Friday, December 10, 2010

Still Crazy After All These Years

Many of us boomers spent our youth exploring the boundaries of what society defined as “normal.” We grew our hair long and wore pants with comically wide leg bottoms. We engaged in certain illicit activities, hitchhiked around the country, and invented a glossary of special terms to describe our state of being. We saw ourselves as a tribe of merry pranksters that would bring peace and justice to the world, and rock ‘n’ roll was our weapon of choice. All in all, we behaved in a way unlikely to inspire confidence among employers.

So we found jobs in construction and other businesses that would have us.

Forty years later, some habits are hard to shake. The part-time work became a career. We still love the Beatles; and while bell-bottomed pants and words like “groovy” have thankfully passed into history, a few aging hippies are still looking to create some peace and justice in their corner of the world.

A couple of years ago, Paul Lesieur, owner of Silvertree Construction near Minneapolis, had had enough of the caveman attitude on a popular construction forum; he wanted to start his own forum, to promote a more thoughtful and constructive dialogue. So with the vision and determination of an idealist he outlined his master plan, found a web designer who built the site for a piece of the action, and rolled out RemodelCrazy in August 2009. Sixteen months later, the site is self-supporting and steadily building membership and advertiser participation.

Lesieur says, “the intent is to gather the industry, from plumbers to tile salespeople; they’re all equal, and we’re all going to help each other raise the industry as a whole. Very far-reaching and idealistic, but that is the plan. I want all of us to move forward, even the guy who sweeps the job site.”

“When you go to a NARI awards meeting, the larger firms with the resources to go after the awards are usually the winners,” states Lesieur, “yet there are 200 other very capable contractors in the audience who aren’t getting recognition. I respect the guys who earn those awards, but the two-man company in the audience that does a good job for their customers – those guys deserve the same recognition, and that’s what I’m about.”

At one time Lesieur was upset with NARI and NAHB because he didn’t think they represented the remodeling industry as a whole. But he came to appreciate the positive things they have accomplished, so part of his objective with RemodelCrazy is to create a community that could enhance their reach. With a combined membership numbering less than 20,000, NARI and the NAHB Remodelers don’t have the political clout of an organization like the over 1 million members National Association of Realtors (NAR). While building an organization of NAR’s size isn’t literally his goal, Lesieur hopes that his more inclusive approach can create enough scale to increase the influence of the remodeling community – to be “one voice for the industry,” as Lesieur envisions it.

Unlike those utopian ventures back in the 1960’s, Lesieur’s plan includes making a profit, or “monetization” in the parlance of the digital era. In addition to traditional advertising revenue, RemodelCrazy will also take a percentage of sales generated through the site for products that have been reviewed by selected RemodelCrazy members. Each review will be based on the members’ actual hands-on use (no testing lab), and be bluntly honest, but fair-minded. No money will change hands until a review is complete – good, bad or indifferent. Some of the products currently under review or in the pipeline include estimating software, a HEPA vacuum, insurance coverage verification web site and a discount buying club for contractors.

In keeping with the irreverent spirit of the 1960’s, Lesieur – who has ten or so certifications – has created his own professional category: EIEIO (Excellence In Everything I Offer). While that is undoubtedly a tweak directed at the pretentiousness of the alphabet soup approach to credibility-building, he is sincere about establishing a peer-to-peer credential. “The key is to establish respect among your peers. It’s serious, it’s fun; but we want to be responsible, and we’re doing that by combining the two,” he says.

A few minutes spent on the RemodelCrazy site confirms this dual objective. Meaningful commentary stands side-by-side with photographs of a member’s breakfast. Maybe this is what the age of Aquarius is really about.

Thursday, November 4, 2010

Restoration Revisited

In February 2009, I wrote a column about how remodelers hard hit by the recession might be able to get some work in the insurance restoration industry. The gist was that since many restoration contractors don’t have the resources to handle reconstruction work, a remodeler might want to pursue this as a subcontracting opportunity. I concluded, “After all, fires and burst pipes don’t care about the economy.”

Here we are almost two years later, and the remodeling market isn’t what anyone would call robust. While my original advice still holds true, there’s another opportunity to consider: Become a restoration contractor. Now, on the face of it, this contradicts my original argument. I had discouraged remodelers from jumping into restoration work because it’s an entirely different business from remodeling, with different technical skills, pricing methodology, equipment requirements and marketing tactics. Given these differences, it would be highly risky for a remodeler with no prior insurance industry experience to make the attempt – without a lot of guidance.

There happens to be an established model for guiding people through a business start-up in an unfamiliar industry. It’s called franchising. As a former executive of a remodeling franchise, I can argue both the merits and the disadvantages of franchising as a business strategy – it’s not for everyone. But in the right circumstances for both the franchisee and the franchisor, it is an excellent option.

There are a number of national insurance restoration franchise organizations serving various segments of the insurance restoration industry: water mitigation, fire damage, catastrophic loss (hurricanes, earthquakes, etc.), carpet and upholstery cleaning, laundry and dry cleaning, and so on. The logical opportunity for a remodeler would be with organizations that work mostly in water mitigation and fire damage, which frequently involve reconstruction work. A downside, though, is that the big players in these markets have pretty much reached market saturation–there aren’t a lot of open territories remaining. Another issue is that, by and large, their target profile for a franchisee is an existing independent restoration contractor or cleaning contractor.

One franchise organization, though, has made the strategic decision to target remodeling contractors. First General Services (FGS), based in Orlando FL, has a business strategy centered on the belief that a remodeler can easily be trained to do water mitigation and fire restoration work; but there isn’t enough classroom time for a cleaning contractor to learn the building skills that a remodeler has spent a career acquiring.

When asked how becoming a franchisee would be a growth opportunity for a remodeler, FGS’s president Joel Dagenais says, “There’s a steady stream of work after you get on the carriers’ lists and develop good relationships with adjusters and agents. Margins should be better than in remodeling with this economy because you’re not competing against the pickup truck contractors–most established competition comes from larger, high-overhead operations. And with insurance work, you know that the money will always be there, because insurance companies are footing the bill; so collections are less of an issue. There’s also less marketing to do after developing the relationships, because you have a recurring relationship with just a few companies and people.”

This is all well and good, as long as the contractor can develop those relationships. This is where Dagenais believes remodelers bring a competitive advantage to the game. “After years of doing things the old way, carriers are pulling back,” he says. Many established restoration contractors have gotten a little too comfortable being treated generously by insurance carriers, and have grown high-overhead companies that don’t run as lean as a typical remodeling company. Dagenais believes that since remodelers have had to develop lean organizations because of the economy, they have a competitive edge over existing restoration contractors who've become used to the old way of doing things.

Most seasoned remodelers remember the expensive mistakes they made in the early days, and would advise any startup to have a mentor to help them develop the skills necessary to run a viable enterprise. Dagenais recognizes this, which is why FGS’s goal is to provide the training and support to replace the first three years of the learning curve. Nothing is guaranteed in this world, but for remodelers facing an uncertain future, a little research into the world of insurance restoration might be worth the effort.

Thursday, October 7, 2010

Both Sides of the Satisfaction Equation

Jim and Mary Finlay believe in more than just delivering a high-quality project for their customers; their business philosophy is driven by personal values, and they’re compensated in ways that aren’t only measured in dollars and cents. For the past 18 years, Archadeck of Suburban Boston has earned a loyal following of repeat customers, and this is a case study of how that is done.

