Monday, July 27, 2009

Big-Box Installed Services, Part II

Last month I explored the issue of a labor-only relationship for a big-box installed service program, and how a standard markup percentage would leave you far short of the earnings necessary to justify your time and effort. The retailer had also requested us to provide them with a catalogue of pre-designed components (deck platforms, railings, stairs, benches, etc.) that their inside salespeople could mix and match; and a unit pricing schedule that would enable them to quickly produce a quote from their assembled “designs.”

But in my experience, very few customers want a cookie cutter solution – they want a custom design that considers the aesthetic, functional, site and budget variables unique to their situation. And given the probability of customers wanting something off-list and the tendency of salespeople to promise anything to avoid the hassle of solving a problem they aren’t equipped to solve… well, I probably don’t need to finish the sentence.

The biggest problem is the impact of design efficiency on cost, and hence prices. Given unlimited options, how could we teach the retailer’s salespeople enough about deck design and construction for them to accurately adjust the pricing as design changes alter design efficiencies?

In spite of my recommendation that the party best suited to design and sell the project was us – the contractor – the retailer insisted on pursuing their model. So if I wanted the opportunity to capture a new market segment for our franchisees, I should come up with a solution. This is a rough summary of my proposal:

Platforms. Each pre-designed deck in the catalogue must be offered at a minimum size/cost, so the only change option would be a size increase, and I would be able to provide square foot pricing for that. Additional options requiring variable pricing were decking material (PT vs. composite), decking direction (parallel vs. diagonal, or w/parting board), fasteners (screws [stainless or galvanized], nails, or staples), site access, elevation, attached to the house or freestanding, and so on.

Railings. While the price could be increased or decreased on a linear foot basis, there would be a minimum price (the most-stringent local code may not require railings around a platform up to 30” elevation, but would require them on our minimum-size stairs – see below – since they had more than two risers). The style of the railing also affected the labor rate (standard picket railings are more efficient to build than Chippendale railings).

Stairs. Stairs would also have to have a minimum cost based on a minimum size (three risers/two treads). Additional stairs would be priced on a per-tread basis. For some reason that still escapes me, many customers love flared stairs. So in spite of their much higher price due to the much lower efficiency to build, I felt obliged to provide them as an option. Also, the height of the stairs introduced additional design/cost variables (no flared stairs above eight risers, landings on long runs, etc.).

Other variables that would have to be considered in the final pricing schedule were: Designing around existing site conditions (a tree through the deck, for instance), demolition, architectural review, accessories, and so on. I proposed to develop a pricing wizard to ensure that their sales personnel would cover all the key variables and price them to reflect local costs of materials and labor.

This column doesn’t do justice to the detail that I had to spell out in my proposal. But even after doing that, I had to raise another list of issues that would have to be addressed if we were to get this program off the ground. Next month I talk about “oh yeah, another couple of things…”

Thursday, July 2, 2009

Big-Box Installed Services, Part I

About five years ago, we were approached by a big-box home improvement retailer to build decks under their name across the country. They wanted us to create a catalogue of pre-designed projects that their installation services staff could price quickly and sell in the store; and they also wanted us to provide them with labor-only services, since they would be providing the materials.

There were a number of issues that came to mind as I considered the potential relationship. The most important was the concept of a labor-only relationship. From my point of view, that arrangement would remove most of the value my company added, relegating our service to a commodity. That concern was heightened when they asked us for a single square foot price – basically, take our labor cost and mark it up. And since the industry standard markup is 50%, it felt as though we were viewed as just a carpentry service, attractive mainly because we had a presence in 30 states.

So put yourself in this scenario and run the numbers to see how you would fare compared to the retailer: Assume that your labor cost for construction of a simple pressure-treated deck is $5.00/s.f. A 50% markup on the labor would produce a contribution to your company of $2.50/s.f., for a total labor charge to the retailer of $7.50/s.f. Also let’s assume that a simple P-T deck costs the customer $20.00/s.f. After deducting your labor cost and their material cost of around $5.00/s.f. (remember, they’re the supplier), the home improvement company would receive a gross margin of $7.50/s.f. or 37.5% of the selling price. Your $2.50 would be 12.5% of the selling price.

Skilled labor is a scarce resource, and should be utilized to produce the highest gross margin attainable relative to the market value of a project. For custom-designed, custom-built projects, this margin should be in the 40%-50% range. Proportionately, labor costs should be in the 20%-25% range. This means that when you deploy a “unit” of labor, the markup should be 160% to 200% in order to achieve the desired margin. As the labor-only provider in the example above, your markup was 50% instead of 160%-200%; your margin was 12.5% instead of 40%-50%.

Because of this I decided to propose a labor rate far above the industry norm – one that would generate a real-dollar contribution to overhead & profit comparable to that produced on a typical project; with a discount to allow for the fact that the marketing & advertising, design and sales costs would be covered by their company instead of being paid by us as below the line expenses.

However, we still had overhead for these functions, which would have to be covered by non-big box work. So given a choice, we would commit our construction crews to projects that produce the greatest return. But in slow times (economically or seasonally), choice may not exist. So this relationship might make sense if the big box retailer could provide a consistent book of business that would help make the workflow more predictable and cover the monthly nut.

This is just the first set of issues I faced when considering whether or not to provide installation services for a big retailer. Tune in next month for Part II: Can you have a single per-square-foot price for multiple designs installed in different site conditions?