RENO SUMMIT REPORT
What renovators By Kim Laudrum
learned at RenoSummit 2013
150 of you attended Canadian Contractor’s one day business seminars in Whitby, Toronto and London, ON. photos : larry arnal photography
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RENO SUMMIT REPORT
“You should have no more than 20 percent slippage. More than that and you’ll see the money dribble through your fingers.” – Victoria Downing
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ant to run a more profitable renovation business, have time to enjoy life and build equity in an enterprise you can sell? It can be done. But first you’ve got to understand why you’re really in business, says Victoria Downing, president of Maryland-based contractor training organization Remodelers Advantage. “Your business is a tool to help you get what you want out of life,” she said. Downing was the keynote speaker at Canadian Contractor’s RenoSummit 2013 business seminars held in Whitby, Toronto and London, Ont. in early November.
Now, your business is not going to give you a better life if you’re still marking up your materials and costs as little as 10 per cent, Downing told the attendee contractors. You need to aim for something closer to a 50 per cent mark-up or more on materials and labour, she advised. Yes, some renovators in the crowd bristled at that. “I’m competing with guys who are doing cash-only deals. They are just killing the market,” said Maurice VanEgmond of VanEgmond Carpentry in Brighton, Ont. A mark-up of 50 per cent on materials and direct job-cost labour “is going to price me out of the game,” he said.
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Maybe not, Downing replied. Maybe his competitor is pricing himself out of the game. Downing explained that, unless a renovator has a serious mark-up on costs, he isn’t even going to be able to cover all his overheads, including labour burden (all the deductions you have to pay beyond basic wages to your crew), insurance, vehicles, equipment, administrative and office expensives, and more. Net profit doesn’t even begin to show up until all those overheads have been paid for. Plus, you need think about putting something back into your business. “You need to make money to reinvest in your business, grow, get new software, build a six-month salary safety net for yourself, plus you need to do marketing and other things,” Downing said. Would keeping overheads low help improve profitability? Lorenzo Marchelletta of Super Seven Group in Toronto asked Downing. “Overhead is not necessarily a bad thing. Your overhead should help you to increase profit,” Downing replied. “If you hire some support, it can help take some of the pressure off and you can make more money.” “In my opinion, your budget is the absolute most critical tool to being successful,” she said.
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Gross margin “The big number for me is gross profit margin,” Downing said. That’s the revenue earned minus the cost of goods sold, divided by the revenue. In her example, the client paid $15,000 (a 50 per cent mark-up) for a job that cost the contractor $10,000, yielding a $5,000 gross profit. To find the gross profit margin (a percentage), divide the gross profit by the revenue. In this case that is $5,000 divided by $15,000 which equals 33 per cent. Yes, a 50 per cent markup gives you only a 33 per cent gross profit. Downing suggests renovation contractors should aim for a gross profit margin in a range between 33 to 40 per cent “to run a decent company.” To get to that 40 per cent margin you need an almost 70 per cent markup. “You can get a life but you can’t get a decent life if you can’t make enough to get the people you need to support what you need to do,” she said. “There is no one right gross profit margin for every company,” Downing said. “You can keep your gross profit margin low, but you might have to increase your volume.” Mike van den Bosch of Bosch Services Ltd. in Burlington shared that his company had tiny 10 per cent gross profit margins a little over a year ago. “This year, I haven’t priced any jobs lower than 35 per cent. And you know what?
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Profit Tips from Victoria Downing
My sales went up! We did more sales by focusing on the business. I’ve had to hire more help.” Downing commented: “I have seen this change so many people’s lives just by having the backbone to charge what you feel you’re worth.” And she has a no-nonsense term for what causes you to charge less than you’re worth: “Head trash.”
Head trash “The lesson that I learned is to not give in to the ‘head trash’ and reduce the price of the job,” offered Randy Burke from Evergreen Home and Cottage in Lindsay. And Len Williams of Rosemount Construction Inc., West Hill, ON (a member of Renovantage) shared another margin-raising success story. In less than one year, he went from looking at a $10,000 tax bill that he couldn’t pay, to looking at a $100,000 tax bill that he happily paid. Williams told us he used to work 80 hours plus a week, stressed over paying bills and missed seeing his family. Now he works fewer hours, has a decent living and says he has “a family life again.” The key takeaway? You are much better than you think and you deserve to be successful. Or, as Victoria Downing pointed out, “Profit is not a four-letter word.”
