Drywall costs are on the rise – plywood costs increasing earlier than usual

• Drywall costs increased 15% to 25% after staying flat for many quarters.
• Plywood costs up 15% to 25% across the country.
• Dimensional lumber costs hold steady or fluctuate by less than 5%.
• Roofing costs decrease up to 10% in most areas.
• Insulation costs stay mainly unchanged with decreases of 5% in a few areas.

Here are some relevant articles from this quarter:

BuildFax Remodeling Index: Activity climbs 13 percent in January

HousingZone Staff March 2012

Nearly 3 million residential remodeling construction permits were filed in January, an 11 percent increase from the same time last year.

Residential remodels authorized by building permits in the United States in January were at a seasonally adjusted annual rate of 2,998,000, according to the latest release of the BuildFax Remodeling Index (BFRI). This is 13 percent abovethe revised December rate of 2,653,000 and is 11 percent above the January 2011 estimate of 2,705,000.

Seasonally adjusted annual rates of remodeling across the country in January 2012 are estimated as follows: Northeast, 430,000 (down 7 percent from December and up 12 percent from January 2011); South, 1,122,000 (up 17 percent fromDecember and up 6 percent from January 2011); Midwest, 595,000 (up 9 percent from December and up 14 percent from January 2011); West, 852,000 (up 10 percent from December and up 14 percent from January 2011).

“Residential remodeling this winter is as strong as it has been in more than five years. We expect residential remodeling to continue to grow throughout 2012,” said Joe Emison, vice president of research and development at BuildFax.

The BFRI is based on construction permits for residential remodeling projects filed with local building departments across the country. The index estimates the number of properties permitted. The national and regional indexes are basedupon a subset of representative building departments in the U.S. and population estimates from the U.S. Census. The BFRI is seasonally adjusted using the X12 procedure.

Residential Remodeling Index: Remodeling Hit Bottom in 2011

Sal Alfano
Remodeling magazine February 2012

The January 2012 Residential Remodeling Index (RRI) shows that overall remodeling activity declined 4% in 2011 compared with 2010. The revised data series, which is completely refreshed each quarter, reveals a slightly lowerthan anticipated bottom in the fourth quarter of 2011. This “second bottom” registered a total decline of just under 21% from the 2007 peak.

Taking into account recent improvement in the US economy and housing, the new forecast calls for 3% growth in remodeling activity across the US in 2012. Compared with 2011, this translates into the addition of 120,000 remodeling andreplacement projects nationally representing an estimated increase in remodeling expenditures of $2.6 billion. Although growth forecast to be just 0.3% in the first quarter, overall activity is expected to increase steadily through theremainder of the year.

Despite the modest growth rate forecast in the national averages, a much stronger increase in activity is expected in many recovering markets. In fact, of the 366 metropolitan statistical areas (MSAs) covered by the RRI, 304 are forecastto grow an average of 3.6%; just 22 markets are expected to decline.

City Watch – A closer look at the 20 best-performing markets on our Top 100 list

Remodeling staff
Remodeling magazine January 2012

Top Performers

These cities are characterized by steady housing prices and building permits. Remodelers in these cities are enjoying the most consistent workloads and backlogs.

Austin deserves its spot in the top 10, at least according to Doug Marsh, president of Sky-West Builders, who says that though there’s plenty of remodeling work going on, the key is who you know. “Except for the typical high-end[projects], it’s very cutthroat,” Marsh says, adding that it’s definitely a buyer’s market. “In Austin there are high-dollar ZIP codes where there’s a ton of work, including new construction,” he adds. “If you can get into theseneighborhoods, the money is there,” with remodeling projects in the $300,000 to $400,000 range. One thing that’s especially prevalent in Austin is that people truly love their neighborhoods. “They don’t want to move, so that really pumpsthe remodeling market,” Marsh says. “There’s a lot of stuff going on, and the remodeling permits are up.”

If there’s a rough patch in the remodeling industry, it hasn’t affected Russell Remodeling, in Dallas. Owner Tom Russell says he does pretty big projects and hasn’t really felt a downturn since he’s been in business. With a couple of bathremodels starting in January that range between $75,000 and $100,000 each and another $80,000 project at the ready, Russell is staying busy fielding calls. While his subs haven’t been as busy as they used to be, Russell has plenty of workfor them. “When I’m busy, they’re busy … and they’re plenty busy,” he says.

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And he’s not alone, he points out: several friends in the remodeling world are also staying busy. “The people doing quality work are the ones who still have work,” Russell points out. And, he adds, if anything, the downturn could be usefulin thinning the herd in the Dallas/Fort Worth Metroplex.

Houston is at the top of the list, again, thanks to the foresight of the city’s leaders from almost three decades ago. When the oil boom went bust in the early 1980s, like Scarlet O’Hara declaring she would never go hungry again, the cityvowed to never again be dependent on just one industry. Thus started the influx of every sector from high-tech to aerospace. And Leslie King, an “old Houstonian” and the owner of Greymark Construction, couldn’t be happier, as 2011 isturning out to be her best year ever. Granted, the typical price for a project has dropped from the $150,000 to $200,000 range to around $75,000, but King says she’s working harder than ever on “a ton of kitchens and bathrooms” rather thanwhole-house remodels. In 2010, Greymark did a total of 27 projects; the company had already reached that number by last April, and 2012 is poised to be even better. “I’ve never been booked out for six or eight months in advance,” she says.”The first quarter [of 2012] is really good, and we’re already working on the second quarter.”

In Kansas City, daily papers are reporting upbeat stories about future job growth and city development good news for remodelers who have weathered tough times. “Three years ago things started going south. Two years ago was bad. Last yearwas bad. Millwork and cabinet shops dropped like flies,” says Norburg Construction owner Dan Norburg. But, he says, “a switch flipped” in September 2010, and “people are just tired of sitting on the fence.”

Kansas City never had the ups and downs of the coasts, and its medical industry continues to grow. In 2011, owner Jigger James’ company, Repairs Unlimited, saw “good, healthy growth”: his disaster restoration segment was up 45% from 2010and he saw nearly 15% growth in his remodeling segment. While there’s still plenty of competition, many “newer” remodelers  new-home builders who entered during their own downslide or newcomers cashing in during the boom  have gone out ofbusiness. Those left standing are solid, forward-thinking companies such as Country Club Builders, where owner Steve Atkins has taken on universal design and hopes to double his workforce in 2012.

For Oklahoma City, the oil and gas industries provide a stable economic base. “As long as gas prices are good, these [industries] are hiring and their employees have money to spend and improve their properties,” says Bryan Lee, owner ofGilcraft Construction, in Yukon. His projects include additions and whole-house remodels, and, he says, people are buying and renovating houses in the city’s desirable older neighborhoods.

Mike Casey, president of Gibraltar Construction, in Oklahoma City, attributes his company’s 8% growth over last year to the firm’s longevity  in business 20 years  and advertising to reach a broader customer base. Three years ago, about70% of his work was for upper middle-class homeowners in the Edmond area. Now his work is more widespread, with more middle-class clients who are upgrading baths and kitchens but are staying within the room’s existing footprint. “It’s adesire rather than a need,” Casey says. He has four employees, but with increased jobs in 2011 which he expects will continue through 2012  he plans to add sales and management staff.

Pencil Sharpeners

Remodelers in these cities report refining their budgets, running lean, and doing a stable amount of work but with fewer people or within a tight market.

People in the The City of Brotherly Love have to count themselves lucky when they compare housing costs here to those in New York City an hour and a half up the road via the New Jersey Turnpike. It’s less expensive to live in Philadelphia,where employment is powered by government, health services, and education but is simultaneously hampered by a cash-strapped city and its struggling school district. Local remodelers are starting to see some rebound even with unemployment at 10.9% in September 2011  two points above the national average. “I can tell you that 2011 is definitely better than last year, by a lot,” says Bob DuBree, who expected sales at his company, Creative Contracting, in the Bucks Countysuburb of North Wales, to be up about 25% over 2010. Bathrooms more in 2011 than in the previous five years combined  helped lift Creative Contracting’s numbers. For some companies, a relatively healthy commercial construction market hashelped make up for slack demand in residential renovation caused by slow housing sales and scarce credit. “Our commercial business has definitely increased in the last six months,” says Mark Pennington, secretary/treasurer of Gardner/Fox,one of the largest design/build companies in the area, located in the upscale Main Line suburb of Bryn Mawr. Gardner/Fox has recently hired back some laid-off employees, but Pennington says that he’s not sure if the uptick in whichopportunities became projects is about the company “being in the right place at the right time [or is] truly a shift in the market.” Residential customers are “still looking for what they’ve always looked for”: that would be a family roomconnected to the kitchen, and a remodeled kitchen or a master suite renovation.

Tulsa, was once the “Oil Capital of the World.” Petroleum still plays a big part in area employment. But as Oklahoma’s second largest city and the 46th largest city in the U.S., Tulsa remade itself as an aviation and aerospace center,with, today, more than 300 aviation-related companies in the area  including Boeing and American Airlines  annually generating $3.3 billion in commercial activity. This is a region with unemployment at a much lower level  6.4% in September compared with more than 9% nationally. But at the moment, the largest of those aviation employers  the American Airlines maintenance facility at the Tulsa International Airport, with 7,000 employees  may be looking to sell or relocate,which has given area business owners a case of “lockjaw,” reports Greg Wolter, owner of Community Builders, a home improvement company that expects a record sales year for 2011, due to, among other things, its own aggressive marketing. Innearby Bixby, Okla., Scott Shepperd, owner of S.A. Shepperd, specializing in kitchens and baths, calls Tulsa a “finicky” market for remodeling, where homeowners are more conservative in their spending than they were a few years back.”There seems to be money that wants to be spent,” he says, “but nobody wants to spend it.”

