The Profitable Contractor

Are You Misclassifying Workers?

2011-05-29T18:33:00.000-04:00

In April 2010, a senator and a group of representatives introduced a bill called the Employee Misclassification Prevention Act in both houses of Congress. Its goal is to require employers to keep records of independent contractors (ICs) they use, and penalize employers that misclassify employees as ICs. Then in September, another group of legislators introduced The Fair Playing Field Act of 2010, also in both houses. This bill would end the current moratorium on IRS guidance regarding worker classification, and increase tax penalties for misclassifying workers.

Both bills were referred to committee, and lacking bipartisan support they aren’t likely to be reintroduced in the current Congress. But this doesn’t mean that the battle is over. The broad goal of this legislation is also being pursued through regulation, as the U.S. Department of Labor (DOL) has placed a high priority on reducing worker misclassification; and it has identified the construction industry as one of the largest offenders. Although large commercial, industrial and home building contractors will obviously be first in the DOL’s sights, all contractors that use ICs will be subject to this enhanced focus – and the motivation is strong. The General Accountability Office is said to have estimated that in one year, the government lost $4.7 billion in federal income and employment tax revenue through improper classification of workers.

To address this, the DOL plans to “redouble its efforts to combat worker misclassification” by funding state grants to improve data-sharing between states and the IRS (and other federal and state agencies - click here). According to this budget report, the DOL grants will also pay for targeted audit strategies, and a cross-state agency task force to “target egregious employer schemes to avoid taxation through misclassification.”

In its 2011 budget, the DOL calls for a “joint Labor-Treasury initiative” to coordinate federal and state efforts, with 100 new hires focused on misclassification and litigation. To expand on that, the 2012 budget would allow for a high performance award program for states that are most successful at prosecuting employers. The bonuses paid will be used to upgrade states’ programs for detection and enforcement.

The DOL’s We Can Help program encourages workers to notify the department if they think they’ve been improperly treated by an employer. To deal with the increase in investigations produced by this campaign, the DOL’s Bridge to Justice program refers claimants to private trial lawyers through the American Bar Association – which has spiked misclassification litigation.

And last, but not least, there’s a proposed rule called the Right to Know Under the Fair Labor Standards Act which will require employers to perform an analysis of all their ICs and notify them of their reasons for classifying them as such.

So if you use ICs in your business, don’t assume that the mere existence of a written contract will be sufficient to immunize you from the efforts of the DOL or its partners. Since neither the DOL nor IRS have a “bright line” test, you should familiarize yourself with the similar but different factors each department uses on a case-by-case basis to determine IC status, and make sure your business practices are compliant.

(My July 2010 web column on this topic can be found here)

How to Make Your Own Silver Lining

2011-01-03T10:20:00.000-05:00

Weather-related metaphors are good for capturing the mood of many life experiences, with “gray, cloudy skies” being appropriate for this economy. The natural reaction to cloudy economic prospects is to hunker down and complain about the lack of sun. Then there’s Jim Finlay, owner of Archadeck of Suburban Boston, who recently said “I’m not religious, but thank God for this recession!” Jim is one of those who see silver linings when the skies get cloudy.

Finlay started his remodeling business in 1993, when the country was just coming out of recession; and he recalls hearing some wisdom about how recessions force new business owners to develop frugal practices and watch expenses like a hawk. At the time he was skeptical, but now he embraces the concept. “Slower sales have given me the time and the motivation to examine my business closely,” states Finlay. “I’ve shifted and sharpened my marketing, adjusted my sales process to focus on prospects who appreciate (and who will pay for) our services… examined overhead and project costs and corrected my pricing software to significant bottom line advantage.”

In one example of his analysis, Finlay talks about job costing. “Jobs that end up with high expenses and low contribution attract attention.” But don’t overlook those that come in at target contribution, he advises. When digging into the details of those projects, he has from time to time discovered some offsetting errors – pricing problems that went in his favor hid pricing mistakes that cost him money. By understanding the errors he can make adjustments, critically important to avoid future pricing mistakes that don’t go his way; especially when business is booming again (because it will someday, inevitably).

In expressing a broader, more philosophical benefit of periodic recessions, Finlay says it gives him a chance to re-learn exactly why he’s in business: “To give our clients the world class service they deserve while giving us the satisfaction of having enriched their lives.”

But there can be very tangible financial benefits when slow times allow the business owner to re-evaluate costs. When his office lease was up for renewal, Finlay sent the landlord a polite letter saying “Vacancy rates are up, rents are down… can we negotiate this?” He suggested the rate from two years prior, and the landlord accepted it. Over a two-year lease, he will save $7,700 in rent.