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ry to mark up the cost of materials and labour by 50 to 70 per cent. This will yield you a gross margin of 33 to 41 per cent. Include your labour burden in your estimate. In addition to the hourly wage, the labour burden includes taxes, vacation pay, employment insurances, pensions, and benefits, for example. You might be paying your workers $30 per hour, but what is the real cost per labourer to you? It might be as much as 50 per cent more. Look at your profit/loss statement once a month and compare it to your budget. Are you hitting your target? Identify where you are making money and where you are losing it. Todd Juhnke of Sage, a contracting software company (and RenoSummit 2013 sponsor), says many renovators don’t even look at their financials until tax time. “It’s a missed opportunity,” he said. The business owner’s salary should be about 10 per cent of revenue. And this should be paid on a fixed basis, just like any other salary. Work with OPM (Other People’s Money). Always make sure that the client is up to date on payments so you aren’t using credit or your own money to pay for materials and labour. Aim for a reasonable rate of business growth: in the 10 to 15 per cent range. At 5 per cent, you are just keeping up.
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Building trust with your crews Renovators who want to build their business with the intention of selling it in the future will need to trust others to be successful, said Tim Faller, a business coach for Remodelers Advantage who spoke at RenoSummit 2013. “Every business has goals and the more you can involve your employees in your goals - and theirs - the more successful you’ll be,” Faller said. Trust is an essential part of team building, Faller said, and one of the best ways you can get crews’ trust is to show them they are appreciated, according to studies on motivation. The second best way to motivate employees is to give them the feeling that they are in on things, Faller said. “Many business owners feel the employees have nothing to do with the money. Wrong. They have everything to do with the money,” he said. Faller offered the following tips for ensuring success: 1. Get the sale. 2. Get the sale at the right profit margin. 3. Have a hand-off meeting between the salesperson and the production staff. Get all the details down on paper from the salesperson’s head.
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4. Create information that works for the production team so that they can meet their target dates and the business can realize a profit. 5. Pre-plan all the details and hand-off to the production team at least two weeks before the start date. 6. Have the production manager take a critical look at the job requirements as planned by the sales team in conversation with the client. There might be some issues or questions that come up that should be addressed. “It’s much better to have those conversations up front,” Faller suggests, than to lose time later on the job. “Good planning will generally lead to greater customer satisfaction,” he says. “You want to WOW your customer.” Make sure you follow up to see that the end result matches the plans. 7. After the job, conduct a debrief, Faller emphasized. It’s important to develop continuous improvement systems. Such systems become a part of the company’s equity – they are valuable should you ever wish to sell your company. The debrief should look at what went right and what went wrong on a project. Was the client happy? Did you meet budget? Was the jobsite left tidy? “Find solutions and repeatable scenarios,” Faller advised.
Tips for Better Teams from Tim Faller
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on’t just say, “I have an open door policy” – make communication happen. Only about one per cent of employees will come to you with a problem. You need to ask questions – and ditch the blame. Ask, “What would it take for you to care about that?” to create accountability among your members. Encourage production people to participate in scheduling and providing materials lists. Why? It holds them more accountable. It also walks them through the job and allows them to visualize it. Provide detailed production plans. Once the start date arrives, all materials should be on site and the production team should be ready to go. Conduct a debrief after the job is finished. What did we do right? Are there any repeatable solutions for which we could develop a system?
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Hard-hitting, low-cost marketing “A lot of renovators don’t focus on marketing until they have no business,” notes Victoria Downing. By then it could be too late. And that’s a shame because good marketing will bring in the leads that will help you gain a better choice of client. “We want you to work with those clients who appreciate you,” Downing said. But don’t expect things to happen right away. “It takes a good, solid six months of marketing before you start to see results,” she added. Start with your annual revenue goal and work your way backwards to determine how many leads you need to generate, Downing said. Let’s say it’s $120,000. Ask “What’s my average job size? Is it $10,000? How many $10,000 projects will I need to reach the revenue target?” Let’s say you need one per month or a total of 12 for the year to reach $120,000. Then determine your closing ratio. That is, of the appointments you go on to quote a job, how many do you sell? Maybe it’s one in ten. If so, you’ll need 120 appointments or 10 per month to make your annual revenues. You also want to be sure you have qualified leads. Qualified leads, as opposed to just leads, are the types of clients that you really want to work for. You need to define your geographic area, the range of household income you are looking for, and the type of work you are best at. Downing suggests businesses should expect to spend
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about 60 per cent of their marketing dollars on previous clients and their circle of influence. Why? Because previous clients provide referrals – the best kind of marketing there is. Your circle of influence includes your suppliers, sub-trades, guys you play hockey with – anyone you know socially and in your community. “I am starting to see business really rocking on social media these days,” Downing said. Homeowners are researching online (HomeStars, etc.) before they ever contact a renovator. Consider connecting with previous clients on Linked-In and Facebook. Get a website and start to capture potential client’s e-mail addresses. If people are visiting your site, they are probably already considering a renovation. Offer them something they can download for free in exchange for their e-mail address: a guide on the top five things to avoid when renovating, for example. Then e-mail them monthly, “softly, subtly,” in a way that lets them know about your latest services, Downing advises. To stay in front of his customers, Reno Summit 2013 attendee Lou Orazem (Inspire Homes) outsources an electronic newsletter, produced once a month for a little over $300. In it he provides tips and information useful to homeowners. He sends it out to his database of existing and potential clients. Orazem's contact list includes previous clients, leads generated at trade and other shows in his community, architects, designers, painters, and property managers, among others.
