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.
Monday, May 17, 2010
Saturday, April 24, 2010
Lead Rule Perspective
Much (virtual) ink has been spilled writing about the EPA’s lead-safe work practices rule – a lot of it objecting to the methods and timing. While no serious person would trade profits for the health of children, it is reasonable to question the way in which the EPA is implementing this, as well as the efficacy of the policy itself. Heated rhetoric by environmental and health advocates such as "A bad economy is not a good excuse to poison children,” does little more than polarize the debate and maligns small business owners who will be burdened by a mandate that may fail to achieve its purpose.
Following is a small fraction of the many comments by contractors and other stakeholders found on the Internet, on forums like RemodelCrazy and Contractor Talk, industry organizations’ web sites, and from comments on news stories:
- Two-thirds of U.S. homes and apartments (78 million out of 120 million) were built before 1978. Half of the pre-1978 homes don’t contain lead but the rule, depending on implementation, might apply to all of them.
- Many homes older than 1978 have gone through a number of remodels [already].
- Making it unlawful to practice home renovation without federal certification will assuredly reduce the supply and raise the cost of renovations. One result of shifting the cost curve will be to encourage teardowns of otherwise sound housing stock. Some other properties that remain occupied will simply go without renovations and repairs, with unpredictable (but probably not good) consequences for health and safety.
- Homeowners will almost certainly turn to unlicensed workers rather than pay higher costs for companies who follow the federal rules.
- I am advocating that the law be changed to compel property owners to take more responsibility in ensuring that they comply with the law and hire only companies that are certified.
- The new rules mandate an excessive use of plastic and force workers to wear booties on plastic sheeting. So in exchange for reducing lead dust, we can kill workers by forcing them to work while standing on “slip and slides.”
- Anyone know where I can buy a truck load of Visqueen (poly sheeting) before the price goes up?
- Think about neighbors who claim the paint dust does not obediently fall onto the horizontal ground plastic, but is airborne and (they claim) travels onto their property. Give it to a lawyer and we could have an expensive suit to defend. I fear the neighbors more than I fear the EPA.
- Another issue is the cost of insurance. My agent said it would start at $3,000 a year, on top of my regular insurance.
- In training, the instructors said that anytime you leave the containment area you needed to perform a dry decontamination. [After doing a bathroom remodel as a test case] I stopped doing this after repeated trips to my tool trailer and the dumpster. It got to a point where I was not sure if I was de-conned anymore.
- The bagging or wrapping of any lead paint products is required and even without wearing the suit your times will increase due to the heat being confined in the room(s). Then you have the time for pulling nails or screws so they don't tear the bags.
- The rule will add 10-15% of the project cost. On this particular project we are looking at 20-30K in additional fees to meet the requirements.
- There aren’t enough training options. The EPA hasn’t made this a priority for public outreach, so the average consumer just thinks it’s an optional added cost, not a necessity.
- The higher costs may drive homeowners to choose do-it-yourself alternative solutions, such as window air conditioners and space heaters, which would not make use of energy-efficient technologies.
- What happens if a non-compliant contractor is busted in the middle of a job, can’t pay the fine, and leaves the homeowner with a torn-up house he can’t complete?
- The April 22 deadline may derail the proposed Home Star program and prevent meaningful retrofit work from being performed because there won't be enough certified renovation contractors.
- Some of the problems we face, like proper insurance coverage, misinterpretation of the rule, homeowners doing the demolition themselves, unlicensed contractors offering cost savings , property values being affected and a proliferation of lawsuits by unscrupulous homeowners and their attorneys will be on us like stink on a skunk.
- A common sense approach followed by the majority would produce a safer remodeling market than an onerous rule strictly followed by a minority.
And on the upside…
- I can see [commercial contractors and home builders] that "dabble" in remodeling clearing out of the game for sure.
Following is a small fraction of the many comments by contractors and other stakeholders found on the Internet, on forums like RemodelCrazy and Contractor Talk, industry organizations’ web sites, and from comments on news stories:
- Two-thirds of U.S. homes and apartments (78 million out of 120 million) were built before 1978. Half of the pre-1978 homes don’t contain lead but the rule, depending on implementation, might apply to all of them.