Creative cost control can be habit-forming. After feeling increasingly annoyed by the price increases and unreliable service of his concrete supplier (which has a near-monopoly in his area), he learned of an ingenious engineering solution from a fellow franchisee. So now, instead of paying the concrete supplier to NOT deliver three times as much concrete as he typically needs for his deck footings, Jim exclusively uses helical footings. Not only do they cost slightly less per footing, but they give him a measurable advantage in productivity. No longer does he risk the collapse of 17 four-foot-deep footing holes after a heavy rain (which actually happened on one job); no longer does he have to wait for the building inspector’s approval, or for the concrete to set up. The helical system also has just the right documentation needed to quickly satisfy inspectors. “And I get to thumb my nose at the concrete company,” Finlay says with a laugh.

But ultimately, the down time affords him a chance to “push the reset button” on his business to help achieve his personal goals: “What I really enjoy is focusing on the client, determining what he needs and wants, then giving him exactly that – to his absolute satisfaction. I’m in the renovation business to make some money, yes, but also to enrich peoples’ lives… which sounds corny, but that’s part of my compensation.”

Silver linings, enriching lives. Sounds like the kind of business that will thrive in good times and bad.

Still Crazy After All These Years

2010-12-10T23:34:00.002-05:00

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.

Restoration Revisited

2010-11-04T21:51:00.003-04:00

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.

Both Sides of the Satisfaction Equation

2010-10-07T13:38:00.001-04:00

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”

Weather or Not

2010-09-02T20:44:00.005-04:00

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.

Connecting the Dots: Safety and Profitability

2010-08-13T19:39:00.004-04:00

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?"

You Can Get There From Here

2010-08-09T19:46:00.002-04:00

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.

Independent Contractors…or Employees?

2010-07-12T14:54:00.001-04:00

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.

Talking About Hazards

2010-07-05T08:19:00.000-04:00

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?

Start All Over Again

2010-06-02T21:25:00.001-04:00

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.

When Things Go Right

2010-05-31T19:59:00.004-04:00

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.

OSHA Update

2010-05-17T19:40:00.002-04:00

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 http://osha.gov/dep/penalty-change-memo.pdf.

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.

Lead Rule Perspective

2010-04-24T16:31:00.002-04:00

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.

Do You Believe in Safety?

2010-03-19T23:01:00.004-04:00

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.

Still Dead, But With Some Qualifications

2010-03-05T16:27:00.007-05:00

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.”

Dead on Arrival

2010-02-03T17:47:00.001-05:00

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?

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

2010-01-05T15:31:00.002-05:00

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.

A Different Take on Ethics in Remodeling

2009-12-01T09:54:00.002-05:00

Barry Klemons built his business around a set of bedrock principles, and earned a reputation for honesty and integrity. His attention to each and every customer was legendary, so he was shocked and upset to hear through the grapevine that a former customer was bad-mouthing him and his company. It was a woman for whom Archadeck of Charlotte had built a screened porch a couple of years earlier, telling everyone what bad work they had done. Returning to his office, he found her number and gave her a call. “Mrs. Smith? This is Barry Klemons. We built your screened porch, and I just heard that you’re unhappy with our work.” “That’s right! I am unhappy,” she snapped. Barry asked what was wrong with it. “The roof has been leaking for over a year!” “Why didn’t you let us know?” Barry asked. She said “I did, I wrote a letter.” “I didn’t receive a letter from you,” he replied. “Well,” said Mrs. Smith “I never mailed it.” In disbelief, Klemons asked “why… not?” “Because I knew you wouldn’t do anything about it!” That was like a slap in the face, an unjustified attack on his character. Of course Barry had the leak fixed and his honor restored – at least in the mind of one customer who had stereotyped him as a “typical” remodeling contractor.

Evidently, a contractor’s reputation is at risk even when he does everything right (short of reading the customer’s mind). Klemons, who sold his company in 2007, was Chairman of the Charlotte Better Business Bureau. He was the 2005 recipient of the Charlotte Ethics in Business Award after receiving Honorable Mention the previous year. The Charlotte chapter of NARI, of which Klemons is a charter member, gives an annual award in his name. He’s a multiple Chrysalis award winner, and is a Remodeling Magazine Big 50 Remodeler. In addition to numerous professional awards, Barry’s civic contributions are widely recognized and lauded.

And Mrs. Smith just assumed that he wouldn’t stand behind his work.