About ten years ago, the Finlays built a pressure-treated deck for Sarah. After completion Sarah gushed in praise of the workmanship, causing Jim no small amount of embarrassment. When it came time to replace her old curved-glass bumpout off the kitchen with a stick-built room – but save the existing blue tile floor – she had Archadeck of Suburban Boston do the work. And she was just as thrilled with that project.

A couple of years later, Sarah’s boyfriend Frank moved in with her. They decided to build a large addition with a great room, basement, garage, workshop area, and office. The addition was to match the home’s contemporary roof lines, with 4” x 14” exposed fir beams and structural insulated panels. It was a substantial project, and Sarah’s loyalty to the Finlays resulted in a no-bid contract.

Archadeck had a construction manager who was self-sufficient and able to solve problems without any direction. He was also a good carpenter and able to jump in and work if needed, so there was no hesitation on Jim’s part to delegate this size of project to him. What Jim hadn’t known at the time, though, was that the construction manager occasionally let his personal feelings affect his work – if he didn’t like a customer, he wouldn’t go out of his way to please them.

About three-fourths of the way through the job they had a progress meeting, and Frank asked Jim to take over project management. He complained a little about the construction manager’s attitude, and there were some timing issues with the subs, but Jim didn’t hear the complaint as an ultimatum. And since he was overwhelmed with other obligations at the time, Jim politely explained why he couldn’t comply with the request.

Toward the end of the project they had an early walk-through, where Sarah and Frank had a lengthy punchlist. While reviewing it, Jim came to learn that Frank was paying for the project as a way to earn equity in the house. And when Jim thought about it, he realized that Sarah had given Archadeck her unqualified endorsement; yet they hadn’t lived up to those expectations, which might have caused some friction between the couple. It wasn’t until then that Jim recognized the depth of the problem Frank had addressed in the earlier meeting. At the end of the walk-through Frank looked at Jim and said, “You know how much we’ve been inconvenienced. What are you going to do to make this up to us?” Jim said “Let me think about that.” And he did.

He returned for the last meeting to close out the paperwork and resolve the final payment. Jim had recognized that simply giving a cash rebate would have a minor immediate effect, but wouldn’t change the negative emotions that had accrued during the job. So he said, “You asked me what I’m going to do. Here are brochures for three upscale resorts. We’re paying for you to spend a weekend together at the one of your choice.” The idea was to repay them in kind – for their inconvenience, apprehension and stress. They were delighted and Sarah chose one she had always wanted to go to but could never afford. Flowers were waiting in their room when they arrived.

Later, Jim and Mary learned that on that weekend Frank had proposed to Sarah. Goodwill that had been lost during the job was regained in a way that established a unique, unforgettable connection to their customer. Jim says, “Money is probably the least effective form of apology, and I wanted a way to relieve the stress we’d created. But it’s not just that - what’s just as important is the satisfaction I feel in being able to do that. I almost lost a friendship, but was able to save it”

Thursday, September 2, 2010

Weather or Not

The Weatherization Assistance Program (WAP) has been around since 1976: a federally-funded program designed to reduce energy consumption in lower-income housing. According to the U.S. Department of Energy, over 6.2 million homes have been weatherized since the inception of the program. Along came the Great Recession, and Congress responded with the American Recovery and Reinvestment Act (ARRA). Included in ARRA was $5 billion of additional funding for WAP, with the intent to kick start job creation in the construction industry.

The first installment occurred in March of 2009, with the goal of using at least half of the $5 billion by June 17, 2009. To quote a U.S. Department of Energy announcement about the weatherization program, “Special consideration will be given to projects that promote and enhance the objectives of the Act, especially job creation, preservation and economic recovery, in an expeditious manner.” This is why ARRA was nicknamed “the stimulus.”

The Department of Energy recently announced that $2.6 billion, or about 52% of the funds had been expended as of August 20, 2010, or 14 months after the target date – more of a push start than a kickstart. It’s fair to say that the goal of creating jobs in an expeditious manner was not achieved (blamed on the lack of infrastructure to process the increased funding, which is now in place). The good news is that a large amount of funds remain. This provides an opportunity for contractors that could still use some stimulation, and who are capable of bidding and delivering low-margin volume work and carrying receivables for 30 days or more. Some conditions of working under this program include:

- Reporting, tracking and segregation of incurred costs;
- Reporting on job creation and preservation;
- Access to records by Inspectors General and the Government Accountability Office;
- Ensuring that manufactured goods are produced in the United States;
- Certification and registration;
- Ensuring that wage rates are comparable to those prevailing on projects of a similar character.

This last condition comes from applying the Davis-Bacon Act requirements to ARRA-funded projects, and will be the first time it’s been required in the 34-year-old weatherization program. While these requirements are common in federally-funded construction projects like highways (which are heavily unionized), they’re not typically applied to residential work. Depending on the region, Davis-Bacon wages may be higher than a given company’s pay scale (see Wage Determination by State), which would put pressure on margins and could introduce some dissonance among employees that are paid less on typical company jobs. Also, compliance can be cumbersome for a small contractor, which argues for outsourcing payroll to an expert – adding another cost to overheads.

One billion dollars of the $5 billion enhancement to WAP is set aside for funding technical assistance and training at both the state and national levels. The goal is to “help form the foundation for a sustainable energy efficiency industry in America that can extend to the more than 100 million middle-class homes that stand to benefit from weatherization.” If this fits in your strategic plans, you should utilize the resources.

An additional $3 billion of ARRA funds above the $5 billion for WAP have been allocated to the State Energy Program (SEP), which is primarily intended for developing and implementing comprehensive state energy conservation plans (technical assistance, training, education, etc.) and not for construction projects. However, it will fund rebates to consumers for home energy audits, which is another opportunity for contractors that are positioned to provide that service.

The states deliver federal WAP funds through a network of local community action agencies, non-profit organizations and local governments, which may perform the work themselves or put it out to bid (for a list of agencies, see your state’s department of housing and community affairs). More information on the weatherization program can be found at ARRA and WAP and WAP Online.

Various estimates of the number of new jobs created by the additional $5 billion put the cost of each job at between $37,000 and $57,000. Perhaps this could be one way of making your tax dollars work for you.

Friday, August 13, 2010

Connecting the Dots: Safety and Profitability

The most efficient weight-loss book would have only two chapters, each with one sentence: Chapter One – “Eat less.” Chapter Two – “Exercise more.” There’d be a similar book for improving your company’s health: Chapter One – “Reduce costs.” Chapter Two – “Increase revenues.” This article hopes to make a case for the financial benefits of implementing a rigorous safety culture – a commitment that can both reduce costs and increase revenues.

The first and most obvious area where cost savings can be achieved is with Workers Compensation insurance. Many business owners don’t realize how much control they have over their experience modification rate (EMR or Mod Rate), which is used to adjust the “book rate” for Workers Comp premiums. A company’s EMR is based on how its claims experience compares to industry averages in its classifications, with a 1.0 rating representing the average. “Insurance costs are controllable costs – they’re not a fixed expense,” says Mark Oldham, CSP, an executive consultant in risk management for Fireman’s Fund. Insurance is a significant percentage of the overall cost of business (just add up your Workers Comp, liability, automobile, property, inland marine, umbrella, professional liability, and employee benefits). “It’ll have a disproportionate impact when costs can be lowered,” states Oldham. “Insurance trades fixed costs for unknown costs, and premiums are directly influenced by prior experience and control over operations.”