- Many homes older than 1978 have gone through a number of remodels [already].
- Making it unlawful to practice home renovation without federal certification will assuredly reduce the supply and raise the cost of renovations. One result of shifting the cost curve will be to encourage teardowns of otherwise sound housing stock. Some other properties that remain occupied will simply go without renovations and repairs, with unpredictable (but probably not good) consequences for health and safety.
- Homeowners will almost certainly turn to unlicensed workers rather than pay higher costs for companies who follow the federal rules.
- I am advocating that the law be changed to compel property owners to take more responsibility in ensuring that they comply with the law and hire only companies that are certified.
- The new rules mandate an excessive use of plastic and force workers to wear booties on plastic sheeting. So in exchange for reducing lead dust, we can kill workers by forcing them to work while standing on “slip and slides.”
- Anyone know where I can buy a truck load of Visqueen (poly sheeting) before the price goes up?
- Think about neighbors who claim the paint dust does not obediently fall onto the horizontal ground plastic, but is airborne and (they claim) travels onto their property. Give it to a lawyer and we could have an expensive suit to defend. I fear the neighbors more than I fear the EPA.
- Another issue is the cost of insurance. My agent said it would start at $3,000 a year, on top of my regular insurance.
- In training, the instructors said that anytime you leave the containment area you needed to perform a dry decontamination. [After doing a bathroom remodel as a test case] I stopped doing this after repeated trips to my tool trailer and the dumpster. It got to a point where I was not sure if I was de-conned anymore.
- The bagging or wrapping of any lead paint products is required and even without wearing the suit your times will increase due to the heat being confined in the room(s). Then you have the time for pulling nails or screws so they don't tear the bags.
- The rule will add 10-15% of the project cost. On this particular project we are looking at 20-30K in additional fees to meet the requirements.
- There aren’t enough training options. The EPA hasn’t made this a priority for public outreach, so the average consumer just thinks it’s an optional added cost, not a necessity.
- The higher costs may drive homeowners to choose do-it-yourself alternative solutions, such as window air conditioners and space heaters, which would not make use of energy-efficient technologies.
- What happens if a non-compliant contractor is busted in the middle of a job, can’t pay the fine, and leaves the homeowner with a torn-up house he can’t complete?
- The April 22 deadline may derail the proposed Home Star program and prevent meaningful retrofit work from being performed because there won't be enough certified renovation contractors.
- Some of the problems we face, like proper insurance coverage, misinterpretation of the rule, homeowners doing the demolition themselves, unlicensed contractors offering cost savings , property values being affected and a proliferation of lawsuits by unscrupulous homeowners and their attorneys will be on us like stink on a skunk.
- A common sense approach followed by the majority would produce a safer remodeling market than an onerous rule strictly followed by a minority.
And on the upside…
- I can see [commercial contractors and home builders] that "dabble" in remodeling clearing out of the game for sure.
Friday, March 19, 2010
Do You Believe in Safety?
Elaine Taylor recalls back in the mid 1990’s when one of her employees – a young carpenter – was wrapping up work at the end of the day. He and another carpenter were replacing the roof on a fire-damaged home. They were working in wintertime, but not just any old winter. This was winter in Alaska, and the crew had just finished spreading plastic sheets to cover the roof openings. One feature of plastic is its low coefficient of friction, especially when icy and laying at a 23⁰ angle. One feature of young carpenters is an attitude of haste; another, of invincibility. Naturally, he lost his footing; and of course, he wasn’t wearing his fall protection equipment. In less than two seconds, he had fallen 2½ stories – over 30 feet – hitting the frozen ground at around 32 mph.
Fortunately his landing was cushioned by snow; otherwise he might have died. Nonetheless, he broke his lower back and never again returned to work as a carpenter. He was off work for a year and had to get training to work in another industry. “It changed his life forever,” Taylor said wistfully.