With its strong aerospace industry (employing 82,000 people at roughly 650 companies), and robust information/communications businesses such as Google, Microsoft, and Amazon, Seattle is a white-collar town with a median household income $60,843 in 2009  substantially higher than the national average of $50,221 (from the 2010 U.S. Census). Hanley Wood Market Intelligence projects a 4% increase in remodeling activity in the Seattle market, welcomed by local remodelers whohave seen the same tepid appetite for renovation experienced in other parts of the country. “It’s nothing like it was five years ago, when you were literally turning down work,” says Joe McKinstry, owner of Joseph McKinstry Construction, aremodeling and custom-home builder in Seattle that had 18 employees during the housing boom and has exactly the same number today, though it is doing jobs that are smaller. In the days of rapidly rising housing prices, the owner of an$800,000 house would spend $600,000 remodeling it. “That’s not the market anymore,” McKinstry says. His company builds lots of kitchens, baths, and decks. Cathy Gaspar, co-owner of Gaspar’s Construction, a Seattle remodeling company, saysthat her company’s clientele  who used to have few qualms about spending over their budget  now “want to maintain a budget.” Green remodeling has many fans in the Pacific Northwest. One Gaspar’s project two years ago involved reusing orrecycling just about everything that could be salvaged.

Home prices in the Gateway City went down during nine of the first 10 months of 2011, due to an abundance of foreclosed properties. But the market for home renovation in St. Louis, a place once known primarily for agricultural products andbeer, is slowly looking up. Manufacturing, health care, education, and hospitality  major sources of employment  all added jobs here last year. For the last three or four years, many remodelers here have considered themselves fortunate tohave survived, even if they don’t do the kind of sales they once did. “There are a lot of one- or two- or four-man companies that used to have 10 or 15 employees,” says Scott Mosby, owner of Mosby Building Arts, one of the largestremodeling companies in the region. “But the ones that should be around are still around.” Mosby and others expect to see more business just from pent-up demand. Gary Callier, president of Callier & Thompson, which operates a large kitchenand bath showroom in St. Louis, says that his company is “still down 30% from where we were four years ago.” But Callier says he is budgeting for $8.4 million in sales in 2012, which is what the company expected to see in 2011. Like manyremodelers, he says, “I’ve thrown away my crystal ball.” This market, with many older homes, also has an older demographic. That’s reflected in the many requests that Callier & Thompson gets for walk-in tubs, low-threshold showers, andhigher toilets. Mosby credits his success to the company’s decision to create a “Solutions” division for maintenance and repair, to augment design/build sales. In 2009 and 2010, Solutions generated 60% of sales, but in 2011, design/buildonce more generated 60% of Mosby Buildings Arts’ sales.

New Normal

Residents are ready to spend, but are doing so with caution or are breaking projects into phases.

Before 2008, banks were the largest employers in Charlotte, which was the second largest banking center in the U.S. (New York City ranks No.1). Jamie Oliver, president of Southend Home Improvement, says that almost half the company’s leadscome from bank employees, but many are holding off due to uncertainty about jobs and bonuses. However, due to its marketing efforts, Southend’s sales volume increased by 25% in 2011 and roofing sales were up 80% over the previous year. Itis also pursuing multifamily projects, working with property management companies and condo associations to install new windows or siding and to repaint exteriors. For residential projects, most clients aren’t financing but are using moneythey have saved. Jobs include kitchens, baths, and outdoor spaces, with clients getting five to seven bids (versus two to three before the recession). Oliver says that homeowners are also interested in boosting energy efficiency to lowertheir utility bills, with federal tax credits a bonus rather than a motivator to do the work. In April, Southend opened a satellite office in South Carolina to better serve the storm-driven roofing needs of this more rural market.

Though Duane Johns, co-owner of Advanced Renovations, also noticed cautiousness among banking employees, he is encouraged by new employers such as Electrolux and Charlotte’s role as an energy hub, drawing alternative-energy companies intothe city. The remodeler says that after shrinking in 2008 and 2009, project size increased in 2011, and the last six months seem busier. He has noticed more remodeling activity in neighborhoods closer to the city and has even seen somenew-home construction activity. In 2008 and 2009, customers were only looking at cost. In 2011, more sought value and professionalism  possibly, Johns speculates, as a reaction to bad experiences with low bidders. Homeowners are notsplurging on large additions or extravagant details, instead opting for functional updates to increase the value of their homes.

From Forbes to Bloomberg Businessweek,Columbus raked in accolades throughout 2011, including being listed as one of the top 20 strongest economies coming out of recession (Bloomberg). Remodelers seem to agree with the sentiment ofrecovery, saying that Ohio homeowners are beginning to dust off the cobwebs of a slow economy. “It’s is a solid town,” says Gary Demos, president of Dave Fox Remodeling, in Columbus. “There’s money here, there’s education, industry.” Demossays that perceptions of Columbus’ strength and stability have even made an impression on his peers. “We hosted 11 companies for a peer group meeting last September,” he says, “and heard a lot of really positive comments about the city. Interms of sports, the downtown area, campus, and the Arena District really cleaning up the city and its image, people were saying what a great city Columbus is.”

After being entrenched in a wait-and-see attitude for a long time, Demos says that’s now shaking loose and homeowners are beginning to act. But, he notes, financing remains a concern for some. And, of those who have funds available forremodeling, many are focusing more on who they work with than on what they’re paying for it, compared to years past. “Before, price was a huge issue,” he says. “Everyone that had a project was looking for who could do it mostcompetitively. Now they want to know who they can trust to do it well and to maximize their value.”

Design and right-sizing have also come to the forefront. Todd Schmidt, president of Renovations Unlimited, in Grove City, Ohio, says, “Our clients are spending more time on evaluating how much space they really need to add on and thepotential of phasing projects to get the most from their budget. In the past, they may have renovated the whole house at once; now they’re doing the second floor first, and then the first floor. Or, if they had been planning on anaddition, they’re looking at something like a 12-by-8-foot addition rather than a 20-by-20-foot project.”

Schmidt adds that he hopes the comfort level homeowners have adopted will snowball into more growth for the industry through the next few years. “We’ve heard a couple of different scenarios: that we’re in year four of a 10-year recessioncycle, contrasted with the prospect that remodeling here could be back to 2008 levels by 2013. We try to look at the positive side and keep moving forward.”

Denver proper  not including the mountain towns and second-home markets  has seen a winnowing process among remodelers, contractors, and architects. “But in the past year we’ve seen an increase in remodeling activity,” says Michael Griggswhose Certified Restoration Consulting Group works with remodelers and restoration companies.

Cress Carter, owner of Old Greenwich Builders, a high-end general contracting company, says that his clients and vendors who have been sitting on the sidelines “no longer want to wait to do their project.” Carter’s business  mostly customhome building  has hardly seen a dip and doubled its volume in 2011. This may be an anomaly, but Dave Gartland, a partner at BOA Construction, says, “We’ve built more custom houses  three in 2011  in a short period of time than we have inthe previous 20 years.” BOA’s remodeling work “remains clustered at each end of the spectrum: small interior remodels  as much as they can for as little as they can spend  and some big whole-house jobs.” But, Gartland says, BOA is notseeing a lot of “bread-and-butter additions with master suites.” Though the housing market is depressed, and overbuilding has left some developments half empty, Carter says that his high-end clientele are building knowing they’reunderwater on day one post-project: “People are going for long-term investments and plan to live in their homes for the next 20 to 30 years.”

Paul McClorey, president of Paulson’s Construction, in Howell, Mich., says that Detroit’s decline seems to have slowed, and that although “it’s not a bright picture, it’s not as negative as it once was.”. His business grew from 2009 to2010, and 2012 looks promising for continued growth. He predicts growth in the area north and west of Detroit. “Oakland County will be the area of most immediate growth as the market returns,” he says. However, he adds, potential clients”have the desire to do things, but not the desire to make it happen,” and they have unrealistic expectations about project cost. Some are trying to find ways to complete a project by asking about purchasing their own products or doing someof the work themselves. Patricia Harroun, president at Cardea Construction, in Ann Arbor, Mich., says that 2011 has been the toughest year in her 26 years in business. “We’re so small,” she says, “we are directly tied to the economy.”Harroun says that contractors are now moving to remodeling  as are as former car industry employees. The competition has become “quite cutthroat,” with small contractors doing work “for the price of materials.” Some homeowners haveunrealistic expectations about projects, and they usually choose to drop a project after some initial research. However, others have been saving money and are ready to update their homes. They seem more secure about their jobs than a fewyears ago and “are buying good-quality products and splurging on finishes,” Harroun says. “There is less buyer’s remorse.”

The Milwaukee-area economy has benefitted from relatively low unemployment (8.5% as of press time) that’s expected to decline into 2012, as well as increases in median income. Home­owners are spending carefully, but they’re spending. “Weall went through the ‘What happened to the economy?’ phase, and it was negative for so many years,” Kevin Anundson, president of The OAR Group, in Elm Grove, Wis., says. “Now we all know that we’re working harder for the same or less money… When something happens long enough, it becomes normal. This is our new normal.” For many Milwaukee-area remodelers, the new normal is defined by smaller projects or phasing of large projects that, three or so years ago, may have beendone all at once. “In 2007, customers called us to remodel their whole kitchen because the dishwasher had broken,” says David Pekel, president of Pekel Construction & Remodeling, in Wauwatosa, Wis. “Today when the dishwasher breaks, theycall the repairman.” Pekel adds, “Clients are coming to me saying, ‘We have five projects to do in the next five years. Can you help us understand if there’s a rhythm to how they should be done?’ They want to invest as much as they cancomfortably in each phase of the project. It’s still the same pizza, just one slice at a time.”