In fact, Workers Comp operates like a line of credit, where the insurer spreads the cost of a company’s predicted future losses over time, meaning that premiums are in essence just a way of financing a company’s cost of accidents and injuries. So, obviously if a company can reduce its claims over time, it will reduce its cost of business. This can translate to a measurable effect on the bottom line. The example below illustrates the difference in premiums between a .80 EMR and a 1.20 EMR for just one of a contractor’s job classifications:

Modifiers are also applied to a company’s general liability and auto insurance, but the EMR is a key indicator of a company’s performance. Oldham says, “It’s used as a litmus test of how you run your business. If you can’t work safely, you can’t produce a quality product.” Many insurance carriers will meet with a prospective client before offering a quote, and perform a loss control survey to gather information on its operations. This will assist the underwriters in understanding what the company does and how well it does it, and can have a direct bearing on cost. Underwriters make empirical decisions based on these tangible factors to determine debits and credits against the book rate. The carriers will also advise the client on how to control losses, identify risks, and develop appropriate action plans and follow up properly.

Fireman’s Fund also provides its clients with post-loss consulting services if warranted. They will help prepare a mutual action plan with specific objectives and timelines for the risk consultant and the client – then execute the plan in concert. At the conclusion, the desired reduction in hazards and risk factors should be clear enough for the client to give an “as a result” statement. If it can’t, the plan was merely a series of activities rather than a strategic effort.

For those contractors that don’t have a full-time safety department (or even those that do), Oldham suggests taking advantage of the many services that insurance carriers offer, such as subscriber-only content on their web sites with training programs, educational resources, topics for safety meetings, and so on.

Oldham emphasizes that successful companies are engaged. There’s an awareness of the true costs of risk, an understanding of what drives risk, and mechanisms to control the cost of risk (such as diligent hiring practices, strong training programs, aggressive injury investigation and correction efforts, and claims management like bringing injured employees back to work ASAP). When Fireman’s Fund performs a loss control survey, Oldham says that they look for employers who “get it.” These are companies that don’t just focus on the cost of insurance premiums. They understand that accidents and injuries affect their other business costs (such as the state unemployment compensation billing, which increases with the turnover rate); and they understand why.

Creating and keeping a safety culture

Some contractors look to incentive programs as a way to reduce injuries and accidents. But, according to Dianna Wiggins, an independent loss control consultant, “There’s a place for safety incentives after you’ve changed the safety culture – by developing a really good safety program.” First, stop the injuries and accidents by implementing a good program with excellent training and management. And a prerequisite to culture change is a genuine, highly visible, unwavering commitment from the very top of the organization. Because good safety practices can be perceived as slowing productivity, there is a natural tendency for line employees to view them as arbitrary and annoying rules that are imposed by “the office.” This isolates the safety personnel, who are peers, putting them in the role of “safety police” (with all the associated avoidance behaviors that accompany that mindset). A key part of the visibility shown by management is active and vocal support for the safety staff.

“After the accidents stop, employees can get complacent,” states Wiggins. “Two to three years after instituting culture change, safety incentives can help sustain the performance.” In a previous position as Safety Manager for a medium-sized manufacturing company, Wiggins implemented a highly-successful safety program that helped reduce the company’s EMR to .76. This reduced the Workers Comp premiums by almost 60%, which translated to hundreds of thousands of dollars saved per year. Once that was achieved, she maintained that level of performance with clever incentive programs (costing only around $10,000 per year), and the company won over 30 national safety awards.

Wiggins also advocates for an early return-to-work policy, which can help reduce the cost of Workers Comp. This policy allows injured employees to return to work in a light or modified work position until they’re fully recovered and can resume normal work duties. Everything that can be done to reduce the claim cost and get the employee back will have a positive impact on the employer’s cost of business. Justin Cremers, a Safety Coordinator for SMI, a safety consulting firm, counsels his clients on the benefits of an early return-to-work policy. “The type of claims experienced and what’s done to control the cost of claims has a significant effect on Mod Rates,” says Cremers. Claims for medical treatment only are usually less severe and are reduced by 70% before they’re applied to the formula. Cremers urges his clients to take advantage of this by ensuring that injured employees return to work as soon as possible. “This is where an effective claims management and return-to-work program can have a dramatic effect,” he says.

“It’s critical that a job description should include what kind of physical demands are placed on the employee,” emphasizes Wiggins. That document should be given to the doctor so (s)he’ll know what light-duty or modified work the injured employee can perform while recuperating, which will make it more likely that (s)he’ll approve a quick return rather than keeping the employee off work. (A key point to remember is that the employee must have signed the policy.) “You can even get your employees to work at a not-for-profit location, and write it off as a charitable contribution,” she suggests.

Another factor affecting costs can be the OSHA 300 log and 301 Incident Report. Wiggins says that many companies have a high incident rate because they’re recording things that they shouldn’t – they don’t realize that first aid, visits to a doctor for x-rays or blood tests, and even drilling a fingernail or toenail to relieve pressure are not recordable. “The effect of that,” she points out, “can be losing business with companies that don’t allow contractors with an incident rate higher than the national average.”

Similarly, opportunities to perform work for the government and large companies that have rigorous safety standards exist only if a company’s EMR is below 1.0; and the chances improve the lower the Mod Rate gets. But this is only part of the equation. If your firm becomes noted for safety excellence, your customer base is much more likely to increase and repeat – which is exactly what happened during Wiggins’ tenure.

Actions, when allowed to repeat, become behaviors; and behaviors develop into cultures. “A culture of safe work practices and intelligent/informed risk-taking is the strongest operational mindset any employer can ever hope to have,” says Oldham. Companies that "get it" focus on the actions of their employees to protect and nourish a safe-work culture – not just "Can we do it at a profit?" but "Can we do it at a profit, safely?"

Monday, August 9, 2010

You Can Get There From Here

In an old joke the great classical pianist Arthur Rubinstein is asked, "Pardon me, sir, how do I get to Carnegie Hall?" He replies, "Practice, practice, practice." This advice would be well-taken by anyone wondering how they can reach their goals, whether personal or business.

For one member of Remodeling’s Big50 class of 2010, his journey in life and work confirmed the truth in Rubenstein’s apocryphal wisdom. Chris Wright, the owner of WrightWorks in Indianapolis, spent years accruing the skills for success and then building a business that is now swamped with repeat work and referrals; a business that has won three regional and one national CotY awards, and two Chrysalis awards this year… sort of the remodeler’s version of getting to Carnegie Hall.

Before he started WrightWorks in 1998, Wright benefitted from a series of powerful role models: His grandfather and father, who instilled a competitive fire and an expectation of excellence in him; his first manager at Federal Express, an ex-Marine and police officer who was a strong and principled leader; a martial arts instructor who helped him understand how to be the best person he could be, and who also hired him as the school’s program director. Here Wright learned the connection between belief in what you’re selling and the success of your sales process.

After leaving the martial arts school Wright partnered with his cousin, renovating older homes for sale to low-income families. This is where he learned to love the process of revealing the beauty of an old, neglected house. While working on the low-income projects, Wright met a designer who was starting his own business. This was the impetus for launching WrightWorks, and together they did small projects like kitchens and bathrooms. Today they collaborate on large six-figure projects.

Like many startups, Chris felt that “It was all about the craft – if it’s perfect when I’m done, I’ll be successful.” Business realities got in the way, though. “I got beat up. If there’s a mistake to be made in the business, I’ve made it.” He floundered because he didn’t have a strong financial background and had no frame of reference for pricing his work – so he’d just shoot in the dark, with unpredictable results.

