order to price and job cost accurately, the estimate needs a lot of detail. If you (oops!) forget to include windows or a toilet, your only choices are (a) go back to the customer, admit your mistake, and hope he accepts the revised price or (b) eat the cost.

Also, sharing a highly detailed estimate with the project’s lead carpenter can help limit questions from the field back to the office.

But the same high level of detail that can save you when pricing and producing the job can get in your way if you attempt to job cost at that same level of detail. As a QuickBooks ProAdvisor working with literally hundreds of contractors, I have seen two common categories of errors:

 

Job costing at too high a level of detail can be a problem

Job costing methodsContractors who try to job cost inside QuickBooks at the level of 2x6’s and specific products (Kohler faucet K-13490-CP) produce three problems:

  1. Your project manager and bookkeeper will waste time coding out every little line item on a vendor’s bill.
  2. The more opportunity for choice, the more likelihood of misclassifying things. Highly detailed job cost reports actually have a greater chance of being inaccurate on a category-by-category basis.
  3. Your job cost reports will be so lengthy and complex that you’ll lose the forest for the trees.

 

Job costing using apples and oranges?

Accurate job costingContractors who continually add job-specific line items in QuickBooks invoices (ex: “repair Jones front porch step”, “Replace damaged shower tile”, “Add backsplash”) produce these two problems:

  1. They create a disconnect between the categories used for estimating (apples) and those use for job costing (oranges), making it virtually impossible to compare common estimated and actual categories
  2. They create an ever-increasing list of job-specific categories inside QuickBooks with single-use history   

 

How to do it right

Instead, estimate at a high level of detail but create a way to subtotal these into categories that you use consistently, will be relatively simple to code, and will produce reports that allow you to perform a side-by-side comparison of estimated and actual costs.

For those using a customized spreadsheet for estimating, the process might look like this:

Estimating categories for job costing

The summarized categories with costs can then be entered in your accounting software and job costed using the same categories. Doing this will keep your cost categories consistent and provide apples to apples comparison.

 

Topics: Business Financials, Job Costing Considerations, Success Strategies, Financial Related Topics, Production Considerations, Guest Blogs, Estimating Considerations