Pekel adds that many homeowners are focusing on home improvement rather than on remodeling: upgrading mechanical systems or repairing and replacing exterior products. “To that end, the economy is influencing the degree of home improvementthat’s going on.” Anundson and Pekel both note that financing has had a major effect on the size and scope of Milwaukee-area remodels. “There are challenges in paying for projects  even some homeowners who appear to be well-off can’t getfinancing,” Anundson says. Pekel agrees: “People are using more of their own money, and that’s one of the reasons these projects have taken on a more affordable or realistic budget character.” Anundson believes many homeowners are “sick ofwaiting” for the economy to improve. “This won’t be our ‘normal’ forever,” he says. “There are better days coming.”

Smaller projects, tighter budgets, say remodelers in Minneapolis. “It’s not quite as fun as it used to be,” according to Ali Awad, a principal in the design/build firm Awad + Koontz. “And it’s a lot more competitive.” Veteran remodeler EdRosko­winski, with Vujovich Design Build, agrees. His company did 60 projects in 2011  20 more than the previous year  but they were smaller in volume.

“Our larger projects are typically driven by new purchases,” Roskowinski says, but “since the real estate market has been down, we’ve seen fewer large projects.” Despite the difficulties, remodeling projects have been steady, especiallythrough the summer and especially for subcontractors, says Dan Hanson, owner of Hanson Building & Remodeling, who has been a sole proprietor for the past three years. The weather plays a big role in Minnesotans’ decision to remodel, andfor roofing companies, a year of snow, ice, hail, tornadoes, and heavy rains has been a boon, says Dave Karel, president of Garlock-French Roofing. But because a large number of roofs in this market have already been done, Karel says heisn’t “overly confident” about the future., and will remain conservative in his budget estimates for the next few years.

Tortoise & Hare

These cities have made a slow and steady climb in the Top 100 Markets list over the years.

Residential Remodeling Index (RRI) research places Boston sixth on the list of largest markets based on remodeling activity per household. Remodelers there agree that repeat customers have bolstered their businesses in the last year. Withsome houses more than 150 years old, little room for new construction, and the seventh most dense population in the country (according to 2010 census data), Boston is a consistently popular remodeling market. The city has claimed the lucky13th spot on the Top 100 Markets list for the second year in a row, steadied by job security and strength in service, technology, education, and medical industries. “I don’t think we’ve seen the erratic nature the rest of the country has,”says REMODELING columnist Greg Antonioli, president of Out of the Woods Construction, in Arlington, Mass. Antonioli suggests that residents of Boston’s higher-end neighborhoods still remain financially conservative, but that “posterityfatigue” is setting in. “They were ready to pull the trigger on a project in fall of 2008, and they’ve been sitting on it for three years,” he says. “Now they’re tired of waiting and want to move forward, though they are interested inseeing more options and cost breakdowns, which we certainly don’t mind.” Antonioli and Cory Desjardin, who is president at New England Design & Construction, in Boston, both note that real estate turnover has brought them new business overthe past year. “We’ve done two projects and are looking at a third where the clients have purchased a property with the intent to remodel it before they move in,” Desjardin says. “Realtor friends have told me that home values haven’tfluctuated too much  they’re not going up, but they’re also not going down. Leads I’ve gotten through Realtors’ offices are for homeowners who are buying now and remodeling right away so that in five years they can turn it around again.”Other Boston homeowners are moving forward with needs-related remodels, such as growing families or in-laws moving in. They’re remodeling rather than selling, and David West, president of Meadowview Construction, in Georgetown, Mass., saysthat they’re looking to work with someone they can trust. “It used to be that having a large proportion of repeat and referral work wasn’t a great idea  you need to be bringing in new customers as well. But referrals and repeat work havereally kept us afloat. Most of these people have busy careers, they work a lot, and they don’t want to have to be in their house to manage a project. They want to work with someone they’ve worked with before, or who comes as arecommendation from a trusted friend.”

ProBuild, a large national building products supplier closed its two Chicago locations at the end of 2011. Steve Taylor, co-owner of Synergy Builders, in West Chicago, says that besides ProBuild, several large millwork companies haveclosed their doors. In turn, his small millwork supplier has picked up the slack and is doing well. He says that in this tough market, when it comes to remodelers and vendors, those that remain are offering strong customer service and aredoing well. “We demand great subcontractors and vendors  it’s all about service,” Taylor says. Synergy Builders recently dropped a large cabinet company because the remodeler was not receiving the type of customer service required torespond to its clients. Taylor says that a representative from his new cabinet company sent a vendor to the jobsite to help him with a design. His plumbing vendor is replacing damaged products without any hassle and recently took some ofthe Synergy Builders crew on a golf outing. Taylor says that his homeowners want to know that he is bringing reliable companies into their homes. Synergy Builders has an eight-week backlog and has and expects to increase sales in 2012.”Vendors see how well we are doing, and they help us any way they can,” Taylor says. “They want to keep us as customers.”

LaPelusa Home Improvement has been in business in Niles, Ill., for 46 years and is seeing local companies closing their doors, says president Tony LaPelusa. Three large local suppliers have gone out of business, and a Milgard window anddoor manufacturing facility has closed. However, LaPelusa says, the vendors that he works with are very attentive. If he has an issue, not only does he get a visit from a supplier rep, but sometimes from a manufacturer rep as well. “Theyare very helpful,” the remodeler says. As far as product orders go, LaPelusa says he hasn’t noticed any issues in fact, he adds, if anything, order times have gotten shorter. His company rebounded well from a rough 2009 with a good 2010and 2011, which he describes as “slow, tentative growth,” and he says that help-wanted signs in store windows and full shopping-mall parking lots are both signs that people are spending money. LaPelusa Home Improvement has work lined upthrough spring 2012 and has several projects currently in different stages from design to bidding that the owner expects will contribute to the company’s 2012 volume.

According to website OregonLive.com, while Oregon’s rural areas continue to struggle with especially high unemployment, metro Portland is now recovering faster than many other U.S. metro economies. Since 2009, metro Portland has added 4%to its gross metropolitan product, compared with the U.S. average of 3%, and employment per capita increased by 2%, versus the national metro average of 1%.

But as in other markets, Portland remodelers have seen fewer and smaller jobs the past few years. For many, work may be steady, but how much available work there is depends on the neighborhood and its proximity to those involved inhigh-tech industries. (Intel employs thousands of workers and pumps billions of dollars into the state’s economy.) Overall, the housing market remains depressed, and Mitch Speck, owner of Specktacular Home Remodeling, believes it has yetto bottom out. “There are still a lot of foreclosures,” he points out. “As long as those foreclosures continue, we’ll see prices decline.” While Portland remodelers agree that there is a sense of pent-up demand, this housing issue ismaking it difficult for midrange clients to get financing. But high-end jobs, too, have slowed down. Lane Cooper, owner of Cooper DesignBuilders, in Portland, says that he has had only a few $200,000-to-$700,000 jobs this past year, butthat $25,000-to-$50,000 projects are picking up because “people can handle projects of that size without getting financing.” The challenges of the changing market have resulted in changes to remodelers’ business practices. Speck laid offemployees, moved his office back to his home, and took on production duties. He also has gone back to doing light commercial work, where he has seen an uptick. Wade Freitag, owner of Craftsman Design and Renovation, moved hisoffice/showroom to the second floor of Rejuvenation Lighting & House Parts, which was recently purchased by Williams-Sonoma. He has found that this increased foot traffic offers his company a built-in qualifier. Despite the ongoingchallenges, both Freitag and Speck remain optimistic for 2012.

Also, new recommended Hourly Labor Rates (HLRs) have been posted.

Most Material Costs Stable Except Roofing

• Dimensional lumber costs the same or increase less than 3% in some areas.
• Plywood costs stay the same or go up 5% or less.
• Roofing costs increase again by as much as 10% in some areas.
• Drywall costs continue to stay low with little or no change.
• Insulation costs stay virtually unchanged.

Here are some particularly relevant articles:

Mixed remodeling forecast for 2012
Remodelers hopeful for 2012, but not banking on big recovery

By Jonathan Sweet, Editor in Chief
Professional Remodeler

December 7, 2011

After a 2011 that failed to live up to expectations, remodelers are not as optimistic as they were a year ago that business is going to improve.

Just less than half of remodelers expect revenue to increase in 2012, according to the latest Professional Remodeler research. Twenty-nine percent of remodelers expect no change next year, while 23 percent expect revenue to decrease.

“I see some cautious optimism, but things seem on the edge and could fall again really easily,” says a design/build remodeler from the Northeast.

Says a Texas full-service remodeler: “The news is so bad consumers are going to go back to ‘wait and see’ before they buy.”

That pessimism is a marked contrast from the end of 2010, when remodelers were very hopeful about 2011. At that time, 64 percent said they expected their revenue to increase and only 15 percent expected business to slow.

Unfortunately, a stubbornly weak economy and continuing pressure on the housing market combined to make reality a lot less attractive, with only 29 percent of remodelers reporting their business picked up this year compared to 2010 and 42 percent saying that revenue was down.

“We need a bit of a burst to generate some demand out there,” says Kermit Baker, director of the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University. “Folks are just nervous about getting into home improvement projects with the economy as weak as it is.”

A Cloudy Outlook for 2012?
LIRA data indicate a less-than-stellar short term

Mark A. Newman

November 16, 2011

Home improvement spending will remain tepid through the first half of 2012, according to the Leading Indicator of Remodeling Activity (LIRA) released today by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University.