Over time, he’s come to believe that business skill is equally important to the craft. “I have a deep respect for the people who have put in the time and effort to systemize every part of their businesses,” he states. As he matured, he realized that “If I build it right but don’t make money, my clients aren’t going to care.” In other words, a great reputation wouldn’t matter if he was out of business. Today his mantra is that “it’s either going to work for all of us, or it’s not going to work.”

“The relationship with the client has to have balance. There has to be mutual respect and appreciation. Problems usually happen when there’s an imbalance in the relationship.” Wright has grown very sensitive to that, and “when an imbalance starts to creep in, I know when to step in and try to bring it back to where it needs to be.”

Wright is also sensitive to the fact that the home is a very primal thing. “Your home is your cave…it’s an extension of who you are.” And when a contractor comes into your home and “tears the guts out, they’re kind of tearing away part of who you are.” Being sensitive to that fact is “very, very important to my success,” Wright believes. It’s equally important to develop a team of people that share this view, and Wright is quick to credit his team – which includes his vendors – for their contribution to the success of his company.

At the core of WrightWorks is a set of values that enshrines hard work and personal accountability. In a way these were the “directions” Wright followed that led him through each stage of his career to the present – a highly-regarded company that thrives even in a weak economy… a path worth following if you’re just starting your career.

Monday, July 12, 2010

Independent Contractors…or Employees?

On June 17, Department of Labor (DOL) deputy secretary Seth Harris testified in a Senate hearing about a proposed rule that would impose additional recordkeeping and notification requirements for employers. The text of this testimony can be found here. Reading all 4,465 words is enlightening.

Mr. Harris’ testimony was directed at “worker misclassification,” which occurs when a worker who is legally an employee is treated as an independent contractor. He cited five industries where misclassification is most prevalent, and construction was first on his list.

The testimony was in support of proposed legislation (the Employee Misclassification Prevention Act) that would make misclassification a violation of the Fair Labor Standards Act (FLSA); providing the DOL with additional tools for enforcement, such as monetary penalties for recordkeeping violations. This legislation would also establish a legal presumption that a worker is an employee and “put the burden of proof on the employer” to demonstrate that the worker is an independent contractor. Given the political opposition, the odds of the bill passing this year is not high. But Mr. Harris made it clear that the DOL nonetheless intends pursue the same ends with “new tools to detect and prevent worker misclassification” in pursuit of its “good jobs for everyone” mission.

Specifically, the DOL wants to implement “a broad strategy that requires employers to understand [emphasis added] that the burden is on them to obey the law.” But whether or not a worker is an employee depends on which law is applicable. Mr. Harris favors the FLSA’s “economic realities” test, which is broader than the common law test used by the IRS.

Mr. Harris went on to state, “We call this compliance strategy ‘plan/prevent/protect.’” This new strategy will require employers to:

1. Create a plan for identifying and remediating risks of employment law violations and make the plans available to workers so they can participate in their creation, fully understand them, and help to monitor their implementation.

2. Implement the plan in a manner that prevents legal violations.

3. Ensure that the plan’s objectives are met so it actually protects workers from violations of their workplace rights.

“One way in which ‘plan/prevent/protect’ will be implemented is by increasing transparency in employers’ recordkeeping requirements under the FLSA,” stated Mr. Harris. To achieve this transparency, the DOL’s Wage and Hour Division (WHD) proposes that employers perform a written analysis – applying the FLSA’s “economic realities” test – before declaring that a worker is an independent contractor; and that they disclose the analysis to the affected worker and keep a record of it in case of a WHD investigation. Because “plan/prevent/protect” is a department-wide initiative, OSHA will be considering similar rules.

Also, the WHD has launched a campaign called “We Can Help,” focused on the construction and other targeted industries “tailored to inform low wage, vulnerable workers of their rights and benefits, how to get help if they believe those rights are violated, and to assure them that their complaint is confidential.” A cynic might call this a snitch campaign.

These efforts, which Harris calls “regulatory innovations,” are part of a broader effort that includes “close cooperation with our partners in the…IRS…to address worker misclassification.” Before that chill runs all the way down your spine, there’s more good news. The DOL has also drafted legislation for Congress called the “Unemployment Compensation Integrity Act,” which contains provisions that would “enable states to retain a percentage of delinquent employer UI taxes.” This essentially provides states with an incentive to target misclassification as part of their tax compliance efforts.

Coming so closely on the heels of OSHA’s “administrative enhancements” and the EPA’s flawless rollout of the RRP Rule, this is not good news for contractors already dealing with additional compliance burdens (echoing the EPA’s cost estimates for the RRP Rule, Harris stated that compliance would be “simpler” under the DOL’s innovative new scheme). Of course employers – especially contractors – try to minimize their fixed costs, particularly in an economy that leaves no margin of error; and there will always be those who abuse the system. But this seems to punish the class for the behavior of a few students.

Harris attempts to quantify the scope of the misclassification problem, but his key allegations are so tempered with qualifications like “some employers,” “many workers,” “often exploited” and the like, that it’s questionable whether the problem truly warrants such an aggressive response from the DOL. Our cynic might imagine other motives for this, such as the pursuit of additional sources of revenue, the expansion of governmental control, and the fact that you can’t unionize independent contractors.

Monday, July 5, 2010

Talking About Hazards

One day a young man named Bill came by the offices of a cleaning & restoration contractor to apply for work. Tom, the general manager, was impressed with Bill’s carpet cleaning experience, and was glad to get his application. Bill said he didn’t have time to complete the application on the spot and asked if he could fill it out at home and bring it in later. They scheduled a full interview for the following morning. At the interview, Bill answered all the questions, demonstrating that he had sufficient knowledge to qualify for a position. Tom assigned him to work with the lead technician for two or three weeks to get on the job training. The reports back from the lead tech were positive – enough to put Bill on his own. Customers were delighted with Bill’s performance, overlooking the fact that he may have shown up a little late; but they praised him for his “great work.” Tom had one criticism, though, which was Bill’s productivity: If he was given a work order of four jobs, he might only complete two or three in a day.

During a temporary work slowdown, Tom sent his lead tech out on his own without a helper and assigned Bill to the office so he could see how successful the OTJ training had been. Tom and Bill met in the office and went back to the stockroom. Tom asked Bill to tell him what traffic lane cleaner was used for and what the dilution rate was. Bill picked up a bottle and held it in front of him for a long moment, all the while moving his lips slightly. Bill got it half right and missed the dilution ratio. Then Tom handed Bill a bottle of browning treatment and asked him what it was used for. Before he could be stopped, Bill opened the bottle and sniffed it. With his sinuses suddenly burned from the vapors, he abruptly dropped the bottle and ran to the bathroom to flush his sinuses out. Bill came out of the bathroom with his eyes watering, nose running and in obvious discomfort.

Afterwards, Tom asked Bill the obvious question: “Can you read?” He claimed that he could, but “not too well.” Tom asked him about his high school education and Bill produced a laminated miniature of his diploma out of his wallet. So Bill had been able to perform the correct steps in the spotting process, based on memorizing what he had seen others do; but when presented with an unfamiliar label his only recourse was his sense of smell. Even though Bill had graduated from a public high school, it is doubtful that he could read even at a 5th grade level. After further discussion, it was discovered that the application that Tom had received weeks earlier had actually been filled out by Bill’s wife.