The company Taylor owns with her husband Larry and their children Trent and Lisa – Taylored Restoration, in Anchorage – had been technically compliant with AKOSH regulations. They had their safety meetings, they had a safety program; but they didn’t follow up in a systematic fashion to ensure that employees were implementing the procedures. “We talked the talk, but didn’t walk the walk,” Elaine Taylor says. “It wasn’t really key to our beliefs.” Before the accident, AKOSH would inspect their commercial work, but after the accident they became a larger dot on AKOSH’s radar. It didn’t help when they filed the accident report late (the federal OSHA standard is less strict, requiring notification at three hospitalizations). The job site was a long way from the hospital, and they arrived so late they decided to wait until the next day to file; not realizing that their delay placed them in violation of AKOSH’s 24-hr. notice rule. That highlighted the need for better education in the applicable OSHA regulations.
Fortunately, they didn’t incur any legal liability. But they paid a fine to AKOSH, and of course their EMR went up – causing their worker’s compensation premiums to increase significantly. While the economic consequences were meaningful, the greater impact on the Taylors was the sobering human cost paid by their carpenter. At a subsequent meeting of the company leadership team, Taylor interrupted the discussion and declared “We’re approaching this the wrong way. We need to look at safety as the first thing we think about.” That initiated a fundamental change in the company’s operating procedures and culture.
Now, every employee has the authority to stop any activity they think is unsafe. If a worker has an accident, it’s addressed at the next company meeting and the employees discuss how it could have been avoided. Safety policy is enforced rigorously in the field – the Taylors actually fired some employees that had refused to tie off. The company also works closely with their worker’s compensation carrier to ensure that their safety program is up to date.
Their subcontractors have to walk the line right along with them. On one project, a Taylored Restoration employee stopped some employees working for a sub and kicked them off the job. At another project, an apartment complex, an employee spoke up during a job site meeting and insisted that a sub working for the apartment manager be tied off or Taylored would stop work. The apartment manager agreed and required the worker to wear his fall protection equipment. It happens that a sub actually did fall off the roof, and when he reached the limit of the line he swung back under the eave into a tempered glass window. The impact left an imprint of his body on the glass, most likely damaging his pride but not his health.
Every new Taylored Restoration employee now must go through a formal safety orientation, and is not allowed on a job until he’s seen a few key videos. There’s a company safety committee with oversight responsibility for the various departments – cleaning, office staff, large jobs, small jobs, and so on. They are charged with continuous revisions to the safety manual and MSDSs, and with keeping employees’ safety awareness at top of mind. Safety presentations are run by different departments in rotation at the company-wide monthly meetings. Creativity is encouraged, if not required – departmental employees produce skits, videos, and exercises to convey their lessons in new and memorable ways. One exercise pits workers in a relay race to help get them more familiar with tying off their fall protection equipment.
There’s no central database for residential construction, like Dodge Reports, from which OSHA can develop programmed inspection lists, leaving it to the off chance of a drive-by to initiate any scrutiny. This means that compliance in residential restoration isn’t driven by being closely watched, but instead is driven by company culture. So if a contractor’s owners don’t have a genuine commitment to safety, like Elaine and Larry Taylor do, the risk of serious injury or death is probably too high.
Fortunately his landing was cushioned by snow; otherwise he might have died. Nonetheless, he broke his lower back and never again returned to work as a carpenter. He was off work for a year and had to get training to work in another industry. “It changed his life forever,” Taylor said wistfully.
The company Taylor owns with her husband Larry and their children Trent and Lisa – Taylored Restoration, in Anchorage – had been technically compliant with AKOSH regulations. They had their safety meetings, they had a safety program; but they didn’t follow up in a systematic fashion to ensure that employees were implementing the procedures. “We talked the talk, but didn’t walk the walk,” Elaine Taylor says. “It wasn’t really key to our beliefs.” Before the accident, AKOSH would inspect their commercial work, but after the accident they became a larger dot on AKOSH’s radar. It didn’t help when they filed the accident report late (the federal OSHA standard is less strict, requiring notification at three hospitalizations). The job site was a long way from the hospital, and they arrived so late they decided to wait until the next day to file; not realizing that their delay placed them in violation of AKOSH’s 24-hr. notice rule. That highlighted the need for better education in the applicable OSHA regulations.
Fortunately, they didn’t incur any legal liability. But they paid a fine to AKOSH, and of course their EMR went up – causing their worker’s compensation premiums to increase significantly. While the economic consequences were meaningful, the greater impact on the Taylors was the sobering human cost paid by their carpenter. At a subsequent meeting of the company leadership team, Taylor interrupted the discussion and declared “We’re approaching this the wrong way. We need to look at safety as the first thing we think about.” That initiated a fundamental change in the company’s operating procedures and culture.