According to LIRA estimates, the first quarter of 2012 is on track to be the worst for home improvement spending. The second quarter may see a slight uptick that could reverse the trend but only if consumer confidence booms with jobs and the housing market.

“There’s a lot of volatility in the market with a bit of random, non-seasonal bouncing around,” says Kermit Baker, director of the Remodeling Futures Program at the Joint Center, adding that the “bouncing around” is due to replacement projects that are typically weather-related, and those numbers are getting mixed into the data. “It’s weak enough that the noise sort of dominates from what the trend is. Our indicators tell us that the trend is flat when we were hoping there would be a more clear sense of a recovery.”

As for how long this lackluster market will continue, Baker says to count on a fairly bleak outlook at least until the middle of 2012. “After that it’s a little too early to tell,” he says. “We’re not seeing anything that would indicate a dramatic turnaround. Quite frankly, it depends on what the economy does over that period.” Key indicators will not only include consumer confidence but also any periods of sustained job growth or a more stable housing market.

For remodeling to see a significant uptick, it’s really going to take a sharp increase in consumer confidence in the economy and housing market. “If you live in a market where prices are trailing down, it’s a more difficult decision to pull the trigger on that upscale remodeling investment,” Baker says. “You’re going to do the roofing and siding stuff that you need to do but the discretionary stuff is a harder sell in this market. It’s going to take some sense that things are getting better. And there’s enough uncertainty that people don’t feel that way at present.”

ROOFING AND LUMBER COSTS GO UP ACROSS THE COUNTRY

• Dimensional lumber costs go up 5-10% around the country.
• Plywood costs go up 5-10% in most areas.
• Roofing costs increase again by 5-10%.
• Drywall costs continue to stay low with minor increases in some areas.
• Insulation costs fall 2-5% in most areas with minor increases in some areas.

Here are a couple of insightful articles:
Kitchens, bathrooms top projects as homeowners look for more bang for their buck

By Jonathan Sweet, Editor in Chief
Professional Remodeler

August 26, 2011

Even as many remodelers continue to see a move toward smaller, need-based projects, some are starting to see prices increase again.

That’s according to the latest Professional Remodeler research, which found the shift to smaller projects that started a few years ago continues. Still, some remodelers are experiencing a nascent recovery.

“A year ago it was all price shoppers. Currently, people are looking more for people that they trust,” said a Wisconsin design/build remodeler. “If you do a good job and are reliable it works in your favor.”

It may not be 2005, but it’s also not 2009. For the first time since 2007, less than half of remodelers said their average job price has declined from a year ago, with only 45 percent reporting project size is down. That compares to 75 percent last year who reported a drop in the previous 12 months. Only 13 percent said prices had dropped more than 25 percent, compared to 32 percent who said that last year.

Still, there are challenges, many remodelers said.

“Projects are much smaller, budgets are tight, most jobs are no-frills,” said a New York design/build remodeler.

Clients are “looking at smaller projects for fear that the value of the home might decrease further so they are holding off slightly,” said a full-service remodeler in Pennsylvania.

While only 22 percent of remodelers said their average project price was increasing, that’s far better than the 8 percent that said the same last year. A third of remodelers reported no significant change in their average project price in this year’s survey.

Almost 40 percent of remodelers said their average project falls under $25,000, with about 55 percent reporting an average price of less than $50,000. Big jobs haven’t disappeared, though: 32 percent said their average remodeling project was more than $100,000 and 16 percent said it was more than $200,000.

There’s no better example of the change in the market than the shift in project type. Kitchens continue to be the top project for many remodelers as they have been in the past, even as the scale of those kitchen re-dos declines.

However, from 2004 to 2008, whole-house remodels and additions were the next most popular projects as homeowners took advantage of skyrocketing home prices and easy money to undertake massive projects. For the last three years, though, those projects have been passed up by handyman work and exterior remodeling.

“People are much more apprehensive about investing in their homes because they’re not seeing a return,” said a California design/build remodeler. “Remodeling has shifted to home maintenance and repairs.”

Consumer confidence still biggest obstacle
A general lack of consumer confidence continues to be the most important reason homeowners are choosing not to remodel or to reduce their project scope.

“Everyone is very hesitant and unsure,” said a New York full-service remodeler.

Sixty-eight percent of respondents cited consumer confidence as a challenge (see chart below), and 52 percent said it was the top cause of a decrease in project size. Declining home values was a distant second, with 36 percent of remodelers saying it was one of the reasons behind declining prices and 18 percent picking it as the top cause.

“There’s a lack of confidence in maintained value,” said one remodeler and custom builder. “High-end clients are not willing to invest with diminished returns.”

Financing challenges was picked as one cause by 33 percent, with 10 percent saying it was the No. 1 reason.

“Most clients are working with cash now since most homes are underwater and cannot be borrowed against,” said a Florida remodeler.

Financing challenges were the only obstacle to see a marked decline from 2010, when 51 percent cited it as a major cause of smaller projects.

For those remodelers who have seen their average project increase in price, the top reasons were increasing consumer confidence and marketing to higher-end clients.

Finally, many remodelers reported a decrease in business because of the expiration of the energy-retrofit tax credits included in the stimulus package in 2009. The $1,500 credits on windows and other upgrades helped many remodelers sell projects the last two years. (64 percent of remodelers said it was impacting clients’ remodeling decisions in a previous Professional Remodeler survey.)

While 60 percent of those we surveyed said there was no impact, 34 percent said the expiration has hurt business.

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Homeowners Shelve Remodeling Plans Over Economic Fears

By Sheryl Nance-Nash, Daily Finance

Too scared to spend amid so much economic uncertainty, homeowners are just saying no — to remodeling. According to Remodelormove.com, the number of homeowners who say that the economy has them shying away from renovations jumped from 69% in the spring to 80% now.

Financial analysis company Sageworks has found remodeling contractors reporting their business is down 3.81% over the last 12 months, a greater pace of decrease than was seen in 2009, when we were in the throes of the recession, says spokeswoman Melinda Crump.

“The fall 2011 U.S. Remodeling Sentiment Report shows that after a year of stabilization in 2010, the unrelenting bad news about the economy this summer is driving many homeowners to reconsider and either delay or scale back their remodeling plans,” said Dan Fritschen, founder of Remodelormove.com, in a prepared statement.

The strong pullback was unexpected, Fritschen told DailyFinance. “A year ago, I wouldn’t have thought that this is where we would be today. I was surprised by the strong reaction.”

Cynthia Ponce of Ponce Construction has seen firsthand homeowners cringing at the thought of ponying up cash right now. “We’re a pool and landscape contractor in Southern California, and have been in business for over 24 years,” she says. “Lately, we’ve been given the excuse of ‘Your pricing is great, and your work is awesome, but we just want to wait a few months and see what the economy is going to do. We will give you a call, or you give us a call in about three or four months.’ ”

“There are quite a few people who still have money, but they’re scared to spend it right now and just want to wait and see what happens,” says Ponce.

But the continued high unemployment and stock market woes fuel fear.

Another clue as to how leery folks are — those who are going ahead plan to go cheap. Nearly 80% of those who will remodel say they plan to use “economy” materials, compared to 68% who said that at the beginning of this year. And with DIY a perennial money-saving technique, 62% said they planned to do some of the work themselves.

John Boyd of Ridgefield, Conn., had planned to remodel his kitchen and master bath, and then move, but decided not to
because of the recession. “I’ve done some repainting and other improvements that I can handle without a lot of money,” says Boyd. “It’s a nice house and a lovely area, but we’d like to shorten the commute to New York. We still want to move but who knows when the house will sell, so we might rent the house.”

Robert Donaldson, on the other hand, couldn’t wait for the economy to improve because his renovations were more urgent. “As our family grew, our house had to be renovated. I would estimate that the renovations for the rooms was around $7,000; my wife and I saved up money to afford the renovations,” says Donaldson, of Lakewood, Ohio.

“We felt comfortable with the amount we spent on the renovations for a couple of reasons. First, we know that the money spent on renovating the house would improve the performance, aesthetics and resale value of the house. Secondly, we knew that this would be our only window of opportunity to undertake these renovations until our kids were grown and off to college. There are no regrets whatsoever in undertaking and spending money on the renovations to our home. Having finished and comfortable living spaces for our children to enjoy outweighs any regrets.” says Donaldson.

There is an upside for renovating now, says Remodelormove.com’s Fritschen: “Materials are less expensive, some 20% to 30% less, without sacrificing quality.”

Just because the wider economy is uncertain doesn’t mean waiting is necessarily your best move, he suggests. “Look at your situation. If you’re confident about your income stream and you want to make changes that will improve your home, its value and your lifestyle, then remodeling is a good investment, especially compared to what you can get in a savings account right now.”

LUMBER COSTS GO DOWN DURING THE SECOND QUARTER OF 2011, ROOFING AND INSULATION GO UP

• Dimensional lumber costs decrease 3-5% around the country.
• Plywood costs decrease 3-7% in most areas.
• Shingle costs increase again by 5-10%.
• Drywall costs continue to stay low.
• Fiberglass insulation costs up 5-10% in most areas.

Here is a helpful article:
Remodeling activity in April hit the highest level for the month since BuildFax started tracking the market in 2004

By Jonathan Sweet, Editor in Chief
Professional Remodeler

June 15, 2011

The remodeling industry continues to show strength, with record levels of activity for the month of April. The BuildFax Remodeling Index for April 2011 shows that remodeling activity for the month was higher than any April since BuildFax started tracking the market in 2004. The latest BFRI index indicates that residential remodeling activity registered the eighteenth-straight month of year-over-year gains, demonstrating that many Americans are continuing to remodel their current homes, rather than purchasing new homes.

