Finding Hidden Profits: A Guide for Custom Builders, Remodelers, and Architects

By Dennis Dixon

If you are a great craftsman and project manager but not good at numbers or paperwork, then you need to learn how. Finding Hidden Profits: A Guide for Custom Builders, Remodelers, and Architects shows you step-by-step how to position your business to make more money through these five key elements: Allowances Change orders Draw schedules Detailed specifications Comprehensive contracts With more than 30 years of experience working on 300+ projects, from high-end custom homes to remodeling, smoke and fire damage, and annual property maintenance, Dennis Dixon knows how important it is to provide quality work on time and on budget. From choosing the right clients to setting expectations through clear communications and a comprehensive contract, Finding Hidden Profits provides practical advice, simple formulas, and useful tips you can use to start finding the profits hidden in your business today!

• Language: English
• Publisher: BuilderBooks
• Release date: Jan 1, 2017
• ISBN: 9780867187557

Book preview

NAHB.

Introduction

Iwrote Finding Hidden Profits, 2nd ed. for architects, builders, custom builders, building design professionals, interior designers, subcontractors, and remodelers—a how-to manual of proven methods that can make your business more money. There are few shortcuts in the construction business and no substitutes for being organized.

The wisdom from the first edition was that the quality of business management must be at the same level as the craftsmanship of the finished product. If you are a great craftsman and manager but not good at numbers or paperwork, then you need to learn how—and this book will help you—or hire someone who is.

Your profits will always depend on your relationship with your clients. We poll our customers at each project’s conclusion and incorporate their feedback into our operations: paperwork, estimates, field supervision, resolution of plan mistakes, errors and omissions—ultimately, everything we do. Why? Customers like our methods. They realize we are already aware of their concerns. Our clients know what to expect, what they are getting, and even, what they are not getting. We provide a service that is not provided by other local contractors—and you can, too.

Clear communication is the key. It starts with your contract. Having uniform policies and procedures in your contract with regard to allowances, change orders, specifications, and payment schedules produces a game plan that all the players will use. You minimize, if not eliminate, misinterpretation by owners, designers, subcontractors (subs), suppliers, and even your own staff.

Try treating the customer like your grandmother. Building or remodeling a home is an emotional undertaking that involves dreams, desires, and expectations. As the professional you bring reality to those dreams and that is not an easy task. Be patient. Spell out everything. Communicate clearly and often. Owners place their trust in our judgment, decision-making, and integrity.

My 32 years with Dixon Builders covers more than 300 projects, from high-end custom homes to remodeling, smoke and fire damage, and annual property maintenance. My portfolio includes both commercial and residential projects. I know how important it is to provide quality work on time and on budget. I also know that the paperwork is just as important if you want to make a profit. And I know that most important of all is a happy customer.

Before you can think about making a profit on a project, you must know how much you are spending on overhead and on job costs. The more accurate your costs, the more likely you are to make strong estimates, bids, and contracts that will make you a profit.

You increase profits through five key elements: allowances, change orders, draw (payment) schedules, specifications, and your contract. A contract with facts, figures, and details that answers 95% of the questions and addresses as many of the possible field dilemmas as you can think of minimizes wasted time and effort explaining the normal procedures of any construction or remodeling project. Plans and specs are never perfect, but working with anything but A-grade documentation is going to cost you money, time, and frustration.

Arguing about money, details, quality, schedule, finishes, etc., over an entire project can be exhausting. And it makes for a dissatisfied client. Cost is important, but it should be balanced by concern for quality, durability, and just plain common sense. Client suggestions for cost savings range from being non-code compliant to just plain silly. Having to justify every aspect of a project distracts you from your real priorities: quality construction, good supervision, and following the production schedule. Here are some silly cost savings suggestions:

•My brother saved a ton of money by having the builder place everything at 24 inches on-center instead of 16 inches.

•You’ve told my wife and I several times that you want to raise the finished floor level of our home several feet due to the surrounding terrain and potential water runoff. Is it really worth an additional $5,840? What’s the cost of annual flood insurance? What does it cover and not cover?

•We don’t need your superintendent on-site 20 hours per week. Take that cost out of the contract. I took shop in high school. I’ll supervise the construction.

•It costs us $16.85/hour for your cleanup guy? Can you hire our 15 year old at $10/hour cash? He can work after school and on weekends.

Owners doing portions of the work on their own project might seem like a good idea until you consider the realities of experience and responsibility. Talk to your insurance agents (liability and work comp) about the downside and risks from doing this if you want a good laugh.

There aren’t any shortcuts to profit or success. Focus on planning well and know your numbers for overhead, including how much time it takes to work up an estimate, and for all of the assemblies, products, and people involved in a project. Take notes every day in your project log or journal and review them at the end of the project, so you can learn from your own experiences.

Find the Right Clients and the Right Projects

Abusiness 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.

Figure 1.1. Sample Project Priority List

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 (©) 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.

Know Your Numbers: Overhead, Salary, Profits

Profit is the amount of money remaining after all overhead