Qualified Remodeler Magazine

JAN 2019

Qualified Remodeler helps independent remodeling firms to survive, become more professional and more profitable by providing must-have business information, namely best business practices, new product information and timely design ideas.

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like to lock in a number of open projects at the lower rate—and delay shipments to the respective jobsites until the products will be installed. "With our relationship, they allow us to extend it into the past. We just give them a list of names, say these are all coming, and when they're coming," Jackson says. "They'll lock those jobs in at past prices because the jobs are already sold. I think a lot of times, a lot of this stuff is about building relationships with your trade partners, your sub- contractors and your [material] vendors." The company instituted a commodity clause in its contracts with homeowners and will include a contingency for tariffs shortly. Jackson examines historical material pricing, such as the Random Lengths Lumber Report, for some context. Because the remodeler typically manages larger-scale proj- ects, though, obtaining a building permit can some- times stretch out to eight months, he notes. "The challenge is, 'How do I get a contract signed—and then how do I protect myself on those numbers?" says Jackson, who guarantees pricing for clients and will absorb up to 5 percent of a fu- ture jump in material prices. "My recommendation is if [a remodeler] puts this kind of clause in, I don't think it's something that a company wants to go back and utilize on a regular basis." Real-Life Pricing Since founding his own company in 2009, Matt Millsap has consumed myriad books and arti- cles about markup and profit. Four years ago, he switched from a pricing model that relied on lump sum to a cost-plus setup, in which subsequent price increases are collected promptly. Only one prospec- tive client during that time opted for a competitor who offered the more familiar version. "[With] the lump sum, we had such a long scope narrative; you have to be so precise on how you describe exactly what you're doing and what ex- actly is included," explains Millsap, the owner of Building Company No. 7 in Nashville, Tennessee. "We certainly paid a lot more attention in the past four years. When you do lump sum, I feel like you don't know what you're targeting or shooting at." Luckily, he adopted the cost-plus model just before material prices began their steady climb, and the growing labor shortage inflated rates for many subcontractors. The company has been able to capture a majority of price discrepancies, as a result, and the new system has eliminated many of the arguments with customers about their finish selections, scope of work and any change orders. "A client would be like, 'What do you mean the backsplash wasn't included? What do you mean you only estimated for $3,000 in tile labor? How did you not read my mind that I wanted to do a hexagonal or brick-like pattern?'" Millsap says. "The [price] increases didn't start hitting us until about two and a half years ago—that's when they started to make a really big difference." Building Company No. 7 administers what Millsap calls a health check with clients every month to ensure price differences can be addressed immediately. If the remodeler notices that a project budget could exceed the estimate by more than 5 percent, an employee will contact the customer directly, and an extended scope of work (ESOW) will be sent via automated soƁware and email. "We try to head all that off. If you wait until the end, that's a recipe for disaster and lawsuit," notes Millsap, who waited until the completion of a project one time and had to fight for payment. "We like to leave on a high note with a client. When you do that kind of stuff, the customer feels that they were lied to; they feel taken advantage of. And at that point you're kind of backed into a corner." The company leans toward the higher end when estimating, instead of giving clients the absolute cheapest price for which their job could be done. That way, the business can likely achieve some savings along the way and pass those benefits on to customers. And if homeowners want to alter a decision, or discover an unforeseen condition like a bad foundation, their budget will not break. "I tell clients, 'You're going to get the guy who's going to come in way lower than us. At the end of the day, we'll probably be the same,'" Millsap ex- plains. "Sure enough, I'll see the same clients who didn't go with us, and they'll say, 'Good to see you. We really wish we would've gone with you because we ended up paying what your estimate was, except it was a battle the whole way.'" In Nashville, a project that took four months four years ago now takes eight months to complete, he adds, as the city tightens inspections in historic areas where the company performs a lot of its work. With new construction decreasing amid an abun- dance of inventory, however, many trades have to wait a long time for builders to pay them and will commit to home improvement jobs instantly. "Right now we have a lot of foundation guys and framers calling us for work. And that's be- cause the new construction market has slowed, and they're looking for work from us in the remodeling market," Millsap says. "There were subcontractors who wouldn't return my call six months ago or a year ago. And now they're calling me—and texting me—every other day looking for work." Transparent Estimate Michael Anschel has spent the last 24 years think- ing about how to estimate the cost of a job and price a project correctly. He started with a 20 percent markup and then realized the difference between markup and margin, so he began applying a 35 " IF YOU WAIT UNTIL THE END [ TO COLLECT ON AN EXTENDED SCOPE OF WORK], THAT'S A RECIPE FOR DISASTER. " Matt Millsap SPECIAL REPORT 36 JANUARY 2019 QR QUALIFIEDREMODELER.COM

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