How to Grow Your Restoration Company by Improving Profits
In the first blog of this three part series on How to Grow Your Restoration Business I spoke about accelerating top line revenue. In this blog I want to focus on the flip side of the "how to grow your restoration company" coin by focusing on improving profits. I personally remain convinced that your greatest and simplest wealth growth will come from profit growth, not revenue generation. Every restoration owner wants to build the multimillion dollar business they have always dreamed of having. They want cash flow sufficient to run their business without worry. They want cash reserves necessary to undergird their business development plans to grow their business. They want to increase their personal wealth by taking money out of the business for retirement and personal investing.
There are ONLY two ways to make the money needed to support cash flow, cash reserves, and personal wealth and they are to accelerate top line revenue growth and improve and protect the bottom line profit growth. Revenue and profit are the only mechanisms to make money in business.”
Improving and Protecting Bottom Line Profit
Many business owners fail because they lose hope and lose sight of their dream and begin focusing on the wrong things. Many owners make too little profit, pay too much for their material and labor, and lose their sense of personal wellbeing over the many customer complaints and management problems they face when managing construction operations. Many full-service restoration business owners find that their construction services are just too much to handle, and failing to take control of the operation leads to a sizeable loss of profit.
Imagine if you were able to increase your overall profits by 20% - 30%. This would increase your cash flow, give you greater cash reserves, and perhaps bring back the joy you felt when you first started your business knowing you are doing a good job, making good money, and are back on top running your business like a real pro!
What are the strategies that can help you take control of your operation and improve your profit margins?
Strategy #1 – Set profit goals for every revenue source in your operation
The mere act of setting a profit goal for mitigation, reconstruction, roofing, contents cleaning and so on sets in place a target that demands your attention. Your goal becomes a benchmark against which you can assess your success. Did you make it or not? If not, why not and what changes need to be made to reach the goal going forward? Having the right profit margin goal is the first step, assessing how well you are doing is the second, and making needed changes to do better is the third. What profit margin goals should you set?
- Mitigation – 75%
- Contents Cleaning – 65%
- Reconstruction – 50%
- Roofing – 40%
These aren’t unrealistic goals. They actually represent what my company regularly achieved in each of those service areas. As a business coach I now teach contractors how to achieve these benchmarks and it actually works for them too.
Strategy #2 – Use wholesale distributors for the bulk of your building material purchases
Many contractors would no doubt say that they would if they could but they don’t know where to find these profit making wholesalers. I can tell you that you can access wholesale flooring from Shaw Industry distributors who are the same distributors selling to your local retailers. Buying directly using wholesale outlets saves you 35% - 50% on the single largest line item on most damage repair estimates.
I spoke recently to a restoration business owner in San Francisco. We checked his Xactimate price list to see what he was being paid for average grade carpet (FCC AV). The Xactimate pricing was $21.99 SY. Buying through an available Shaw carpet industries wholesale distributor this same average grade carpet costs $11.99 SY. That is a 46% savings. WOW! Every time a contractor sends a customer to a local retailer the customer asks, “How much do I have to spend?” When you tell them the insurance company will pay up to $21.99 SY what do you think will happen? They will spend every penny and then some – every time! This example illustrates the importance of taking the showroom to the customer. You offer multiple presentation boards of carpet full of color and texture choices that you buy at wholesale prices and lock in huge profits. If you send your customers to a retailer’s showroom you will lose your entire profit potential and the retailer will reap the profit that could be yours.
Finding wholesalers is the key to making money in business. You make money when you buy materials for less than you are paid. Flooring represents only one common material of the many that are available to each and every contractor through wholesale sources. You just need to know where to look.
Strategy #3 – Improve your estimating practices
When asked most restoration contractors readily acknowledge that their estimators leave money on the table every day of the week but are themselves helpless to figure out exactly where. Most construction estimators are self-trained in Xactimate. They are valuable to the owner because they know construction but too often they fail to fully utilize all the many excellent features of this pricing platform and therefore leave money on the table nearly every time.
Few estimators have developed a systematic approach to their construction take-off. Because they are all over the board it is easy to miss items leading to a loss of profit for the company. Instead the company owner should require and teach a consistent approach to writing estimates for which each estimate adheres. That starts with a consistent and reasonable approach to the take-off which should begin from top to bottom, from left to right, and from wall 1 to wall 4. The same sketch should be used for both mitigation and construction estimates in order to insure dimensions remain the same, rooms are labeled the same and in the same order, and when the two are set side-by-side the estimate reviewer can more easily insure that charges for material taken out were put back and charges for what was put back were also charged for removal.
When I do estimate review for contractors I am amazed how frequently upper cabinets were replaced in the reconstruction estimate but never charged for removal in the mitigation estimate. I find underlayment is replaced but no charges for removal exist anywhere.