Because Bill’s field performance was so good, Tom decided to keep him on the payroll, but only working under direct supervision. Tom went a step further and arranged for Bill to attend a remedial reading class, even allowing him to attend class while on the clock. But Bill never showed up for the first class, and never came back to work again.

This is an unfortunate story – for the employee, of course. He was a responsible person who cared about doing a good job for his customers. What employer doesn’t want people like that on his team? But it’s also unfortunate for the company, which learned that its hiring and training practices were inadequate… at least in this case.

You don’t know what you don’t know, so sometimes experience is the only teacher. Does Tom now make sure that every prospective employee can read before making a hiring decision? One would think so. But before that experience with Bill, why would he have thought about making sure that a job applicant isn’t functionally illiterate? What other possible negatives are you supposed to anticipate? This is why OSHA regulations are so dogmatic and absolute – they have to cover the unanticipated exceptions to the rule.

And that’s why OSHA’s Hazard Communication Standard (29 CFR 1910.1200) requires every employer to translate the information contained on the MSDS into any understandable format (which would have been the spoken word with Bill); and that employees are trained about the hazards they’re exposed to in the workplace… before they’re exposed.

In the case of browning treatment, the hazard identification for inhalation is “May cause irritation of the upper respiratory tract,” and the risk level is low. But what if it had been a highly toxic substance that Bill had sniffed? Inhaled substances enter the bloodstream by way of the lungs, and can have damaging effects on the liver, the kidneys or other organs. Acute effects are an obvious danger of course, but almost any substance is toxic at some concentration or dosage; so even lower doses of a moderately hazardous substance can be problematic if repeated exposure occurs over long periods of time. Hazardous substances aren’t just found in drums with diamond-shaped symbols – they include paints, solvents, fuels, and even dust.

This is why every employer must establish a written hazard communication program (HazCom) in all workplaces where their employees are exposed to hazardous chemicals. A HazCom program must include a list of all hazardous chemicals that are present in the workplace, the person who’s responsible for the program, where written information about safe handling procedures can be found, and a description of requirements and information about labels, MSDS’s and employee training.

Does your company have this?

Wednesday, June 2, 2010

Start All Over Again

As this is written, the country honors its soldiers who have died while serving in the military. It’s a hot, sunny day in Richmond Va, but the flag hanging over the front door undulates in a cooling breeze, rocking the flagpole in its metal wall mount. This flag flies every day of the year in memory of two citizen soldiers that fought in a war many years past, who were among a generation that is leaving us at a rate of over 1,800 a day.

The Greatest Generation, indeed. They lived through a time when one-quarter of the working population was unemployed, an entire region of the country suffered an ecological disaster caused by drought and land mismanagement, and the world was at war. Because today we know how it all turned out, it’s difficult to imagine the fear and uncertainty experienced at that time. Those fifteen long years of existential crisis shaped the modern character of a nation and provided lessons for future generations to learn.

In the past couple of years, while the country has suffered a serious recession, our industry has suffered a depression; construction-industry unemployment has exceeded that of the Great Depression. Environmental disasters like Katrina and the Gulf oil spill tax our resources, our country is engaged in two expensive wars, and our future is uncertain. So there are a few parallels.

For those of us who came of age during the Vietnam War, we know that bad times come and go just like good times. But in 2008 a twenty-five year period of robust economic growth and mild recessions came to an abrupt end, and the current mood is as close to the existential angst of the 30’s and 40’s as any we’ve seen in our lifetimes. Maybe that’s just because we have more to lose than we did back in our youthful days of massive social transformation and violent protest.

Certainly we’re exposed to more detailed information about what’s wrong in the world, at a greater speed than were our parents and grandparents. We have a far greater number of entertainment choices, which fragments our collective attention instead of focusing it. During the Great Depression the entire movie industry set about to improve the country’s morale, producing films that featured lighthearted stories – usually in an aspirational setting of affluence if not wealth. In the mid 30’s, Jerome Kern wrote a song called “Pick Yourself Up” for a Fred Astaire-Ginger Rogers film called “Swing Time.” The dancing was fabulous, of course, but the song’s upbeat melody and lyrics spoke to a generation having to cope with devastating financial burdens:

Nothing's impossible I have found,
For when my chin is on the ground,
I pick myself up,
Dust myself off,
Start all over again.

Don't lose your confidence if you slip,
Be grateful for a pleasant trip,
And pick yourself up,
Dust yourself off,
Start all over again.

Work like a soul inspired,
Till the battle of the day is won.
You may be sick and tired,
But you'll be a man, my son!

Will you remember the famous men,
Who had to fall to rise again?
So take a deep breath,
Pick yourself up,
Dust yourself off,
Start all over again.

Be grateful for a pleasant trip.” A lot of fine music has been made since the 30’s and 40’s, but can you imagine this song being written and performed without irony in today’s culture? There was a shared innocence, an authenticity, in the expression of ideas and feelings back when most people didn’t enjoy the quantity of material pleasures that many take for granted today. There may be a correlation.

More to the point, though, can we view the challenges we face today with the historical memory of having overcome greater ones before? We should never forget the courage and optimism of the Greatest Generation, and strive to model the example they set. We would honor their memory every day if we did.

Monday, May 31, 2010

When Things Go Right

The fire spread so quickly that the men stopped their suppression efforts and called 911. It started when an employee for this medium-sized sawmill was welding on equipment inside the mill’s main processing building. He had followed normal procedures, including wetting down the area, but piles of sawdust and debris from the log debarking process – soaked with oil and grease leaked from equipment overhead – had caught fire nonetheless. Fires in mills happen all the time, but in this situation employees inadvertently dispersed the burning debris – spreading the fire up a cable chase, rapidly spreading it throughout the building.

The first fire engine arrived within six minutes of the 911 call. But by then the fire was so intense, with smoke billowing into the sky, that the firefighters called for air support and focused on keeping the flames from spreading to nearby log decks and stacks of finished lumber. Two air tankers bombed the main processing building with retardant, and a helicopter scooped water out of an adjacent lagoon to make water drops. The building was a total loss, a charred ruin of twisted metal that had collapsed into itself. Fortunately the rest of the facility was spared.

The site required extensive demolition and cleanup, of course, but large wood processing machinery also needed to be removed. Much of it was salvageable, so removal had to be accomplished without further damage in an environment where heavy debris had collapsed on and around it.

After weeks of negotiations with the insurer, the restoration contractor was finally able to start work. First, environmental hazards had to be assessed and mitigated before the demo work could start. Asbestos was found in one small room, which was quarantined and quickly cleaned by an abatement team. The nearby lagoon had to be protected from runoff generated when years of accumulated industrial sludge was powerwashed off the floors.

The greatest safety concerns were electrical hazards, fall hazards and line of fire hazards. While some elevated work could be performed from aerial lifts, much of the work required climbing on debris and equipment, and on upper-level decking.

Planning for Safe Work
First, the safety manager required written verification from the sawmill’s management that all equipment and building electrical had been de-energized. Lockout/tagout procedures were documented and reviewed with employees prior to beginning demolition. Hard hats, safety glasses, and gloves were a 100% personal protective equipment (PPE) requirement; and dust masks and hearing protection were recommended. Only trained employees were allowed to operate aerial equipment or work at elevations above 6 feet; and fall protection was 100% required at elevations above six feet. Also, all work above six feet had to be pre-planned and approved by company supervisors. Daily pre-work meetings were held, where all hazards were identified and recommended safe work procedures were reviewed with affected employees. Site-specific job orientation was required for all new employees, who were required to sign written documentation. Hot work permits were filled out and approved by company safety personnel prior to performing any spark-producing activity.

