Big-Box Installed Services, Part III

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

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

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

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

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?

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

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.