Clearly, the public has a generic perception of contractors as unethical. The 2008 Consumer Complaint Survey, published this July, ranked home improvement/construction #2 on its Top Ten Complaints list; and our industry has had the distinction of being ranked in the top three for many years. This perception and the reality causing it places remodelers in a defensive posture before they even show up for the estimate (actually, not showing up for the estimate has become folklore, contributing to the negative stereotype).

Ironically, the customer is frequently an enabler for the problems he complains about. Not to blame the victim here, but isn’t it odd that people will allow – nay, pursue – the lowest bidder to lay hands on what is probably their single biggest asset? The 19th century author John Ruskin said, “The common law of business balance prohibits paying a little and getting a lot. It can't be done.” Yet every day, homeowners effectively conspire with those contractors who are willing to work cheaply to produce an unsatisfactory outcome for both parties. Of course, the reputation of the entire remodeling industry erodes just a little more each time this occurs. And the Mrs. Smiths of the world just assume…

The math is simple, then: The most ethical behavior is to charge more! Or to charge enough to deliver what you promise; and that should never come at the lowest price. Unfortunately, the people who need to learn that lesson probably aren’t reading this column.

A Safe Attitude

2009-11-18T20:03:00.002-05:00

Almost 40 years ago, Dennis Lawson began his working career with a giant chemical manufacturer that produced ingredients used in products from plastics to pharmaceuticals. Today he is the Health, Safety, and Fleet manager for Royal Plus, Inc. (a member of Disaster Kleenup International), with seven locations in Maryland, Pennsylvania and Florida.

Lawson recalled his first job as an industrial fire fighter for American Cyanamid in Louisiana. Not long after starting work, he experienced his first emergency – an employee was exposed to Class A poisons. The employee had been sampling process materials as part of a standard procedure performed every two hours, and had succumbed after inhaling a large amount of hydrocyanic acid gas that had leaked through a pump seal. It was not a pretty sight. By the time Dennis’ team arrived, the employee was unconscious; he had turned blue because the chemical compound was replacing the oxygen in his blood, and he had defecated in his pants. While Dennis hosed down the pump equipment to disperse the leaking gas, the shift supervisor administered CPR and first aid to revive the employee. He was then admitted to the hospital for observation. The man had come close to death, but fortunately did not suffer long-term damage. The trauma was so severe, though, that he threw up for a long time afterward, Dennis recalls.

While relieved that the employee had survived, Lawson found that he couldn’t sleep that night after his shift. The experience had made a profound impression on him, one that has lasted his entire career: Even in the face of the gravest situation, the proper response can save a person’s life. He had experienced first-hand the value of working in an environment with well-established procedures. In this case the SOP was to have a watcher/buddy nearby wearing a self-contained breathing apparatus to quickly call for help when the worst happened.

In the restoration business, everyday hazards may not be as dramatic as clouds of poisonous gas. But the restoration work environment can pose risks not found in a static manufacturing environment. Because the work site changes continuously, lack of familiarity with each location’s potential dangers alters how those risks are monitored and avoided. Procedures must not only include carefully defined tasks, but should also emphasize the less tangible skill of situational awareness. This requires a commitment on the part of the employee – an attitude of caring and vigilance.

What does it take to get employees to acquire the right attitude about safety so they can anticipate and avoid hazards? Certainly the experience of an emotionally powerful event – the sight and smell of a dying co-worker – imprinted an unforgettable image in Dennis Lawson’s mind and influenced his approach to every position since. But you can’t wait for a harrowing near-miss situation to motivate the rank and file, and you certainly don’t want to orchestrate one just to make safety training more effective!

While it would be nice if all your employees would memorize OSHA 29 CFR 1926.850(b) (Subpart T), plus the other 10,000 provisions in OSHA’s Construction Industry Regulations, the reality is that many feel invincible and view safety training as enthusiastically as they did high school homework. This is especially so if their training is about rules and regulations rather than behavior and culture. The result is a lack of caring – of carelessness – that increases the likelihood of injury and therefore the effort necessary to prevent it.

It is said that behavior influences attitude and attitude influences behavior. One of the most effective means of influencing both is through peer pressure, or validation. (Most youngsters probably wouldn’t try smoking otherwise.) Since perception of motives affects a person’s openness to a message, it matters who is delivering that message. Because of this, a rank and file employee can often be more successful influencing fellow employees than a manager. Those who demonstrate interest and aptitude with safety procedures should be recognized and used as models for desired behavior. Any employees who have personal experience, whether from a near-miss or actual injury to themselves or a co-worker, should be encouraged to share that with the group. Individuals from outside the company who have suffered serious, even disabling, workplace injuries can be recruited to speak at your safety meetings. As happened with Dennis Lawson, the more intense the emotions associated with any experience, the more likely you are to remember and care about it in the future. To help achieve the strongest emotional impact on your employees, ask your presenters to explain in detail how the injury has affected their lives. The more dramatic the message, the more potential there is for a breakthrough in attitude.