Most of the fall protection issues were caused by leading edge conditions and holes created after machinery had been craned out. In many of the cases the equipment was large (25 ft. x 15 ft., for example), projecting up through the second level of the building. Removing this equipment left holes in upper-level platforms; and no work can be performed within six feet of an edge or hole without a barrier or fall protection (and a good plan). When the company creates a hazard, it has a special responsibility to protect workers as well as extra liability in the event of an injury.

Obviously, fall protection PPE was in place while removing machinery that penetrated any elevated surfaces. There were plenty of large H-beams to tie off from, so the company used wire rope retractable fall protection. Afterwards, barriers were installed around every opening with 1½” dia. pipe welded six feet O.C. and 3/8” wire rope threaded through holes drilled at 21” and 42”. Caution flags were hung every two feet.

Line of fire hazards existed wherever gravity or the sudden release of tension could cause injury or death: Piles of interwoven steel had to be removed, and any time one piece is moved it can generate energy by falling or causing other pieces to fall. Total situational awareness is mandatory. Obviously, powered equipment was used wherever possible, but in the effort to minimize damage to salvageable machinery, hand work was necessary to cut the equipment free. On more than one occasion, the safety manager stopped work to require a written job hazard analysis before continuing. The priority given to safety on this project meant that every task was assessed and planned before action was taken, changing the protocol from thoughtless routine to thoughtful caution. Every day was the first day, an acknowledgement that hazards evolve; that unknowns exist.

This could only have happened in a restoration company with a strong commitment to safety rules and procedures. Management had an absolute commitment to a safe workplace. The crew was engaged during safety training, toolbox talks and daily hazard identification; and they were proactive whenever they saw unsafe activity.

There were only two near-misses and a cut requiring a Band-Aid… a complicated, high-risk demo job with zero OSHA recordable incidents. That didn’t happen by accident.

Monday, May 17, 2010

OSHA Update

On April 22, 2010, the same day that the EPA lead rules went into effect, assistant secretary of labor for OSHA, Dr. David Michaels, issued a memo to regional OSHA administrators titled “Administrative Enhancements to OSHA’s Penalty Policies.” Although the subject is serious, it can’t go unremarked that the term “administrative enhancements” sounds like ad-speak for a platonic marital aid… perhaps a gift of Post-It notes and a stapler to charm your wife off her feet?

All humor aside–seriously, all humor–this announcement is the culmination of a process that has repositioned OSHA from a compliance organization, or one focused on the carrot of helping companies comply with OSHA regulations, to an enforcement agency–one focused on using the stick of enhanced penalties to change employer behavior. Changing employer behavior is the focus because it is the employer that controls the workplace; and according to Dr. Michaels “American workers still face unacceptable hazards. More than 5,000 workers are killed on the job in America each year, more than 4 million are injured, and thousands more will become ill in later years from present occupational exposures.”

OSHA’s policy has been to consider several factors that can help an employer discount the nominal penalties if it is cited:

• Its history of violations
• Its good-faith efforts to implement an effective safety program
• Its “quick-fix” response to abate hazards found during an inspection, and
• Its size

These factors are given a different discount value, such as 10% for history and 15% for good-faith efforts. The discount for size varies according to how many employees a firm has, with the smallest category (1–25 employees) receiving the highest discount. This offers the greatest advantage to remodelers since the overwhelming majority of firms have fewer than 26 employees.

However, the new “administrative enhancements” change the way these discounts and other policies are to be implemented:

- The time frame for considering an employer’s history of violations will expand from three years to five.

- If an employer has any high-gravity serious, willful, repeat or failure-to-abate violations in this expanded five-year history, then a 10% penalty will be added.

- The time period for determining repeated violations also expands from three to five years.

- Violations will be graded according to their low to high severity, lesser or greater probability, and low to high gravity. The newly-coined Gravity-Based Penalty will determine fines that range from $3,000 to $7,000.

- The size discount has been reduced (the discount for small employers, with 1-25 employees, has been reduced from 60% to 40%).

- If an employer agrees to hire a third-party safety consultant, it’s eligible for a 20% penalty reduction.

- OSHA has changed the way it adds up multiple discounts. Previously, it would add up the percentage reductions and discount the penalty by the total percentage. Now, they will be applied serially (the percentage for each discount factor will be applied one at a time to a declining balance), resulting in a higher net penalty.

- More details can be found at

In reality, few remodeling firms are at risk of an OSHA inspection because most projects don’t rise above OSHA’s target threshold of $1 million, and many remodelers operate individually and hence aren’t viewed as employers. But a serious accident or fatality has a way of putting even a small company on OSHA’s radar.

It happens that the construction industry incurs the most fatalities of any industry in the private sector, and specialty trade contractors the most in the construction industry (the Bureau of Labor Statistics doesn’t provide a breakdown for remodeling contractors). According to OSHA, “Falls are the most frequent cause of fatalities at construction sites and annually account for one of every three construction-related deaths.” In light of OSHA’s new focus on the stick over the carrot, you should review your safety program; but especially so if you do any work requiring your employees (or subs) to perform elevated work.

Saturday, April 24, 2010

Lead Rule Perspective

Much (virtual) ink has been spilled writing about the EPA’s lead-safe work practices rule – a lot of it objecting to the methods and timing. While no serious person would trade profits for the health of children, it is reasonable to question the way in which the EPA is implementing this, as well as the efficacy of the policy itself. Heated rhetoric by environmental and health advocates such as "A bad economy is not a good excuse to poison children,” does little more than polarize the debate and maligns small business owners who will be burdened by a mandate that may fail to achieve its purpose.

Following is a small fraction of the many comments by contractors and other stakeholders found on the Internet, on forums like RemodelCrazy and Contractor Talk, industry organizations’ web sites, and from comments on news stories:

- Two-thirds of U.S. homes and apartments (78 million out of 120 million) were built before 1978. Half of the pre-1978 homes don’t contain lead but the rule, depending on implementation, might apply to all of them.

- Many homes older than 1978 have gone through a number of remodels [already].

- Making it unlawful to practice home renovation without federal certification will assuredly reduce the supply and raise the cost of renovations. One result of shifting the cost curve will be to encourage teardowns of otherwise sound housing stock. Some other properties that remain occupied will simply go without renovations and repairs, with unpredictable (but probably not good) consequences for health and safety.

- Homeowners will almost certainly turn to unlicensed workers rather than pay higher costs for companies who follow the federal rules.

- I am advocating that the law be changed to compel property owners to take more responsibility in ensuring that they comply with the law and hire only companies that are certified.

- The new rules mandate an excessive use of plastic and force workers to wear booties on plastic sheeting. So in exchange for reducing lead dust, we can kill workers by forcing them to work while standing on “slip and slides.”

- Anyone know where I can buy a truck load of Visqueen (poly sheeting) before the price goes up?

- Think about neighbors who claim the paint dust does not obediently fall onto the horizontal ground plastic, but is airborne and (they claim) travels onto their property. Give it to a lawyer and we could have an expensive suit to defend. I fear the neighbors more than I fear the EPA.

- Another issue is the cost of insurance. My agent said it would start at $3,000 a year, on top of my regular insurance.