The BFRI is the only source directly reporting residential remodeling activity across the nation with monthly information derived through related building permit activity filed with local building departments across the country. The April 2011 index rose 15 percent year-over-year and for the eighteenth straight month in April to 109.7, the highest April number in the index to date. That follows year-over-year gains of 17 percent in March, 20 percent in February and 22 percent in January.

“April traditionally sets a baseline for the rest of the year in residential remodeling activity, and April 2011 is the best we’ve seen since the beginning of the index in April 2004,” said Joe Emison, vice president of research and development at BuildFax. “The BFRI is indexed to start at 100 in April 2004 and here we are seven years later, after significant drops in housing value, and the index is almost 110. That means there were almost 10 percent more residential remodels in April 2011 than in April 2004. Given the relatively pessimistic economic news that we heard about April, including a slowing recovery, this is a nice surprise for the industry.”

In April, all regions posted month-over-month gains, and only the Midwest posted a year-over-year loss. The West was up 16.8 points (18 percent) year-over-year and up 5.3 points (5 percent) month-over-month. The Midwest was down 16.9 points (19 percent) year-over-year and up 10.7 points (17 percent) month-over-month, recovering slightly from a lower-than-average March. The Northeast was up 3.2 points (5 percent) year-over-year and 9.1 points (14 percent) month-over-month, and the South was up 9.6 points (11 percent) year-over-year and 10 points (12 percent) month-over-month.

MOST MATERIAL COSTS STAY LEVEL IN FIRST QUARTER OF 2011

• Dimensional lumber prices increased 5% in most areas, returning costs to 4th quarter 2010 levels.
• Plywood costs stayed stable increasing only 5% or less in some areas.
• Shingle costs increased by 5% or more in many areas.
• Drywall costs continue to stay at historic lows.
• Fiberglass insulation costs remained level, increasing 3% or less in a few areas.

Here is an enlightening article:

 Harvard Report: Bright Future for Remodeling

By Jonathan Sweet, Editor in Chief
Professional Remodeler

February 8, 2011

(Read the complete report at Joint Center for Housing Studies, http://www.jchs.harvard.edu)

Remodeling may have been hit hard by the recession, but demographics, an aging housing stock and a recovering economy give us plenty of reason to believe the industry is poised for recovery, according to the Harvard University Joint Center for Housing Studies’ biennial report on the industry.

A New Decade of Growth for Remodeling,” released in January, tells us a lot about where we’ve been, but also where the market is headed. We’ve included some highlights of the report, along with explanation from Kermit Baker, director of the Joint Center’s Remodeling Futures program. The complete report is available for download at www.jchs.harvard.edu.
Discretionary projects, improvements take hit

Harvard estimates that remodeling was a $286 billion industry in 2009 – down 12 percent from the $326 billion peak in 2007, but still above 2005 levels and nearly twice the size of the market in 1995. The biggest hit came in the owner-occupied improvement category, though – the sweet spot for many remodelers.

“Maintenance expenditures and rental expenditures didn’t really drop at all,” Baker says. “In fact, it increased to some extent. If you look only at owner improvements, that was actually down somewhere between 20 to 25 percent from peak to trough. That’s what many remodelers are seeing.”

The share of spending on discretionary projects such as kitchens and additions also dropped – from 49 percent of the market to 46 percent, while expenditures for exterior replacement projects gained market share. Work on rental units was also up from $52 billion in 2007 to $54 billion in 2009, compared with a $42 billion drop in spending on owner-occupied homes.

The relative strength in remodeling compared to new construction has also helped the industry become a much more important part of residential spending.

Census Bureau figures put remodeling spending at nearly 70 percent of all residential construction, up from less than 40 percent in 2005. While that level is unrealistic in the long term as new construction recovers, a 50/50 split between remodeling and new construction is realistic, Baker says.

“If you look at it historically, it’s stayed in the 40 to 45 percent range,” he says. “As population growth in the U.S. begins to slow and homebuilding stabilizes … if that was 50 percent on a consistent basis, that wouldn’t be surprising.”
More diverse market means steady growth

While we won’t return to the over-the-top spending of the last decade, the first half of this decade should see steady growth of 3.5 percent a year in the remodeling market, the Joint Center predicts. That’s on par with the market growth in the late 1990s, but well below the 12 percent average annual growth from 2003 to 2007.

“It’s kind of back to business as usual, but not overly accelerating,” Baker says. “I don’t think there were many people who were living through the 2003 to 2007 period that thought this was going to be a normal level of remodeling activity.”

The unsustainable growth of the remodeling boom was driven by a relatively small portion of the population undertaking large discretionary projects. The top 5 percent of homeowners were responsible for about 60 percent of remodeling spending from 2002 to 2007, compared to about 50 percent in the late 1990s and 52 percent in 2009.

“When the market was growing, it was growing because there was a fairly thin slice spending a lot more on home improvements,” Baker says. “Just getting that back to normal implies a different mix of projects.”

That means remodelers probably shouldn’t expect as many of the big-ticket projects as they saw during the boom. Instead, the market will be driven by smaller projects that are aimed at maintaining and improving homes for the way clients live rather than with an eye toward resale. While that may be painful for those remodelers that cater to the high-end client, it’s key to a more stable industry, Baker says.

“It’s better in the sense that you just can’t expect that to sustain itself,” he says. “It was this high-end part that materialized early in the decade and disappeared later in the decade that caused as much cyclicality as we saw.”

Homeowners with household income of more than $120,000 cut their spending 24 percent from 2007 to 2009, compared to a 17.6 percent cut by those with incomes from $80,000 to $119,000 and 20.4 percent of those with incomes between $40,000 and $79,000. Homeowners with incomes under $40,000 – whose spending would presumably be mostly on maintenance projects – only decreased their spending by about 6 percent.

There were also significant differences in spending by age, with older homeowners cutting their budgets much less than younger ones. Homeowners 65 and over reduced spending by only 0.7 percent and those 55-64 cut expenditures 13.8 percent from 2007 to 2009, while those under 55 spent at least 23 percent less.

“I don’t think remodelers are likely to see the volatility they’ve seen over the last five years,” Baker says. “There should be a broader base of households getting involved in this and I
think they’re getting involved in this for more of the right reasons, the right reasons being that’s what I want my house to look like as opposed to I bet I can get a nice return from that project.”
Small companies continue to dominate

The ease of entry into the remodeling market continues to make it a market made up mostly of smaller firms.

Using the latest numbers available, from the 2007 economic census, Harvard estimates there were 650,000 firms that reported receiving the majority of their revenue from remodeling. Two-thirds of those companies reported no employees. Half of those with employees reported less than $250,000 in annual revenue.

That continued fragmentation of the industry makes it difficult to encourage professionalism and adherence to the rules and regulations of the industry, such as the Lead Renovation, Repair and Painting Rule.

Even during the boom years, the industry saw incredible turnover. More than a third of remodeling companies in business in 2003 were out of business by 2007, including more than half of companies that started in 2003, according to Joint Center estimates. It’s likely those failure rates have only increased during the downturn, Baker says.
Foreclosures: Threat and opportunity

The increase in foreclosures and other distressed properties has played a major role in the decline in remodeling. Delinquent homeowners are unlikely to take on any major spending on their homes. The high rate of foreclosures has also played a significant role in depressing home prices. With declining home prices, homeowners are much less likely to invest in their homes or may be unable to because of the lack of home equity financing.

However, as more foreclosures work their way through the system and are purchased, the new homeowners will likely find there is substantial work to be done, especially with the average home spending 500 days in the foreclosure process, Baker says.

“No. 1, you could assume almost no investment in that property from the time that the household decided it really couldn’t afford that anymore and No. 2, there’s a lot more time for vandalism or anything to occur if it’s just sitting empty with no one really caring about it,” he says.

Harvard cites a spring 2010 study from the Home Improvement Research Institute that found that buyers of distressed homes spent, on average, 15 percent more on home improvements in the first year of ownership compared to other buyers. Most of the homes in that study were short sales, Baker says. As more foreclosures go on the market, that difference is almost certain to increase. “The level of distress for those properties is not nearly what we’re going to see when this wave of foreclosures comes through,” he says.
(Read the complete report at Joint Center for Housing Studies, http://www.jchs.harvard.edu)

SOME COSTS GO DOWN, SOME GO UP

• Dimensional lumber slipped a little lower during the past quarter, falling about 5% in most areas.
• Plywood costs continued to decline by 8% to 15% during the past 3 months.
• Shingle costs are down 10% to 15% in many areas.
• Drywall costs continue to stay at historic lows.
• Fiberglass insulation cost up almost 20% across the country.

Below are articles by two of our favorite experts in the remodeling industry.
Employee Expectations: During the recovery, smart employees will gauge your performance and the performance of your competitors.

Shawn McCadden
Remodeling magazine December 2010
This recession has taught remodeling business owners many lessons. But business owners are not the only ones who have learned from this experience. Employees have also kept their eyes open during these challenging times. The recession has helped them see what works and what doesn’t work in a remodeling business. But more importantly, they have learned what does and does not work for them. If owners want to retain and attract smart employees during the economic recovery, they need to prepare now.

Smart employees have a long-term perspective regarding their careers. They don’t just take any job; they look for jobs with the potential to improve their future.

What distinguishes smart employees from average employees is that they not only watch your business, they have been watching other businesses as well. As long-term thinkers, many of them are planning where they want to be when the market recovers.

As businesses pull out of the recession, these employees will be watching to see if the business and the business owner will be able to get back into growth and profitability mode. They want to see if their employer can provide them with new and better opportunities. If they don’t like what they see, or they see greener grass elsewhere, for the sake of their future they will most likely move on.