As an advocate of behavior-based safety, it is this kind of people-centered approach to management that Lawson has developed. With years of experience, a psychology degree earned over a 20-year period, and four decades of study in the art of karate-do, he feels that Royal Plus is the place where he’s finally able to use all of his talents. Lawson articulated his philosophy with a simple, but profound lesson from the revered master of Okinawan karate, Gichin Funakoshi. He said, “Carelessness comes before accidents.”

What's in Your Contract?

2009-10-30T17:30:00.005-04:00

Mike had built an elaborate deck for Mr. & Mrs. Smith. He always orders more material than he needs, not only in anticipation of the inevitable defective boards but because his aesthetic standards are high and wants plenty of choice. (His supplier restocks his extras at no charge because Mike is an excellent customer.) So by the end of the Smith’s project, he had accumulated a fairly good-sized stack of leftovers. After completion Mike scheduled a time to walk the project, pick up the final check and haul away the excess materials. But when he showed up he was surprised to discover that the neat pile of boards was gone. When he asked Mr. Smith what had happened, the homeowner shrugged and claimed that they must have been stolen. So they proceeded with the job review and Mike got his check; but as he was leaving he happened to glance through a garage window and saw his lumber stacked inside.

When Mr. Smith was confronted, he defended his actions by claiming that he owned the materials because they were delivered to his house for his deck. No amount of argument could unwind Mr. Smith’s rationalization, so Mike decided just to let it go. But he made an angry mental note to add a clause to his contract putting in black and white what reasonable people would take for granted.

How many painful lessons like this have you learned on the job? Have you ever had a customer refuse you access to his house electricity, or try to get one of your employees to do side work? What if you discover a rotted band board after you strip the siding off, or hit an underground tank while drilling a footing hole? Ever had a customer give you a new punch list every time you complete the last? The list goes on. If you’ve been in the contracting business for more than a few years you’ve encountered a host of unforeseen situations that have cost you time, or money, or your customer’s goodwill… or all three.

Knowing that, I’m amazed to see how many contractors still use the same old generic proposal form from the stationery store. Last year I had a new furnace installed, and the two-man HVAC contractor gave me one of these proposal forms as the contract. It didn’t meet state licensing requirements much less deal with the kinds of issues described above.

Because I’m an eminently fair-minded person (with a deep sympathy for the travails of contractors), I didn’t cause any problems for these young guys and would’ve dealt fairly with them had there been problems with their work. But life’s too short to count on dealing with nice guys all the time. It only takes one bad apple to put a well-meaning but naïve contractor out of business.

If it’s too much effort or cost to develop a custom contract for your business that anticipates and resolves conflicts caused by recurring problems, why isn’t it too much effort or cost to deal with the rump end afterwards? Talk about whistling past the graveyard! If you haven’t done so already, sit down and think about the bad times; what could you have done to avoid them? If having prophylactic language in your contract would’ve helped – write yourself a fresh new contract before the season ramps up next year.

OSHA and Residential Remodeling

2009-10-02T12:33:00.002-04:00

Everyone in the remodeling industry knows that much of the work you do presents a risk of injury… and even death. And hopefully you know that all employers are required by OSHA to provide employees with a safe working environment. You may also know that there are 22 states (incl. Puerto Rico) that have state OSHA plans that you must follow (rather than federal) if you work in one of those states.

Did you know that each state has OSHA consultation services? This is different from OSHA’s enforcement division, which is administered by either the state or the federal government, depending on whether or not you’re in a state plan state. The Office of Consultation Services exists to educate employers and employees. They will perform site inspections by invitation only, and keep the results confidential. Small companies in high-risk industries (such as remodeling contractors) are given priority, and the service is provided for free. According to OSHA, “employers can find out about potential hazards at their worksites, improve their occupational safety and health management systems, and even qualify for a one-year exemption from routine OSHA inspections.”

On the other hand, the enforcement division makes unannounced inspections, and is the entity that will penalize you if you’re found in non-compliance. There are two types of inspections. One is a “focused” inspection, which looks at only a limited number of conditions for compliance, such as fall hazards, electric hazards, personal protection, and so on. The enforcement division may do this kind of inspection, but will also perform a “wall-to-wall,” which should be self-explanatory.

Many of you are paper contractors, so what is your obligation to comply with OSHA regulations? To quote: “You will be responsible for doing your best to ensure that your subcontractor complies with OSHA.” In other words, if your sub is not in compliance, and you can’t prove that you’ve taken all reasonable steps to make the sub comply (short of throwing him off the job), you will be held responsible.