- In training, the instructors said that anytime you leave the containment area you needed to perform a dry decontamination. [After doing a bathroom remodel as a test case] I stopped doing this after repeated trips to my tool trailer and the dumpster. It got to a point where I was not sure if I was de-conned anymore.

- The bagging or wrapping of any lead paint products is required and even without wearing the suit your times will increase due to the heat being confined in the room(s). Then you have the time for pulling nails or screws so they don't tear the bags.

- The rule will add 10-15% of the project cost. On this particular project we are looking at 20-30K in additional fees to meet the requirements.

- There aren’t enough training options. The EPA hasn’t made this a priority for public outreach, so the average consumer just thinks it’s an optional added cost, not a necessity.

- The higher costs may drive homeowners to choose do-it-yourself alternative solutions, such as window air conditioners and space heaters, which would not make use of energy-efficient technologies.

- What happens if a non-compliant contractor is busted in the middle of a job, can’t pay the fine, and leaves the homeowner with a torn-up house he can’t complete?

- The April 22 deadline may derail the proposed Home Star program and prevent meaningful retrofit work from being performed because there won't be enough certified renovation contractors.

- Some of the problems we face, like proper insurance coverage, misinterpretation of the rule, homeowners doing the demolition themselves, unlicensed contractors offering cost savings , property values being affected and a proliferation of lawsuits by unscrupulous homeowners and their attorneys will be on us like stink on a skunk.

- A common sense approach followed by the majority would produce a safer remodeling market than an onerous rule strictly followed by a minority.

And on the upside…

- I can see [commercial contractors and home builders] that "dabble" in remodeling clearing out of the game for sure.

Friday, March 19, 2010

Do You Believe in Safety?

Elaine Taylor recalls back in the mid 1990’s when one of her employees – a young carpenter – was wrapping up work at the end of the day. He and another carpenter were replacing the roof on a fire-damaged home. They were working in wintertime, but not just any old winter. This was winter in Alaska, and the crew had just finished spreading plastic sheets to cover the roof openings. One feature of plastic is its low coefficient of friction, especially when icy and laying at a 23⁰ angle. One feature of young carpenters is an attitude of haste; another, of invincibility. Naturally, he lost his footing; and of course, he wasn’t wearing his fall protection equipment. In less than two seconds, he had fallen 2½ stories – over 30 feet – hitting the frozen ground at around 32 mph.

Fortunately his landing was cushioned by snow; otherwise he might have died. Nonetheless, he broke his lower back and never again returned to work as a carpenter. He was off work for a year and had to get training to work in another industry. “It changed his life forever,” Taylor said wistfully.

The company Taylor owns with her husband Larry and their children Trent and Lisa – Taylored Restoration, in Anchorage – had been technically compliant with AKOSH regulations. They had their safety meetings, they had a safety program; but they didn’t follow up in a systematic fashion to ensure that employees were implementing the procedures. “We talked the talk, but didn’t walk the walk,” Elaine Taylor says. “It wasn’t really key to our beliefs.” Before the accident, AKOSH would inspect their commercial work, but after the accident they became a larger dot on AKOSH’s radar. It didn’t help when they filed the accident report late (the federal OSHA standard is less strict, requiring notification at three hospitalizations). The job site was a long way from the hospital, and they arrived so late they decided to wait until the next day to file; not realizing that their delay placed them in violation of AKOSH’s 24-hr. notice rule. That highlighted the need for better education in the applicable OSHA regulations.

Fortunately, they didn’t incur any legal liability. But they paid a fine to AKOSH, and of course their EMR went up – causing their worker’s compensation premiums to increase significantly. While the economic consequences were meaningful, the greater impact on the Taylors was the sobering human cost paid by their carpenter. At a subsequent meeting of the company leadership team, Taylor interrupted the discussion and declared “We’re approaching this the wrong way. We need to look at safety as the first thing we think about.” That initiated a fundamental change in the company’s operating procedures and culture.

Now, every employee has the authority to stop any activity they think is unsafe. If a worker has an accident, it’s addressed at the next company meeting and the employees discuss how it could have been avoided. Safety policy is enforced rigorously in the field – the Taylors actually fired some employees that had refused to tie off. The company also works closely with their worker’s compensation carrier to ensure that their safety program is up to date.

Their subcontractors have to walk the line right along with them. On one project, a Taylored Restoration employee stopped some employees working for a sub and kicked them off the job. At another project, an apartment complex, an employee spoke up during a job site meeting and insisted that a sub working for the apartment manager be tied off or Taylored would stop work. The apartment manager agreed and required the worker to wear his fall protection equipment. It happens that a sub actually did fall off the roof, and when he reached the limit of the line he swung back under the eave into a tempered glass window. The impact left an imprint of his body on the glass, most likely damaging his pride but not his health.

Every new Taylored Restoration employee now must go through a formal safety orientation, and is not allowed on a job until he’s seen a few key videos. There’s a company safety committee with oversight responsibility for the various departments – cleaning, office staff, large jobs, small jobs, and so on. They are charged with continuous revisions to the safety manual and MSDSs, and with keeping employees’ safety awareness at top of mind. Safety presentations are run by different departments in rotation at the company-wide monthly meetings. Creativity is encouraged, if not required – departmental employees produce skits, videos, and exercises to convey their lessons in new and memorable ways. One exercise pits workers in a relay race to help get them more familiar with tying off their fall protection equipment.

There’s no central database for residential construction, like Dodge Reports, from which OSHA can develop programmed inspection lists, leaving it to the off chance of a drive-by to initiate any scrutiny. This means that compliance in residential restoration isn’t driven by being closely watched, but instead is driven by company culture. So if a contractor’s owners don’t have a genuine commitment to safety, like Elaine and Larry Taylor do, the risk of serious injury or death is probably too high.

Friday, March 5, 2010

Still Dead, But With Some Qualifications

The column I wrote last month was published in Remodeling magazine online under the title The World As You Know It, and appears on this blog as Dead on Arrival. It generated some pushback from contractors who thought it focused on the negative; that it seemed to endorse the bankrupt idea of competing on price; that the opinions weren’t valid because they didn’t cite empirical research.

So I asked Les Cunningham to expand on his thoughts:

“Having been an airline pilot, I know humans can’t fly–I’m a realist. Positive affirmations are good, but they need to be salted liberally with realism,” Cunningham says. Thirty-nine years in the industry, and working with thousands of remodelers over those years has given Cunningham a deep reservoir of realism. He suggests that remodelers ask themselves “What’s my company worth today? Is it worth more than it was a year ago?”

“Yes, there’s work out there, but at reduced volume. One good operator I’m working with told me recently that he’s working ten times as hard; it takes two to three proposals to get a contract.” And price? It’s hardball negotiations. The client analyzes whether or not there’s sufficient value in doing the project, and then how much he can afford. Even though he likes you as a professional, can he get the same quality done at a lower price? Cunningham continues, “When someone’s checking your price, they can check the cost of materials and labor and calculate what percent over the cheapest alternative price you are. They make a value judgment for the money spent and quality received. There are more competitors than ever out there that are giving customers a cheaper price.”

Was Cunningham advocating that remodelers drop their prices at the first customer objection? No, he stresses. “Let me tell you a story. Two clients of mine were going after the same job. The [25%] higher-priced contractor was convinced that he was doing the right thing. The one with the lower bid actually had changed the specs and was able to charge a higher margin than he would’ve had he priced the project based on the original specs.” The difference was in understanding the customer’s wishes and his costs well enough to engineer a win-win solution for him and his customer.