Now, every employee has the authority to stop any activity they think is unsafe. If a worker has an accident, it’s addressed at the next company meeting and the employees discuss how it could have been avoided. Safety policy is enforced rigorously in the field – the Taylors actually fired some employees that had refused to tie off. The company also works closely with their worker’s compensation carrier to ensure that their safety program is up to date.
Their subcontractors have to walk the line right along with them. On one project, a Taylored Restoration employee stopped some employees working for a sub and kicked them off the job. At another project, an apartment complex, an employee spoke up during a job site meeting and insisted that a sub working for the apartment manager be tied off or Taylored would stop work. The apartment manager agreed and required the worker to wear his fall protection equipment. It happens that a sub actually did fall off the roof, and when he reached the limit of the line he swung back under the eave into a tempered glass window. The impact left an imprint of his body on the glass, most likely damaging his pride but not his health.
Every new Taylored Restoration employee now must go through a formal safety orientation, and is not allowed on a job until he’s seen a few key videos. There’s a company safety committee with oversight responsibility for the various departments – cleaning, office staff, large jobs, small jobs, and so on. They are charged with continuous revisions to the safety manual and MSDSs, and with keeping employees’ safety awareness at top of mind. Safety presentations are run by different departments in rotation at the company-wide monthly meetings. Creativity is encouraged, if not required – departmental employees produce skits, videos, and exercises to convey their lessons in new and memorable ways. One exercise pits workers in a relay race to help get them more familiar with tying off their fall protection equipment.
There’s no central database for residential construction, like Dodge Reports, from which OSHA can develop programmed inspection lists, leaving it to the off chance of a drive-by to initiate any scrutiny. This means that compliance in residential restoration isn’t driven by being closely watched, but instead is driven by company culture. So if a contractor’s owners don’t have a genuine commitment to safety, like Elaine and Larry Taylor do, the risk of serious injury or death is probably too high.
Friday, March 5, 2010
Still Dead, But With Some Qualifications
The column I wrote last month was published in Remodeling magazine online under the title The World As You Know It, and appears on this blog as Dead on Arrival. It generated some pushback from contractors who thought it focused on the negative; that it seemed to endorse the bankrupt idea of competing on price; that the opinions weren’t valid because they didn’t cite empirical research.
So I asked Les Cunningham to expand on his thoughts:
“Having been an airline pilot, I know humans can’t fly–I’m a realist. Positive affirmations are good, but they need to be salted liberally with realism,” Cunningham says. Thirty-nine years in the industry, and working with thousands of remodelers over those years has given Cunningham a deep reservoir of realism. He suggests that remodelers ask themselves “What’s my company worth today? Is it worth more than it was a year ago?”
“Yes, there’s work out there, but at reduced volume. One good operator I’m working with told me recently that he’s working ten times as hard; it takes two to three proposals to get a contract.” And price? It’s hardball negotiations. The client analyzes whether or not there’s sufficient value in doing the project, and then how much he can afford. Even though he likes you as a professional, can he get the same quality done at a lower price? Cunningham continues, “When someone’s checking your price, they can check the cost of materials and labor and calculate what percent over the cheapest alternative price you are. They make a value judgment for the money spent and quality received. There are more competitors than ever out there that are giving customers a cheaper price.”
Was Cunningham advocating that remodelers drop their prices at the first customer objection? No, he stresses. “Let me tell you a story. Two clients of mine were going after the same job. The [25%] higher-priced contractor was convinced that he was doing the right thing. The one with the lower bid actually had changed the specs and was able to charge a higher margin than he would’ve had he priced the project based on the original specs.” The difference was in understanding the customer’s wishes and his costs well enough to engineer a win-win solution for him and his customer.
But not all remodelers have command of their numbers, especially with complex design/build work. In a more competitive environment, they might find it increasingly difficult to differentiate themselves based on workmanship and service alone. Therefore, those contractors should avoid design-based variables that erode margins, and might benefit from selling products that minimize slippage–what Cunningham refers to as “bolt-on” products.