This means that you will have to require the sub to
- Wear the appropriate protective gear (hard hat, eye protection, appropriate clothing, etc.);
- Use the appropriate fall protection equipment if any work is 6 feet off the ground or higher;
- Use ground fault circuit interrupters on each extension cord;
- Have at least one of his employees trained in first aid techniques, and;
- Have in place a written safety training program and hazard communication program.

If your sub is not in compliance, you should notify him in writing that he must comply before you will allow him to complete the job. Of course, if you employ your workers, it’ll be your obligation to have these practices in place yourself.

With that said, I have never heard of an OSHA inspection on a residential remodeling project in over 20 years of experience with projects around the country. But the issue is not about the low probability of being caught violating some annoying regulations. Nor is it an economic issue. The issue is ensuring that the people who work on your projects do not get injured or killed. This is a value set that should be a part of every remodeler’s culture. It’s about doing the right thing.

Big-Box Installed Services, Part III

2009-08-31T21:00:00.004-04:00

My previous two columns explored several issues that developed while negotiating a deck installation program with a big-box home improvement chain. Hopefully by sharing these experiences, any readers who are considering a relationship with a big-box retailer will pick up a few ideas. By the end of my last column, I had outlined most of a relationship that would work for both parties; but there were just a few more items to discuss.

Warranty claims. Our franchisees would retain all obligations for their workmanship, but since most claims are for defects in materials – and the retailer would be supplier – we would need a crystal clear agreement on their obligations.

Ownership of intellectual property. Since our firm would be providing the designs, structural plans, takeoffs, pricing forms and artwork, we would retain ownership rights. This raised the question of what Big Box intended to do in areas where we did not have a franchise. One possibility would be for us to license the rights to use our materials to a local contractor until such time as we awarded a franchise in that area.

Labor rates. Given the variety of labor rates in different markets, our pricing would have to reflect local costs. This obviously isn’t an issue if your organization operates in a single market.

Other costs. There can be differences in requirements within a single metropolitan area. Beyond the building permits, some jobs may require a Dumpster, port-a-john, zoning and health department fees, and so on. The county where we had planned to pilot the program, for example, required a contractor to have a personal interview at the building department before a condo or townhouse deck project could even be sold. Having clear procedures for their salespeople to price in special requirements was critical.

Sales staff. Our company had previous experience working with a national retailer on a similar program where the store’s personnel were responsible for sales. The challenges we discovered were:

Overpromising the performance/quality of the building material
Promising additional features/work outside the scope of the designs and contract
Inability to answer technical questions
Mistakes in communicating design changes or special customer requests

To avoid these kinds of issues from occurring, we would have to develop and deliver appropriate policies and training; as well as procedures in case a salesperson’s representations created unexpected costs for us.

Material supply. We asked for the following standards of performance from the retailer:

Timely delivery
Accurate selection (we would fax or email computer-generated P.O.’s)
Quality selection
Excess materials/culls picked up & restocked
Ability to accommodate written drop location instructions and special conditions

Given the difficulty of coordinating policy among multiple stores in a single market area, I proposed that one store in an area be the supplier; and that we facilitate a personal relationship between the franchisee and the manager of the lumber department.

After three stages of negotiation it became clear that my approach of describing the devil by its details was more than the installed sales manager had bargained for. It wasn’t long before I received a “thanks, but we’re going to use a local contractor for this program” letter. No surprise, because there will always be contractors willing to work for little more than the cost of their labor and who will deal with problems after they occur rather than beforehand. What we’ll never know is how successful the program could have been with a reliable, professional delivery partner that had an investment in the outcome.

Big-Box Installed Services, Part II

2009-07-27T16:08:00.003-04:00

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…”

Big-Box Installed Services, Part I

2009-07-02T15:19:00.008-04:00

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?

Customers: Can’t Work With ‘Em… Can’t Shoot ‘Em

2009-06-03T17:45:00.000-04:00

Bill had designed and built a nice deck for Mr. Jones, but there seemed to be a new reason every week to postpone final payment. First it was the soil excavated for the footings that the customer wanted to have smoothed out. After Bill took care of that, Mr. Jones “discovered” that a few end tags were still stapled to some of the framing and wanted them removed before he’d make payment. Later, it was the chalk marks along the edge of the decking that hadn’t disappeared yet as expected. And after that he complained about “cracks” in the rail posts, and refused to believe they were a natural characteristic of pressure-treated wood. The more Bill tried to satisfy this customer, the more indignant and nit-picky the man got. It finally dawned on Bill that he may never get paid in spite of his good-faith efforts.