But not all remodelers have command of their numbers, especially with complex design/build work. In a more competitive environment, they might find it increasingly difficult to differentiate themselves based on workmanship and service alone. Therefore, those contractors should avoid design-based variables that erode margins, and might benefit from selling products that minimize slippage–what Cunningham refers to as “bolt-on” products.

Cunningham’s company, Business Networks, collects financial statements and marketing and advertising data from its members around the country, who represent a good cross-section of the remodeling industry. The data they track is placed on a common comparison form with standardized definitions. This enables Business Networks to rank its members and generate averages based on real sales and margin targets. The peer format allows members to review and analyze the data eyeball-to-eyeball. Empirically, volumes and margins are down as much as 90%. Seventy percent of projects are now being financed from savings. Customers are increasingly concentrated among those who have the most stable employment–doctors and other health professionals, lawyers, entrepreneurs, and government employees.

There are successes, but not nearly on the scale as before. Certainly, there are pockets of stability–think Washington, DC and Austin, Texas–but in general, Cunningham says “if there’s a lot less success there must be a lot more failure. To continue in the same direction is the wrong answer. This is the first downturn where everyone’s been affected–nobody’s been untouched. But the market will return sometime…when it has disposable money available.”

Cunningham goes on to say that “until then, what a [struggling] remodeler needs to do is become a general contractor – not a specialist. You take whatever you can to break even or make money. Right now, what people seem to be buying are exterior products: windows, doors, siding, decks, and green-related items. In the boom years, the mantra was ‘if you do quality work, you’ll make a profit.’ Now, that’s a lie.”

Wednesday, February 3, 2010

Dead on Arrival

Les Cunningham has a perspective on the remodeling industry that no one else can match: He was a remodeler for 15 years, and a 14-time CotY award winner. Cunningham founded the peer-review firm Business Networks over three decades ago, and served as NARI’s national president in 2000. With a degree in chemistry and years of experience as a military and commercial pilot, Les’s rigorous intellectual standards are reflected in the way Business Networks operates. Group members have to regularly submit performance data, which is plugged into a proprietary database designed by Les and his team. The updates establish evergreen benchmarks, against which members compare their performance in a continuous process of review and analysis. So when Les Cunningham shares his thoughts, remodelers are wise to listen closely.

“The remodeling industry as we know it is dead.”

Savor that quote in the light of your own experience and what you’ve worked for all these years and your plans for the years ahead. Should you stop and consider the meaning of that for your company, your financial health and your future?

Cunningham looks to historical patterns to help explain his thinking. Remodeling in the 1960’s consisted mainly of “bolt-on” home improvements such as windows, roofing and siding. The industry as we know it today developed in the 1970’s as a housing shortage caused rapidly rising home values–providing the economic fuel for discretionary design/build remodeling. The mindset was that the good times would never end. “The 1981-82 recession put a nail in that idea,” says Cunningham. “But after the recession ended, the same phenomenon took off again.” The recessions of 1990-91 and 2001 repeated the same pattern, bringing us to the market collapse in 2008.

This time though, there is a glut of houses on the market and property values have dropped so much that the equity homeowners used to borrow against has virtually disappeared, eliminating the primary driver of discretionary purchases. With the resulting drop in appraisals, banks have almost stopped lending. “And if you have money, the last thing you’d do is spend it,” says Cunningham. “The old days of a remodeler telling a prospect ‘if you don’t come to my office’ or, ‘if you don’t give me a design fee’ are gone.”

With the severe reduction in the amount of business available, many remodelers who were order-takers in good times find themselves ill-equipped to generate business. With the number of remodelers staying constant in a severely shrunken market, competition has increased. This means that quality work is no longer the primary competitive differentiator. Cunningham explains, “The only dollars now being spent are being spent more wisely because the consumer has the Internet, which gives them more choice. Price has become the deciding issue. Now, most remodeling is needs-based. If there’s a kitchen remodel, it’s financed by savings – not debt. For those that have money, it’s in vogue not to spend. We’re not going to hit the bottom until foreclosures have been soaked up by the market; and not by speculators, but by people who live in those previously-foreclosed homes.”

So with all this gloom, what’s a remodeler to do? Cunningham says “You have to become a home improvement contractor, vis-a-vis the 1960’s…the ‘bolt-on’ products. You must be more of a businessperson, running your company by the numbers. Take every job you can get and keep your costs as low as you can.” He believes that this bodes well for construction franchises that have proven systems and a respected brand, because consumers will opt for a company that they believe will stand the test of time.

All this requires a mental adjustment to the economic realities of life; an adjustment that Cunningham fears many remodelers won’t make. Will you?

Tuesday, January 5, 2010

Just Because the Economy is Bad, Don't Change Who You Are

As a restaurant manager in Dayton, OH during the nasty recession of the early 1980’s, Rick Crossman learned a lesson that he applies to his 20-year-old design/build business. In that bad economy, restaurants struggled to stay busy even on Friday and Saturday nights; but there was one restaurant in town that did a brisk business throughout the week. Other restaurants, in spite of promotions and tinkering with their menus, couldn’t get consistent traffic and of course, many failed. The key for the successful restaurant was in providing its customers with predictable quality; with reliably good food and service at a reasonable price – not the lowest price, but a great value for the price.

The analogy applies to the remodeling industry in the current economic downturn. Too often, Crossman says, even a quality contractor will use the tight economy as an excuse to change his system: traveling outside his normal operating area to run any lead, qualified or not; chasing after projects he didn’t sell before the recession; cutting his material specs, or bypassing the permit process to offer a cheaper price. He begins improvising whatever it takes to get the sale--just like the back-of-the-pickup-truck contractors.

Crossman’s company, Archadeck of Southern Fairfield County (CT), serves the middle to upper-middle market. They serve the same customer with the same product they did before the recession, rather than chasing lower-priced projects. “Wherever you’re pigeonholed, stay in that hole,” he says. “Follow your process – don’t think you need to improvise to win. It’s the same customer.”

Crossman seeks to understand who his customer is and why they buy from him. During the first five months of 2009, his consumers’ attitude seemed to be finding out how little they could spend on a project. Then there seemed to be a learning curve as people started to understand how the national economy affected their personal economy. Their purchasing behavior changed from “how much” to “how well” to spend.

Acknowledging that times are tougher, Crossman believes that it’s more important than ever to qualify prospects to ensure that there’s a match with what you offer. Recently he declined to see one prospect because they lived outside his operating area. The wife called back upset that he had refused to come out for a design consultation. After apologizing for unintentionally offending her, he asked the homeowner “If this is a project I can help you with, would you be willing to do it in the winter instead of next spring?” She said yes. That was a buying signal that justified Crossman’s decision to proceed with an initial visit.

Crossman sold that project in spite of the fact that it’s outside his preferred range. But it’s scheduled to be built this winter when there’s no conflict with projects closer to home, and keeping a crew busy during the slow season offsets the disadvantage of the extra travel. But the project he sold will still have solid copper flashing and stainless steel screws, it’ll be designed to the same rigorous structural standards, he’ll provide the same warranty, and he’ll escrow the down payment rather than use it to pay invoices on other projects. His customer will receive the same product and the same service she would have received when times were good. This may be one reason Crossman’s referrals drive the majority of his business – a business which is actually ahead of his 2008 sales, even in the worst economy since the Great Depression.