Evaluation Points

Some things smart employees are watching for at your company and with your competitors’ businesses:

Direction: Smart employees want the leader of the business to be confident, and they want to have confidence in that leader. They want to work at a business that has strong ethics and is moving in the right direction. They want a place where they can grow and earn more money as the company grows and profits. If these employees don’t see profits on the horizon, they know there is little hope for improved compensation.

Career path: Smart employees want a company that offers career growth and the educational support required to get there. They want more than a promise they want to see a business plan that explains how the company will implement processes that will ensure the promised growth and when that will happen. They want to see where they fit into that plan and they want a way to measure results. Smart employees think “career,” average or desperate employees think “job.”

Job conditions: Smart employees want to work in an environment free from hostilities and one that is sensitive to work/life balance. They work to live, not the other way around. They also want to be appreciated and recognized for their contributions and accomplishments. This is one way for them to measure the success of that business plan.

Pay and benefits: Average employees assume, or have faith or hope, that their compensation will increase. Average business owners have this same mentality. Smart employees never rely solely on faith or hope. Smart employees, like smart business owners, work toward future goals. They set up what they want to have happen rather than relying on hope or simply settling for what they get.

Smart employees also understand the value of their total employment package, including benefits. They take the entire package into consideration, not just wages, when they are thinking about switching to another business that offers a pay increase.

If you have survived the recession, don’t assume that you can take a break. Now is the time to start planning for how you will embrace the eventual recovery. Create your business plan for 2011, assemble a budget to anticipate and validate the financial realities of your plan, and share your plan with your employees.

As you do business in 2011, measure against your plan and budget and share that progress with your team. Your company’s and your employees’ future will depend on what they see.

Shawn McCadden founded, operated, and sold a successful design/build company. A co-founder of the Residential Design/Build Institute and former director of education for a national K&B remodeling franchise, Shawn speaks at industry events and consults with remodeling companies. shawnm@charter.net.

Stormy Waters: To avoid being swamped or sunk by the “rough seas” of the current market, remodeling companies need to adjust to a new course and navigate carefully.

Mark Richardson
Remodeling magazine December 2010
The most common question I am asked when I speak about the future of remodeling is, “When is it going to get better?” or “When do you think things will be back to the way they were in the past?” These questions come from working contractors who have seen dramatic changes in their market and have experienced extraordinary challenges to their success. Most are among the majority of the industry I would say about 80% who are still waiting and hoping for the conditions of five years ago.

To me, this is wishful thinking. Those days are probably gone forever, and no amount of wishful thinking or hopeful “waiting it out” will bring them back. I believe that the smart business mindset is to see the present market conditions as the new normal. Once you resolve yourself to this mindset, you can get back to being proactive and can really evaluate whether or not you have the right team to accomplish what it takes to be successful. I estimate that only about 20% of the remodeling community understands this, but those who do are seeing positive growth and profitability.

I find it helpful to think of our industry’s current predicament as a ship at sea in stormy waters. Becoming resolved to the “rough sailing” that lies ahead is a real eye-opener. Once you accept that future, your confidence builds and you can begin to plot a course that will ensure that your ship and its cargo arrive safely in the next port. This “ship at sea” metaphor reveals some important lessons:

Keep a “lookout.” Stormy waters are more treacherous than calm waters. Every decision you make can make the difference between reaching your intended destination and capsizing and sinking before you get there. As captain of the ship, you need to be alert to changing conditions while at the same time guarding against being swamped with extraneous information that could push you off course. Every decision counts, so make sure you know not only the “what” but also the “why” behind everything you do.

Batten down the hatches. You are sailing in uncharted ocean waters, not anchored in a familiar cove. Your business “ship” will take a pounding that can cause permanent damage and compromise long-term seaworthiness. For a voyage like this, you need to make sure your processes, your product, and your people are in tip-top condition.

Navigate. It’s easy to drift on a swift current, but you need to control your direction by setting a course and making whatever adjustments are necessary to stay with it. You need to be on the offensive, not the defensive, which means your business plan is more important than ever. And because you are constantly struggling against forces that can push and pull you in different directions, you need to monitor progress weekly, not quarterly, to stay on course.

Train the crew. Stormy waters challenge even the best sailing skills, so you need to ensure that everyone on your team has the knowledge and tools necessary to handle any situation. That means investing more time and energy in training, as well as committing to and communicating a vision in which failure is not an option. Strong remodeling businesses are investing three to five hours per week training salespeople, production crews, and future leaders.

Instill a work ethic. Navigating stormy waters is hard work. There’s no let-up and very little time for rest. If today’s conditions are 30% to 50% harder, it should take many more hours to accomplish the same results as it did in the past. Your employees and your trade partners need to roll up their sleeves to assist, even in areas of the business that they never addressed before. That is what hard work is all about.

Many remodeling company owners are unprepared to meet the challenges that lead to success in this environment. Commitment to the reality of the current business climate is the first step. Adjusting to stormy waters will make you and your business better, and in a few years when the waters are calmer, just imagine what you can accomplish.

Mark Richardson is co-chairman of The Case Institute of Remodeling, which provides business educational tools and events for the remodeling industry. mrichardson@casedesign.com; 301.229.4600.

PLYWOOD PRICES SETTLE DOWN

• With the end of hurricane season at hand, plywood costs have gone down 10-15%.
• Dimensional lumber costs have decreased by 5-8%.
• Roofing shingles have gone up 8-12% during the last quarter.
• With winter approaching, fiberglass insulation has risen as much as 20% in some areas.

Here are some timely articles you may find useful.

Get Back to Work: Many remodeling businesses closed during the housing crisis. Here’s how your shop can capitalize on those former owners’ skills and experience.

By: Lauren Hunter

The oldest Catch-22 in the business world can make an owner wonder why adding staff ever seemed like a good idea. “What if you train a new employee well and they leave?” a remodeler asks. To which a friend responds, “what if you don’t train them and they stay?”

The thought of training your competition is unnerving, but in times of high unemployment some remodelers are finding the tables turned in their favor. A dearth of business has forced many small remodeling companies to close up shop. In some cases, trained competitors are becoming assets that bring ownership knowledge and construction skill to other remodeling companies: their new employers.

Rumors abound that entrepreneurs in non-ownership positions are prone to head-butting with superiors. Not true, say seasoned remodelers who have hired many former owners to their companies. As with any hiring situation, they say the key is to interview thoroughly and put former owners’ skills and experience to work where they’ll be most beneficial.

Solid Experience
Ray Wiese says that hiring former remodeling business owners has paid dividends. “When someone mentions to me that they had their own business, that’s a good thing,” says the president of The Wiese Co., in Sherborn, Mass. “They understand not to waste lumber, that the amount of time they have to put in on a job is critical, that there’s not a million dollars left over at the end of a job. Those are terrific tools they bring with them.”

Chris Wright agrees. “Many of us who like to build things don’t have the skill set to really run a business well,” says the president of Indianapolis–based WrightWorks. “If ownership isn’t for them, the goal becomes fitting into a company where they have a skill set that’s valuable. But when they’ve also got some business experience, to me, that is really valuable.”

Even if a remodeler doesn’t want to, or isn’t able to, sustain a business of their own, experience dealing with vendors, sales, estimating, invoicing, and other issues makes hiring a former owner an attractive proposition. Wright says that one former owner now on his staff as a lead carpenter brings his expertise to bear as a liaison between Wright and the rest of the staff. “When you have someone on the team who’s also pulling for you and understands what the end goal is, it really adds to the company culture,” he says.

Truly motivated former owners will do more than offer a sympathetic ear to their new employers: they’ll keep tabs on their own performance. “One owner I brought on as a salesperson comes into my office all the time and asks, ‘Are you making money on me?”‘ says Phil Isaacs, president of California Energy Consultant Service, in Rancho Cordova, Calif. “He wants to know that he’s doing a good job and that the company is benefitting from the work he’s bringing in. It’s that kind of insight into how a business prospers that makes someone with ownership experience valuable.”

What’s My Motivation?
Of course, not all remodelers retain their ownership instincts after closing their doors. Some shrug it off entirely and focus solely on finding a job.

“There are a lot of owners looking for employment right now, and you have to be cautious about their motivation,” Wiese says. “All of our people have families, I have a family, and I’ve been through some desperate times. There are people looking just to make a paycheck right now because they need to.” While that may become a hiring factor, he says, understanding why an employer wants to become an employee is critical.

Wright agrees. “You can get a sense that their heart is in the right place and that they just didn’t have the business skills to make their own company work or that they’re just not interested in pursuing the business end of remodeling,” he says. “If their personality will function in your organization and you can make sure they have a job to do, they’ll be able to do what they really excel at. Those are the best kinds of people to hire.”

That said, if a business-skills issue held back the former owner from being successful, Bill Connor, president of Indianapolis–based Connor & Co., says it’s equally important to learn that right away. A former owner who Connor hired 10 years ago turned out to be a good salesperson but a lousy estimator. “He shut down his company to come work for us, and we found out later that he really needed some remedial training on estimating systems,” Connor says. “After a year-and-a-half he went back on his own and he’s still in business.”

Connor and Wiese also have had to deal with concerns of client poaching when entrepreneurial types go back out on their own. In a separate incident, a former business owner and 14-year Connor & Co. employee was laid off when the company downsized in January 2009. The individual tried to access the company’s database to contact clients, which Connor calls “disconcerting.” Thankfully, Connor spoke to the employee and nothing came of the deceitful activity. For Wiese, a laid-off employee did take advantage of the company’s available database.