So early one Saturday morning, Bill showed up at the customer’s house. Hoisting a chain saw out of the back of his pickup, he stalked to the back of the house and cranked it up. Mr. Jones bolted out of the back door in his robe and demanded to know what Bill was doing. “I’m taking my deck back,” Bill said. “You can’t do that, it’s my property!” screamed the man. “No,” Bill said, “it’s not your property until you’ve paid for it.” The customer threatened to call the police. “Go ahead, call the police. By the time they get here I’ll be done.” Bill’s look of angry determination and the idling chain saw in his hand convinced the customer that he’d be better off making the final payment. The check cleared, and Bill immediately rewrote the payment schedule and punch list policy in his contract.

No doubt many of you have been tempted to pull out the chainsaw with some of your customers. There is some small percentage of the general population that simply must lie, cheat and steal… perhaps because of an extra Y chromosome or some other kind of mental pathology. Some of those people become your customers. Some go into politics.

How many of you have fantasized about creating a “Better Customer Bureau,” to provide some balance to the numerous organizations and web sites dedicated to victimized consumers? Well, someone has finally risen to the challenge. An intrepid contractor in Florida and his daughter have created Business Beware (www.businessbeware.biz). About a year ago, Robert and Ashley Bodi created their website, dedicated to helping businesses deal with deadbeat customers. Registered members (only $5/year) can post customer names and locations, and the nature of their complaint. There are about 800 members – mostly, but not all contractors – who have collectively posted over a thousand complaints. In the interest of fairness, customers are provided with the opportunity to rebut the claims, but so far none have done so. This is probably due to the lack of widespread awareness of the site. They’re doing good work, folks. Why don’t you visit their site and join up? Hopefully, as membership and public recognition increases over time, Business Beware will become an influential force for truth, justice and the American way!

Build Relationships as Well as Projects

2009-05-07T21:02:00.000-04:00

At the end of the day, business is really about personal relationships: Between you and your customers, employees, subcontractors, suppliers, and (groan) government regulators. It’s not enough that you have to battle Murphy’s Law to get each business function performed effectively: Planning, lead-generation, design, estimating, sales, document preparation, permitting, hiring, training, material takeoffs, purchase orders, scheduling, project management, job costing, payroll, payables, receivables, warranty fulfillment, financial review & analysis… No, you must also manage the less-quantifiable aspects of all these responsibilities – the impressions and expectations of the people with whom you interact.

In popular business jargon, each point of contact described in the first sentence above is a “stakeholder,” or someone who is in some way affected by your actions. It’s your job to manage the outcome of your actions on your stakeholders. The most obvious and important stakeholder is your customer. I won’t indulge in the argument that they’re all your customers, because that can become an exercise in semantics. The customer is the customer, period the end. So the $64,000 question is do you know who your customer is? If not, can you effectively manage the intangibles of those relationships for your mutual benefit? I would argue “no.”

In developing systems for use by over a hundred individual business owners – our franchisees – we surveyed our customers not only to understand key demographic criteria (household income, age, gender, occupation and education), but also to understand their reasons for purchasing and their satisfaction with both the finished project and their relationship with us. We developed a profile of a generic customer – specifically the person who would initiate the decision to purchase our service – and tailored all our marketing messages to appeal to that person. Our sales methodology evolved into a finely-tuned process designed to speak from that customer’s point of view. Recognition of who was our customer helped to shape the elements that defined our business, from the use of colors and images to behavior and language. You should seek understanding of your other stakeholders as well, especially your employees, if not quite to this level of thoroughness.

The key first step in the relationship-building process is to establish realistic expectations. While this is an absolute drop-dead must for dealings with your customers, it’s also critical in your dealings with your other stakeholders. Obviously, your success (or lack thereof) in establishing realistic expectations with your customers, employees, subcontractors, suppliers and government friends will determine the quality of the outcomes you achieve. Think of expectation-setting as the oil that lubricates the pistons in an engine. Without it, the engine will quickly overheat and seize up.

And it’s not just the measurable aspects of those expectations that need to be communicated (such as when the crews will show up, whom to call for a problem, when payments are due), it’s your company’s values – transparency, responsiveness, and quality of workmanship being just a few. When you’ve successfully communicated your expectations – and just as important, really heard what your stakeholders’ expectations are – you’ll have benchmarks that make it easier to handle the numerous predictable and unpredictable issues that percolate up regularly in all your business relationships. And you’ll have created the foundation for managing those critical elements of your business called “people.”