Cunningham’s company, Business Networks, collects financial statements and marketing and advertising data from its members around the country, who represent a good cross-section of the remodeling industry. The data they track is placed on a common comparison form with standardized definitions. This enables Business Networks to rank its members and generate averages based on real sales and margin targets. The peer format allows members to review and analyze the data eyeball-to-eyeball. Empirically, volumes and margins are down as much as 90%. Seventy percent of projects are now being financed from savings. Customers are increasingly concentrated among those who have the most stable employment–doctors and other health professionals, lawyers, entrepreneurs, and government employees.
There are successes, but not nearly on the scale as before. Certainly, there are pockets of stability–think Washington, DC and Austin, Texas–but in general, Cunningham says “if there’s a lot less success there must be a lot more failure. To continue in the same direction is the wrong answer. This is the first downturn where everyone’s been affected–nobody’s been untouched. But the market will return sometime…when it has disposable money available.”
Cunningham goes on to say that “until then, what a [struggling] remodeler needs to do is become a general contractor – not a specialist. You take whatever you can to break even or make money. Right now, what people seem to be buying are exterior products: windows, doors, siding, decks, and green-related items. In the boom years, the mantra was ‘if you do quality work, you’ll make a profit.’ Now, that’s a lie.”
So I asked Les Cunningham to expand on his thoughts:
“Having been an airline pilot, I know humans can’t fly–I’m a realist. Positive affirmations are good, but they need to be salted liberally with realism,” Cunningham says. Thirty-nine years in the industry, and working with thousands of remodelers over those years has given Cunningham a deep reservoir of realism. He suggests that remodelers ask themselves “What’s my company worth today? Is it worth more than it was a year ago?”
“Yes, there’s work out there, but at reduced volume. One good operator I’m working with told me recently that he’s working ten times as hard; it takes two to three proposals to get a contract.” And price? It’s hardball negotiations. The client analyzes whether or not there’s sufficient value in doing the project, and then how much he can afford. Even though he likes you as a professional, can he get the same quality done at a lower price? Cunningham continues, “When someone’s checking your price, they can check the cost of materials and labor and calculate what percent over the cheapest alternative price you are. They make a value judgment for the money spent and quality received. There are more competitors than ever out there that are giving customers a cheaper price.”
Was Cunningham advocating that remodelers drop their prices at the first customer objection? No, he stresses. “Let me tell you a story. Two clients of mine were going after the same job. The [25%] higher-priced contractor was convinced that he was doing the right thing. The one with the lower bid actually had changed the specs and was able to charge a higher margin than he would’ve had he priced the project based on the original specs.” The difference was in understanding the customer’s wishes and his costs well enough to engineer a win-win solution for him and his customer.
But not all remodelers have command of their numbers, especially with complex design/build work. In a more competitive environment, they might find it increasingly difficult to differentiate themselves based on workmanship and service alone. Therefore, those contractors should avoid design-based variables that erode margins, and might benefit from selling products that minimize slippage–what Cunningham refers to as “bolt-on” products.
Cunningham’s company, Business Networks, collects financial statements and marketing and advertising data from its members around the country, who represent a good cross-section of the remodeling industry. The data they track is placed on a common comparison form with standardized definitions. This enables Business Networks to rank its members and generate averages based on real sales and margin targets. The peer format allows members to review and analyze the data eyeball-to-eyeball. Empirically, volumes and margins are down as much as 90%. Seventy percent of projects are now being financed from savings. Customers are increasingly concentrated among those who have the most stable employment–doctors and other health professionals, lawyers, entrepreneurs, and government employees.
There are successes, but not nearly on the scale as before. Certainly, there are pockets of stability–think Washington, DC and Austin, Texas–but in general, Cunningham says “if there’s a lot less success there must be a lot more failure. To continue in the same direction is the wrong answer. This is the first downturn where everyone’s been affected–nobody’s been untouched. But the market will return sometime…when it has disposable money available.”
Cunningham goes on to say that “until then, what a [struggling] remodeler needs to do is become a general contractor – not a specialist. You take whatever you can to break even or make money. Right now, what people seem to be buying are exterior products: windows, doors, siding, decks, and green-related items. In the boom years, the mantra was ‘if you do quality work, you’ll make a profit.’ Now, that’s a lie.”