“During his employment, he had built relationships with some of our clients who asked him about doing some work on the side. We have a policy that doesn’t allow that,” Wiese explains. “When [this employee's] name came up in a round of layoffs, he took it personally. He called the client who had been interested in working with him, as well as several other clients, asking him what work he could do for them. I can’t blame a guy who’s just trying to put food on the table for his family, but it was disappointing that someone would take him up on it.”

While Wiese says that there were no indications in his former employee’s career that such activity was possible, some remodelers do look for red flags when hiring former owners. Wright looks carefully at job-seekers’ motivations during the hiring process. “A number of guys have come to me over the years, and their approach is almost comical,” he says. “They’ll call me out of the blue, say they’ve seen my work and tell me they’re looking for a job by the hour.” Wright regards these inquiries with skepticism. Someone who just wants a 9-to-5 job may lack initiative or interest. “I know on some level they’re tired of the rat race and want to find an organization where they don’t have to worry about the other things,” he says, “but I’m not going to provide an environment for them to sail through.”

Field vs. Office
For instances where the motivation is healthy, placing former owners in the right positions is needed for good performance. Former head honchos will be looking for a certain level of autonomy and leadership opportunity. Their experience should be acknowledged during new-employee training.

“Anyone who’s been doing something for a long time will have their own way to do it,” Wiese says. “But they’ll still need to get a feel for our processes and paperwork and what we expect from them as far as materials ordering and project management.”

All three of the former owners on Wiese’s team were hired as lead carpenters and all spent time shadowing another lead. Head-butting hasn’t been a problem. “The former owners we bring on love the industry and may have great skills and ideas, but we don’t see a lot of process issues,” he says. “When we’re hiring someone whose business didn’t work out, process was usually part of the failure, so we illustrate a more effective way to work.”

Don’t Be a Hero
Chris Wright, president of WrightWorks, in Indianapolis, says that he has made every mistake in the book over the years, poor hiring decisions not the least among them. While he generally sees former owners as great prospects for hiring, he says the reasons for hiring someone shouldn’t change just because they have owned a business.

“In an economy like this where there are a lot of people looking for work, it’s tempting to want to be the hero,” Wright says. “It’s especially hard if you have a family member or a friend who needs a job. It’s seductive.”

On his first major job, Wright says he hired a former business owner with a lot of experience and know-how but he came with some baggage. “He was a dream employee, but he had a son and son-in-law that both needed jobs,” Wright recalls. “I was looking at this big job that needed to be framed and had all this other work, so I hired all three of them.”

Ultimately, Wright says the company went bankrupt on that job, due to a number of factors including overzealous hiring. “I had this big job, but I didn’t think past it,” he says. “When someone has great experience, especially as an owner, it’s going to be tempting to snap them up, but will you have work for them and be able to sustain them as employees after that job is done?” If you’re not planning on hiring in the first place, he suggests, don’t bring someone on for the sole reason that they’ve been an owner.

Connor agrees, noting that any personality issues should be easily identified during the interview process. “If hiring a former owner or any potential employee can bolster us in areas that we’re weak, we need to listen to those ideas and fold them in,” he says. “Especially if we’re talking about a salesperson, a designer, or even a project manager with tons of experience, there’s probably a place for us to accommodate their experience. But in the case of a field position, I’m more inclined to say, ‘no, here are our systems.”‘

Isaacs also has had great success blending former owners into his sales staff. “We do have policies to follow, but we ride that fine line by giving them enough freedom to where they feel like they’re the boss,” he says. “These guys were owners and salespeople, so they have connections. Not only do they understand where I’m coming from, but they don’t come to me looking for handouts for leads. They go out, they generate their own leads, and it’s just wonderful.”

Isaacs has expanded his business by purchasing companies that are folding, and bringing those former owners on as new salespeople. He says that keeping those individuals’ leads safe is key. “It’s not in my interest to waste the work that these guys put into their own businesses,” he says. “We’ll pick up their contact lists and they’ll still have all the leads that come into our office, and they’ll have confidence that our system tracks each lead so it won’t end up on someone else’s desk. We track the lineage of leads as well, so if a referral comes in from one of his past customers, the lead goes to him.”

This kind of sensitivity to a former owner’s hard work helps keep the new relationship strong and lets the employee thrive. “Like any other employee, you have to think of retention and be in tune with why these guys will want to stay with you,” Isaacs says. “It goes beyond money. They have to feel that they’re adding value to the new company, that they’re developing relationships beyond the work aspect, and that they’re finally able to capitalize on what they really wanted to get out of the industry in the first place.”

Lauren Hunter, associate editor, REMODELING.

High-Stakes Bidding: Even upscale clients are asking for bids during the recession, and high-end remodelers have had to adjust.

By: Nina Patel Related Articles

Upscale clients, usually more uninhibited about spending money, are pulling in the reins. “The marketplace has changed as result of the recession, and it has changed in complex ways,” says Keith Alward. “Everyone is more nervous about money and more focused on how to control it.”

Alward, the owner of Berkeley, Calif., company Alward Construction, says that one consequence of this attitude shift has been high-end clients seeking three to five bids for a project. This differs from just a few years ago when Alward’s high-end clients readily accepted the project price from his reputable company. The remodeler used to tell potential clients that “[at Alward Construction] we don’t use pricing as a way of getting business.”

In Boston, one of remodeler Paul Sullivan’s three-time repeat clients came to him with a $100,000 remodel. He mentioned to Sullivan that he was considering getting another bid on the project. “People hear things that make them question everything,” says the owner of The Sullivan Co. On a recent $1.3 million project, although Sullivan was told that he was being hired, the homeowners chose a contractor who bid 3% less. These clients, like most high-end customers, Sullivan says, pay cash for projects and can afford the work, but are nervous about the economy and their jobs. “I think plenty of people are not affected other than psychologically by this recession,” he says.

Eric Borden of ESB Contracting, in Toms River, N.J., says that his wealthy clients are also reluctant to spend. “There is retraction, naturally, in all phases of the market,” he says. In 2005, ESB’s volume was $3 million. This year it will probably be $500,000. Part of the reason for the reduced volume is that more remodelers are competing for the work.

Borden says that new companies are moving into his area. He works on multimillion dollar oceanfront vacation homes in Bay Head and Mantoloking on the New Jersey coast and says that clients are asking the remodelers of their primary inland residences to come to the shore to work on their vacation homes. In the past, Borden says, these contractors would have turned down the job because they had enough work in their own area. “Now, they’re willing to travel farther for less money,” he says.

Borden also points out that although the industry has been preaching a “get out of bidding” strategy, in this market the reality is that remodelers have to compete with a range of bidders. That salesmanship “goes out the window” he says, when the client wants to know what you can you do for them today. He is still trying to differentiate his company. “We don’t like the term ‘bid,”‘ he says. “We call it ‘setting the budget,’ and it has always been an education process.”

Bid and Bid Again
“Today, like everyone else, I will take every opportunity I can possibly take,” Alward says. An architect he had worked with years ago asked Alward to bid on a job, but informed the remodeler that he had a strong relationship with one of the other two bidders and that the other bidder had worked on the client’s house several years ago. Also, the clients just wanted a bottom-line number they did not want to see how that number was arrived at. Though Alward ultimately questioned the effectiveness of providing a bid in this way, he did submit one and he won the job. But he worries that in multiple-bidder scenarios, architects might convince homeowners that there is no difference between three reputable contractors, so they should just look at price.

Three years ago, Sullivan did not provide bids. His most common scenario: The homeowner already has a set of plans and is ready to hire Sullivan. He calls Sullivan for a general budget proposal, which Sullivan provides with both a low and a high range.

Almost all of these jobs were billed cost-plus, and since The Sullivan Co. is open book with its clients, the clients knew the company’s labor rates and profit. However, three years ago, most of Sullivan’s clients began asking for fixed-price contracts.

Sullivan recently completed his third bid for a client who does not have finished plans or specifications for their project. “It was supposedly our job, but it quickly turned into a bidding process with another contractor,” Sullivan says. “I know they will try to have me bid it a fourth time with the plans, but I’m unlikely to bid a fourth time. It may seem foolish, but [it's] for the long-term good of my company and the long-term good of the industry. People have to start putting their foot down,” he says. “If we keep getting bullied by clients over a few dollars, we are only hurting ourselves and each other, and the clients are not being served by that.”

Sullivan says that most $1 million-plus projects are not put out for a competitive bid, but if they are, he knows most of the other bidders. “Most of them are involved in the builder’s association,” he says. Due to his association involvement, Sullivan used to recognize the job signs in his area. But now he says there are a lot more players in the game. Many are former employees of large remodeling companies who know what their previous employer charged for projects and feel confident they can under-bid due to low overhead. “They are working out of their basement with no office staff and minimal insurance,” Sullivan says. “They can go in for a 10% profit. A lot of these new companies will ultimately fail, but they are out there now.”

Jackson & LeRoy Remodeling works on architect-designed projects in gated communities in Salt Lake City, with pre-recession jobs in the $750,00 range. “With the upscale market, our No.1 rule is to under-promise and over-deliver,” says co-owner Brandon LeRoy. “The bid scenario is completely counterproductive to that. You have to overpromise to get the job, which does not set the right expectation for clients. It completely contradicts great customer service.” Less than 20% of the company’s work comes from bids. “To win a bid you must compete with bids that are either unrealistic and/or incomplete. I have yet to know anyone, including myself, who can completely equalize apples to apples bids on an upscale project.”

Taking Control
LeRoy’s goal is to eliminate bidding and to “completely operate from referrals.” Until that happens, the company is trying to control and manage the bidding process. “If we don’t get face time with a client, if they do not visit past jobs or do not call our referrals, we do not proceed on the bid. If they do not show interest in us and our quality, they are just looking for a number,” he says.