Remodelers to Restorers?

2009-01-31T17:14:00.004-05:00

While at a recent conference of the Restoration Industry Association (RIA), I heard several contractors complain about remodelers and home builders attempting to get into the insurance restoration business. With head-shaking disdain, they remarked that the restoration business isn’t as simple as builders think.

And they’re right.

But that’s not what some would have us believe. Shortly after the conference I found a web site advertising a book that would teach contractors the SIX EASY STEPS to becoming an insurance restoration contractor, including how to achieve (a remarkably precise) 87.62% bid success rate, with HUGE PROFITS. BIG, FAT, WONDERFUL 20% to 40% PROFITS!

Hmm. A few of these “easy steps” remind me of the first half of comedian Steve Martin’s joke about how to become a millionaire and never pay taxes: “First… get a million dollars.”

“Easy” step #1 is to “Establish a relationship with the proper insurance company 'insider', known as an adjuster.” Well, fine. Go ahead and establish that relationship. But it helps to have knowledge of the special procedures unique to restoration work. “Easy” steps 2 through 6 are to analyze the damage (yes, maybe along with five other contractors), perform the repair cost analysis (do you know how to use the standard estimating software, Xactimate?), obtain an "approval of sheet" from the insurance adjuster (which I assume is an agreed scope and price), set up the contractual relationship (which now involve the interests of three parties), and then “proceed with the repairs.”

Let’s isolate just one of those “easy” steps. An insurance estimate is scoped and priced much differently than a remodeling job, and Xactimate requires special training to use. If you’re a participant in an insurer’s program, they will pay your cost based on Xactimate’s pre-set values + 10% markup (not margin) for your overhead + 10% for profit. Pause for laughter. Money is made in this business, to be sure. But could you make money in your business if you used that formula, literally? Well, there are ways, but those were the subject of ethics roundtable debates at the aforementioned RIA conference.

Now, perhaps I’m being cynical. Maybe it is easy to just dive into emergency response and restoration services for water, smoke, and fire damage. All you need are trained and certified technicians, and the capability of providing 24-hour response. Your staff will need to know how to deal with traumatized homeowners in the middle of a crisis. And they’ll want to use tools and equipment that are specially designed to perform the work required by the emergency – take water damage, for example: equipment that can dry a structure quickly; vacuum units and specialty extraction tools (for carpets and cushions); air movers and dehumidifiers; meters to test moisture content. And there are special procedures and documentation required to prove that the structure was dried properly and returned to a pre-loss condition that won’t promote mold growth.

But wait, there’s more! Other services include content inventory and pack-out, fire damage demolition, smoke mitigation, mold remediation, gray and black water mitigation, and even (shudder) trauma scene cleanup. With fire damage repair, for example, you have to do the correct amount of demolition. Too much and you’ll be doing work for which you won’t be paid. Too little and you could have odor and structural problems. Then you have to properly handle the fire odor problem. But I’ve made my point: Restoration work is a completely different animal.

Different, until you get to the “put-back” or rebuilding step. This is where the remodeling industry intersects the restoration industry. Put-back means what it implies – replacing the structure and finishes to their original state: framing, insulation, drywall, trim, flooring, painting, and so on. Margins are typically lower than for mitigation work, because put-back requires management and technical skills that cost more in the marketplace. This would obviously dilute a restoration contractor’s blended margin if he carried the fixed costs necessary to perform that kind of work. Therefore, many choose not to pursue it. But it’s also the type of work that matches a remodeler’s skills and resources.

Given the state of the remodeling industry right now and for the foreseeable future, this may present an opportunity for you to subcontract for a local restoration firm that does not currently perform the put-back portion of insurance claims work. The difficulty will be in convincing them that their company’s good name will not be tarnished by your failure to perform acceptably. That’s a hot-button issue, as their business relies on maintaining a satisfactory reputation among the insurance adjusters who feed them work. One bad job could undo years of good will.

So if you can demonstrate why there would be no risk in subbing to your company; or if you’re willing to become an employee, there might be an opportunity for steady work through this protracted slowdown. After all, fires and burst pipes don’t care about the economy.

P.S.: The second half of Martin’s joke is “Then say… ‘I forgot!’”

Organize Your Business Using The Franchising Model

2008-10-30T16:04:00.018-04:00

For those who have read Michael Gerber’s The E Myth Revisited, you’ll recognize this theme: Organize your business as though you were going to franchise it.

Franchising is simply a method of distribution of a product or service utilizing the brand, operating systems and support of the franchisor. Applying these principles to your own business can help improve your productivity and profitability even if you never plan to actually franchise it.