By the numbers:
$60 BILLION
size of the Canadian renovation market
$10 MILLION
$11 BILLION
“No renovators in the GTA have annual revenues of more than $10 million per year.”
size of the renovation market in the GTA Source: Greg Peterson, Renovantage
6,000
registered general contractors in the GTA
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Accurate Cost-Estimating
ou need to find out the maximum value to the customer and least cost to you when figuring out the selling price of a project, former renovator Rob Koci (and publisher of Canadian Contractor) told RenoSummit 2013 contractors. Part art (trust your intuition) and part science (so many dollars per linear foot of materials needed), “estimating is nothing more than an act of prophecy,” Koci said. Of course, to become a successful prophet it helps to have a system in place that can accurately give you an idea of the true costs before starting the project, Koci said. But this number can be skewed by any number of factors. For example, how much control do you have over the numbers? Are you hiring subtrades? Did a designer or architect bring you onto the project? If so, you won’t have as much control over your cost estimating as you might like, Koci warned. But assuming you do have some control over the costs of a project, it’s an excellent idea to create a feedback loop to capture those numbers. It can help you to develop and fine-tune a systems approach for your business. Such a system not only
can become a valuable tool for cost estimating, it can also become tangible equity in your business, Koci said. Upon completion of a project, do a postmortem with your employees, sub-trades and suppliers. Determine where your costs escalated or where you saved money. If you were to estimate this type of work again, is there something consistent you could use as a rule of thumb? Ask yourself, Koci said, “Does it look a lot like the last one we did?” Plug that information into your system. It could be a simple Excel spreadsheet or a sophisticated program like the one from Sage, he noted. Or it could be in your head, but it’s better to get it down on paper. This will help you with costing the next project. “Experience counts for a lot,” Koci said. Estimating software programs can be very useful. They are scaleable, accurate, quick, connected to accounting and project management systems. They will allow you to play with the figures. (“Do ‘what ifs’,” as Koci termed it.) ‘[They] can help you determine the risk factor of using the cheapest sub, or the most expensive one.” 4 Estimating Tips – next page.
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Estimating Tips from Rob Koci
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Share your estimate with a successful contractor friend. Ask if it seems about right.
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Think like Wal-Mart. Look at the money you’ve given your sub-trades. Ask them to help you reduce your costs.
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Your estimate should make your prospect a little uncomfortable. If there’s total comfort from the customer, it’s probably too low.
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Don’t allow yourself to get locked into thinking of value as “costs plus mark-up”. What you do is more valuable than that to your customer.
Closing the deal tips from Mike Draper One way to generate more revenue for your company without spending more marketing dollars - is to convert more leads into customers. This was a key part of Mike Draper’s (Renovantage. com) presentation: “The Five Ways Formula to Massively Grow Your Business.” Draper started by reminding the audience of the Renovantage definition of a successful business: “A commercial, profitable enterprise that works without you.” Getting more customers is obviously key to the first part of that definition and Draper asked contractors to consider a change in approach to make it happen. “Rather than increase the number of leads you get,” he said, “consider improving the conversion of leads into customers.” “Leads are actually the hardest thing to increase,” he
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explained. “You could increase the margin, or up-sell the client. But the number one thing you can do for the most impact is to improve the conversion rate of leads to clients.” How can a contractor seal the deal more effectively? Draper warns contractors to avoid proposal killers that turn clients off. Proposals that require large sums of upfront money, that demonstrate a lack of understanding of what the client is looking for, or that fail to provide an item by item quote will see the client lose interest. “Never e-mail a quotation,” Draper advised. Always visit with the client to go over the details so that you can make adjustments to include or exclude changes the customer wants to see. Why should you take that extra step? Face to face is still important, Draper said. Follow up is essential to getting the sale. The number one reason why clients change their purchasing point is not because of the price, but because
they perceive the contractor is indifferent, Draper said. Consider the number of touch points with a client that it takes to make a sale. A whopping 81 per cent of customers will not close the sale until on or after the fifth call, Draper pointed out. Yet, almost half (48 per cent) of the businesses competing for the client will give up after just one call. And 84 per cent have given up by the third call. You can win that business without spending any more money, and increase your profitability, if you just hang in there. cc
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