Wednesday, February 3, 2010
Dead on Arrival
Les Cunningham has a perspective on the remodeling industry that no one else can match: He was a remodeler for 15 years, and a 14-time CotY award winner. Cunningham founded the peer-review firm Business Networks over three decades ago, and served as NARI’s national president in 2000. With a degree in chemistry and years of experience as a military and commercial pilot, Les’s rigorous intellectual standards are reflected in the way Business Networks operates. Group members have to regularly submit performance data, which is plugged into a proprietary database designed by Les and his team. The updates establish evergreen benchmarks, against which members compare their performance in a continuous process of review and analysis. So when Les Cunningham shares his thoughts, remodelers are wise to listen closely.
“The remodeling industry as we know it is dead.”
Savor that quote in the light of your own experience and what you’ve worked for all these years and your plans for the years ahead. Should you stop and consider the meaning of that for your company, your financial health and your future?
Cunningham looks to historical patterns to help explain his thinking. Remodeling in the 1960’s consisted mainly of “bolt-on” home improvements such as windows, roofing and siding. The industry as we know it today developed in the 1970’s as a housing shortage caused rapidly rising home values–providing the economic fuel for discretionary design/build remodeling. The mindset was that the good times would never end. “The 1981-82 recession put a nail in that idea,” says Cunningham. “But after the recession ended, the same phenomenon took off again.” The recessions of 1990-91 and 2001 repeated the same pattern, bringing us to the market collapse in 2008.
This time though, there is a glut of houses on the market and property values have dropped so much that the equity homeowners used to borrow against has virtually disappeared, eliminating the primary driver of discretionary purchases. With the resulting drop in appraisals, banks have almost stopped lending. “And if you have money, the last thing you’d do is spend it,” says Cunningham. “The old days of a remodeler telling a prospect ‘if you don’t come to my office’ or, ‘if you don’t give me a design fee’ are gone.”
With the severe reduction in the amount of business available, many remodelers who were order-takers in good times find themselves ill-equipped to generate business. With the number of remodelers staying constant in a severely shrunken market, competition has increased. This means that quality work is no longer the primary competitive differentiator. Cunningham explains, “The only dollars now being spent are being spent more wisely because the consumer has the Internet, which gives them more choice. Price has become the deciding issue. Now, most remodeling is needs-based. If there’s a kitchen remodel, it’s financed by savings – not debt. For those that have money, it’s in vogue not to spend. We’re not going to hit the bottom until foreclosures have been soaked up by the market; and not by speculators, but by people who live in those previously-foreclosed homes.”
So with all this gloom, what’s a remodeler to do? Cunningham says “You have to become a home improvement contractor, vis-a-vis the 1960’s…the ‘bolt-on’ products. You must be more of a businessperson, running your company by the numbers. Take every job you can get and keep your costs as low as you can.” He believes that this bodes well for construction franchises that have proven systems and a respected brand, because consumers will opt for a company that they believe will stand the test of time.
All this requires a mental adjustment to the economic realities of life; an adjustment that Cunningham fears many remodelers won’t make. Will you?
“The remodeling industry as we know it is dead.”
Savor that quote in the light of your own experience and what you’ve worked for all these years and your plans for the years ahead. Should you stop and consider the meaning of that for your company, your financial health and your future?
Cunningham looks to historical patterns to help explain his thinking. Remodeling in the 1960’s consisted mainly of “bolt-on” home improvements such as windows, roofing and siding. The industry as we know it today developed in the 1970’s as a housing shortage caused rapidly rising home values–providing the economic fuel for discretionary design/build remodeling. The mindset was that the good times would never end. “The 1981-82 recession put a nail in that idea,” says Cunningham. “But after the recession ended, the same phenomenon took off again.” The recessions of 1990-91 and 2001 repeated the same pattern, bringing us to the market collapse in 2008.
This time though, there is a glut of houses on the market and property values have dropped so much that the equity homeowners used to borrow against has virtually disappeared, eliminating the primary driver of discretionary purchases. With the resulting drop in appraisals, banks have almost stopped lending. “And if you have money, the last thing you’d do is spend it,” says Cunningham. “The old days of a remodeler telling a prospect ‘if you don’t come to my office’ or, ‘if you don’t give me a design fee’ are gone.”