The foundation of a franchiseable business is replicable operating systems. “System” is defined as a coordinated body of methods and procedures, but I would add that for business purposes it needs to be documented in a form that can be most effectively utilized by those responsible for its implementation. So where do you start if you want to document operating systems for your business? I recommend that you create a “map” of your organization, sorted by job function, responsibility, and task. From that map you can document the systems for each key responsibility.

As an exercise, write in simple outline format how your business is organized. Example:

I. Marketing/Advertising
II. Sales
III. Production
IV. General Management/Financial

Then under each section, write the related responsibilities. Example:

IV. General Management/Financial
a. Planning & budgeting
b. Bookkeeping & accounting
c. Human resources
d. Office administration
e. Operational performance review & analysis

Then under each responsibility, write the related tasks. Example:

IV. General Management/Financial
e. Operational performance review & analysis
- Review goals & objectives monthly
- Review job cost reports
- Review cash flow reports
- Review financial statements monthly
- Review marketing numbers monthly
- Review sales plan vs. actual monthly
- Compare closing ratios to plan monthly
- Compare gross profit to budget monthly
- Determine where and why variances occurred
- Make changes to plan and budget monthly

Now create a spreadsheet with a page (tab) for each section, with the responsibilities and tasks listed down the rows. At the head along the columns, list the job functions, not titles, in your company (as the general manager, you may also be the sales manager and production manager; so list all three functions). Where a job function and a task intersect on the spreadsheet, place an X if that function handles that task. Ideally, the responsibilities and tasks will be in sequential order, ascending, so the information will be in a “day in the life” order. Example:

With this breakdown, you can provide your staff with an outline of their duties. This, however, is not an “operating system.” A true system would include a written, graphical and/or video description of how to perform it, which should address the “who, what, where, when, and why.” This would be a staggering project for all the tasks that have been mapped out, so the realistic approach is to identify only the most critical tasks and document those. But don’t assume the burden of doing this all yourself; delegate pieces of it to your staff. If they’re not comfortable with writing, meet with them and tape record what they say.

Self-Accountability: The Biggest Challenge

2008-10-26T15:02:00.006-04:00

Years ago, I counseled one of my franchisees who had been a trainer for my company before he left to open his own franchise. He was struggling to survive, and finally reached out for help. Here was a bright young man who had been in the position of teaching franchisees how to improve their business performance; and yet when I asked him the most basic questions (what were his sales against plan, what margins was he hitting, what was his monthly nut), he sheepishly admitted to not having the answers. Even though he knew what to do, he didn’t implement the very lessons he had taught to others because apparently there was no one in authority to kick his butt.

That encounter crystallized in my mind the need for a mechanism to hold the business owner accountable. When you’re the owner, who do you answer to? And what do you do if you don’t like your performance? Unless you have exceptional self-discipline, you probably cut yourself a lot of slack. When work is plentiful, the requirements of the contracting process provide both the structure and urgency that motivate productive effort. But when there’s little to no work on the boards, is your day-to-day activity driven by a comparably clear and pressing set of objectives? In either case, are you managing your business as effectively as possible?

If this isn’t an issue for you, stop reading. For the rest of you, consider developing an external accountability system that will help you focus and perform at the level necessary to navigate through leaner times ahead. Here are two ideas:

First
> Create a checklist of your key performance measures broken down by category – Marketing & Advertising, Sales, Production, and Management & Financial. For example, the list would include number of leads received, number of sales by source of lead, gross margin achieved, net profit for period, and so on. You should be able to come up with at least 20.
> Once a month, meet with an outside advisor (your banker or accountant, or a successful business owner) to report the previous month’s performance on these measures against your budget (assuming that you have one). Defend and analyze the results.

The nominal purpose of this exercise is to help identify problem areas and to establish corrective action. But the actual purpose is to force you into a discipline of planning, tracking performance, and analyzing performance against plan; and to do so in a recurring, timely fashion… all of which are essential to the competent stewardship of a company. Using an outside advisor establishes a de facto accountability relationship, because it’s human nature to avoid the embarrassment of failing to be prepared for the meetings and wasting someone’s valuable time.

Second
Another option would be to join a peer review network that specializes in the construction industry, such as Business Networks (not to be confused with BNI). A good peer review program will require you to meet a high standard of participation and be metrics-intensive, providing a comprehensive data base against which to benchmark your performance. Membership costs money, but if you follow the system your return will far exceed the investment. Having your peers hold you to account, as well as provide you with advice and support, is priceless.

Whether it’s a DIY program or a professional membership, an external accountability system will provide the framework that can motivate you to take needed action when you otherwise might not.