I recently reviewed a Category 3 estimate and found that twice the amount of drywall was replaced in the reconstruction estimate than removed in the mitigation estimate. There are reasons for this but the overage removal was never charged for. Leaving money on the table time after time after time.
Sound familiar? Similar line items should be placed together rather than scattered throughout the estimate. For example drywall, texture and paint should be entered consecutively. Put all trim, casing, and doors line items together. Enter everything related to cabinets including toe kick, fillers, countertops, and so on back to back. When an estimate is poorly organized it sends a message to the adjuster that they really need to look it over carefully for mistakes.
It also takes the internal company reviewer much more time to properly review the estimate than it should. All of the trouble and wasted time costs the company money. If you are going to replace baseboard on line 24 don’t make the adjuster scan all the way down to line 38 to find that you are planning to paint/stain the baseboard too. One item should be listed on line 24 and the next on line 25.
You see what I mean don’t you? It’s all a matter of self-discipline. Tools such as drop and fill; similar and related items; and specialty tools such as framing, decking, and roofing should be used to effectively eliminate underscoping. My experience is that the industry wide tendency in estimating is not overscoping but underscoping. Few adjusters will tell you when you have underscoped a job but they will all call you out whenever you overscope. It is the responsibility of the owner to demand excellence in estimating practices.
Strategy #4 – Take control of your material costs
More money is lost through a lack of control over material purchases than any other single issue. When was the last time your crew bought 15 sheets of drywall when the estimate allowed for only 10? Have you ever paid $35 a gallon for paint when Xactimate paid you only $26? Have you ever paid $210 for a sink but were paid only $95 by the carrier? I have experienced each of these firsthand and it is what led me to take control of material purchasing. The estimate Final Draft shows line items per room that include equipment, material and labor components that comprise the total charge. So the front end of the estimate won’t show you quantity or unit cost of your materials. You have to go into the back end to get that information. You cannot effectively manage costs without this back end information. Having it will make all the difference in the world in your quest to improve your per job profits and stop this common profit killer.
Strategy #5 – Don’t accept bids from your subcontractors
Many contractors send out one or more subs to give bids on a job much like homeowners do when they begin a remodel project. The reason for this misstep is that restoration contractors don’t know how to determine a fair wage so they ask their subs to bid. Many contractors may hire subs on an hourly basis only to have them milk the clock and eat up profit. Others take the lowest bid in hopes of getting the best deal. Some contractors keep the O&P (20%) of the job and just hand the job over to a subcontractor willing to do the work for what’s left. Most restoration contractors earn about 28% - 32% profit per rebuild job and some lower than this. I am working with a contractor who earned 21% on construction rebuild work over the entire year which is just 1% above Overhead and Profit. Imagine what would happen if operations could be improved to such a degree that rebuild services produced 45% - 50% per job profits. That would dramatically change the business in so many ways! I did a study not long ago regarding Xactimate labor charges and local wages in Denver and St. Louis. Here is what I found in terms of the hourly rate Xactimate uses to calculate contractor pay:
- General Carpenters – $67 and $60
- Painter – $55 and $56
- Drywall Installer – $82 and $65
- Demolition labor – $43 and $42
- Carpet installer – $52 and $63
There is not a contractor anywhere in the U.S. who pays these prices to workers. When workers milk the clock you might end up paying these prices, but if you challenge your workers to make more money working by the job they will discipline themselves to work more efficiently. Why not give them a scope of work and a labor number that is a percentage of the Xactimate labor charge for the work you assign to them? Lock in your profit at the outset of the job. Let them manage themselves so if they do take longer than they should you don’t get stuck with the bill.
This is the only way to pay subs. You need to make that change today! Check your price list and then check local labor rates for your market. For example, I found that In Denver during the month I did the Xactimate comparison superior carpentry skills brought a $20 - $25 hourly rate. That is what Denver companies were offering in their Craigslist ads for skilled finish carpenters. Compared to Xactimate pricing local wages were less than 50%.
Giving a scope of work with a materials list along with a good labor number will help you lock in your profits and begin hitting that 50% per job profit on most jobs. There are only two ways for a contractor to make more money – increase revenue and improve profit margins.
Take a swing at each and see what you may be able to achieve! As a top industry business coach I help restoration businesses accelerate their top line revenue growth and improve and protect their bottom line profit growth. Visit my website today where you will find over 50 blogs, podcasts and webinars on topics related to growing your restoration business.
You will find a Coaching Plan that is uniquely focused on the growth needs your company faces. You will also find two FREE eBooks titled HOW TO GROW YOUR RESTORATION BUSINESS and STOP YOUR PROFIT KILLERS DEAD IN THEIR TRACKS. There is a lot of support available to help you gain additional traction and develop the operational design to succeed and thrive as you continue growing your restoration business. Visit me at www.growmyrestorationbusiness.com or call me for a FREE 30 Minute Consultation at 800.655.1598.