With the severe reduction in the amount of business available, many remodelers who were order-takers in good times find themselves ill-equipped to generate business. With the number of remodelers staying constant in a severely shrunken market, competition has increased. This means that quality work is no longer the primary competitive differentiator. Cunningham explains, “The only dollars now being spent are being spent more wisely because the consumer has the Internet, which gives them more choice. Price has become the deciding issue. Now, most remodeling is needs-based. If there’s a kitchen remodel, it’s financed by savings – not debt. For those that have money, it’s in vogue not to spend. We’re not going to hit the bottom until foreclosures have been soaked up by the market; and not by speculators, but by people who live in those previously-foreclosed homes.”
So with all this gloom, what’s a remodeler to do? Cunningham says “You have to become a home improvement contractor, vis-a-vis the 1960’s…the ‘bolt-on’ products. You must be more of a businessperson, running your company by the numbers. Take every job you can get and keep your costs as low as you can.” He believes that this bodes well for construction franchises that have proven systems and a respected brand, because consumers will opt for a company that they believe will stand the test of time.
All this requires a mental adjustment to the economic realities of life; an adjustment that Cunningham fears many remodelers won’t make. Will you?
Tuesday, January 5, 2010
Just Because the Economy is Bad, Don't Change Who You Are
As a restaurant manager in Dayton, OH during the nasty recession of the early 1980’s, Rick Crossman learned a lesson that he applies to his 20-year-old design/build business. In that bad economy, restaurants struggled to stay busy even on Friday and Saturday nights; but there was one restaurant in town that did a brisk business throughout the week. Other restaurants, in spite of promotions and tinkering with their menus, couldn’t get consistent traffic and of course, many failed. The key for the successful restaurant was in providing its customers with predictable quality; with reliably good food and service at a reasonable price – not the lowest price, but a great value for the price.
The analogy applies to the remodeling industry in the current economic downturn. Too often, Crossman says, even a quality contractor will use the tight economy as an excuse to change his system: traveling outside his normal operating area to run any lead, qualified or not; chasing after projects he didn’t sell before the recession; cutting his material specs, or bypassing the permit process to offer a cheaper price. He begins improvising whatever it takes to get the sale--just like the back-of-the-pickup-truck contractors.
Crossman’s company, Archadeck of Southern Fairfield County (CT), serves the middle to upper-middle market. They serve the same customer with the same product they did before the recession, rather than chasing lower-priced projects. “Wherever you’re pigeonholed, stay in that hole,” he says. “Follow your process – don’t think you need to improvise to win. It’s the same customer.”
Crossman seeks to understand who his customer is and why they buy from him. During the first five months of 2009, his consumers’ attitude seemed to be finding out how little they could spend on a project. Then there seemed to be a learning curve as people started to understand how the national economy affected their personal economy. Their purchasing behavior changed from “how much” to “how well” to spend.
Acknowledging that times are tougher, Crossman believes that it’s more important than ever to qualify prospects to ensure that there’s a match with what you offer. Recently he declined to see one prospect because they lived outside his operating area. The wife called back upset that he had refused to come out for a design consultation. After apologizing for unintentionally offending her, he asked the homeowner “If this is a project I can help you with, would you be willing to do it in the winter instead of next spring?” She said yes. That was a buying signal that justified Crossman’s decision to proceed with an initial visit.
Crossman sold that project in spite of the fact that it’s outside his preferred range. But it’s scheduled to be built this winter when there’s no conflict with projects closer to home, and keeping a crew busy during the slow season offsets the disadvantage of the extra travel. But the project he sold will still have solid copper flashing and stainless steel screws, it’ll be designed to the same rigorous structural standards, he’ll provide the same warranty, and he’ll escrow the down payment rather than use it to pay invoices on other projects. His customer will receive the same product and the same service she would have received when times were good. This may be one reason Crossman’s referrals drive the majority of his business – a business which is actually ahead of his 2008 sales, even in the worst economy since the Great Depression.
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.
Tuesday, December 1, 2009
A Different Take on Ethics in Remodeling
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.
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.
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