In most cases the company charges for a bid. LeRoy explains to clients that the company’s thorough bid includes a detailed packet with a preliminary project schedule, a budget forecast with 250 line items, references, copies of the company’s license, photos of past projects, and a certificate of liability insurance. “This approach trumps the standard one- or two-page estimate turned in by competitors. It filters out a lot of [clients] if they are not willing to pay $500 for an estimate,” LeRoy says. “It has reduced the amount of times we get involved with the bid process, and when we do, the potential client is invested.” He says that creating that estimate consumes an enormous amount of time, talent, and resources.

Alward says the paradox is that small jobs do not bring in enough to support an office staff for a large company but they take a lot of time to process. He used to have just one person on staff who was responsible for estimating. Now, he has two people who work only on estimating and are not responsible for any active jobs. However, he is committed to maintaining office staff. “For the amount of business we are doing, we are top-heavy,” Alward says. “I am grasping for opportunities and to make a sale. I’m still revenue-driven.”

Devil in the Details
Alward needs support staff to help respond to potential clients. “Seventeen job estimates spread among a staff of five people is not insignificant. To turn these into work, you need to get them out quickly,” he says. Though he tried to cut back on the details in the estimate, he was unsuccessful because of the company’s ingrained culture of providing comprehensive information.

Even with a set of schematics, Sullivan says, there are so many unknown specifications that it’s difficult to prepare a detailed bid. “Do you assume they want $2 per square foot tile from Home Depot or $30 per square foot tile from a luxury tile store? You don’t know. And there are 20 items like that on a job, so you keep putting in allowances. But even though clients know there are allowances, they will say, Smith Contracting has lower allowances than Paul’s company so we should go with them. Then they choose $30 per square foot tile and end up being the same price,” he says.

Borden says that with his company’s typical 45 to 50 line-item bids, half of the line items are allowances. “Exactly what is a bath fixture? Does it include a shower door or not? Do I include bath glazing as a separate line item?” he asks. When he’s meeting with clients for just an hour, Borden can’t get a sense of their desires or choices for products. “The ‘swag’ part of the bid is where you get into trouble. My specifications are based on a median of what my previous clients have used,” Borden says.

Sullivan says that his company is perceived as one of the more expensive remodelers in the market. “I prefer to leave it that way. We are not the most expensive, but we are up there. We have to be in order to provide the type of service we do and to have the staff and vendors that clients in our market expect.”

To present the bid in person is a “high-pressure tactic,” Sullivan says. Instead, he tries hard at the initial client meeting to present himself and his company in the best light, explaining what his company provides that the competition does not and offering to take the homeowner to see a past project.

Associating with Architects
Most architects LeRoy works with have been educated to follow a bid process. “The natural tendency is to think that in a down economy the bid process becomes more prevalent, but among certain architects we have seen the opposite,” LeRoy says. Many architects surviving the downturn are having a paradigm shift from a bid process approach to a more relationship- and loyalty-based approach.

Architects view remodelers as a potential lead source, so they don’t take the relationship for granted. Jackson & LeRoy Remodeling’s marketing plan brings the company a steady stream of design/build leads that they take to architects. “[Architects] have turned to us in these slow times, bringing their work to us in an effort to get some of our work back to them,” LeRoy says.

The company focuses on two or three architects who best fit its niche and work well with its clients. “The three we work with educate clients and care about process all the way through,” LeRoy says. “Those architects are good about telling clients that low bids are the most incomplete.”

For most projects, Borden says that home­owners approach the architect first, and the relationship between them grows during the year they spend on design. The architect introduces the client to builders they feel will be the best fit for the project. To help bring in more projects, Borden is visiting the architects he knows in his area for some “face-to-face marketing.” “We’re trying to get more plans from more architects,” he says.

Nina Patel, senior editor, REMODELING

PLYWOOD PRICES GO THROUGH THE ROOF!
It must be hurricane season already …

• During the past 3 months plywood prices have gone up 25% to 35% nationwide.
• Wood stud prices have increased over 10% during the past quarter.
• Minor adjustments in dimensional lumber have occurred, adjusting prices up and down by under 5% in most places.
• Roofing shingle prices have gone down slightly in many areas.
• Fiberglass insulation prices have increased by 10% in most areas of the country.

Below are 3 articles by our favorite experts in the remodeling industry.

Four Reasons, Three Steps
Rethink your marketing and learn (the new ways) to sell.
By: Shawn McCadden
From: Remodeling magazine June 2010

Looking for that magic bullet that will make your phones ring with qualified leads? Sorry, it doesn’t exist. Here are four reasons why new marketing is essential to turning your business around.

The marketplace has changed. Financing projects is out. Homeowners’ own money drives remodeling decisions now.

Traditional marketing methods no longer work. Simply repeating those methods is an expense, not an investment.

Formal sales training has become essential, including for remodelers who sold well in the past.

Continuing to do no marketing will put you out of business.

And here are some specific steps to help you make that turnaround.

A Serious Plan

A list of marketing tactics is not a marketing plan. Creating a good marketing plan requires reading a lot, doing research, gathering data, and verifying strategies. Be practical and pragmatic; you’ll need to commit to the money and resources to make your plan happen. Keep in mind the consequences of not planning and following through. Recommended reading: “Goals vs. Strategies,”January 2006.

Step 1. Rethink Your Target Market

Remember when there was so much work going on that homeowners were happy just to get a phone call and a visit from a good contractor? The power has long since shifted, and homeowners know they can negotiate with contractors who specialize in the work they desire. So, who’s in your target market, where do they live, and how do they buy? This clear picture will give you a basis for deciding how to market to them.

Recommended reading: “Niche by Niche,”July 2008.

Step 2. Articulate Your Differences

Tired of homeowners who only want to buy on price? This is your wake-up call. If homeowners don’t see (and you don’t define and communicate) your business as different, you will be forever stuck selling on price.

After all, what besides price distinguishes one bland commodity from another? As you articulate your business’s distinct differences, align them with whom you want to sell to, why these homeowners value those differences, and how your differences will satisfy their needs.

Important:You don’t buy from you, so never assume what prospects want or why. Do the research to confirm the strength of your strategy and your ability to communicate it. Recommended reading: “The Only Game in Town,”February 2008.

Step 3. Learn How to Sell

Many remodelers used to do just fine by selling on the numbers: That is, the more people you got in front of, the more projects you sold. Given how long the typical buying cycle has become and how many visits it now takes to close a deal, who has the time to continue selling on the numbers?

Commit to an ongoing sales training program and individualized coaching time. The training doesn’t have to be specific to remodelers, but your coach should be able to help you work on sales strategies that are specific to your defined target market and differences. Mantra: Learn, practice, debrief, adjust, repeat. The best-performing salespeople practice and continuously learn; their sales systems become part of them.

Took sales training in the past, know it all already? Chances are, your previous sales training helped you memorize responses to typical objections. Typical objections have changed. Recommended reading:

“Confidence Game,” September 2009.

Many remodelers started their businesses because they enjoyed the hands-on work. That era may be gone altogether. If your want to stay in business, it’s time to work on your business, not in it.

Shawn McCadden founded, operated, and sold a successful design/build company. A co-founder of the Residential Design/Build Institute and former director of education for a national K&B remodeling franchise, Shawn speaks at industry events and consults with remodeling companies. shawnm@charter.net.

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Mixing Up Markup
Does the tighter market call for tighter prices and thus lower markup?
By: Linda Case
From: Remodeling magazine June 2010

Nowadays, setting markup is like sailing, says Joanne Hall, of Villa Builders, in Arnold, Md. “You have to trim, jibe, tack, reef the main, and sometimes just turn the damn engine on. I don’t think you should ever believe you can just set your sail and forget it. Not anymore.”

The first step in establishing a markup is to pinpoint your overhead costs and net profit goals. In better times, I pushed remodelers to aim for a net of 8% to 10%, above the owner’s salary, to allow for cost overruns.

These days, I advise shooting for a 5% to 7% net, but I applaud anyone who strives to go higher.

Say you realistically anticipate $1.2 million in volume for the year. You know that your overhead (including pay) will be $324,000, or 27%. You want a net of $72,000, or 6%. Add the two to get the gross profit you need:

$396,000 (33%).

To convert that gross profit into the markup you need, subtract your gross profit percentage from 1 and then divide 1 by the answer (1 – 0.33 = 0.67; 1 ÷ 0.67 = 1.49). Thus, your markup should be 0.49. If the plumber charges you $1,000, in other words, you charge the client $1,490.

Gross Profit Variables

Gross profits of between 30% and 40% tend to be industry benchmarks for remodeling. Yours may need to be higher or lower. The larger your average job size, the lower your overhead per volume dollar, and vice versa.

I’ve seen overhead ranging from 12% (for companies with extremely big jobs) to 40% for companies with smaller jobs or very high marketing and sales expenses.

Your average job size shouldn’t affect your net profit goals, however. Remember that no matter how lean you get, others in your marketplace will undercut you. Why? Because they don’t know their costs and overhead.

To try to match them on price is a sure road to ruin.

Many Roads to Marking Up

It doesn’t matter how you mark up as long as you bring home the bacon. The simplest and most common method is to apply the same markup across the board. But also consider these two alternatives:

Gross profit per hour, based on carpentry hours. This method works only if your carpenters are employees rather than subcontractors.

Multiply your number of field personnel by their actual working time. Assuming you run the $1.2 million company above, let’s say you have six field personnel who work 1,700 hours a year, or 10,200 hours. Divide your gross profit dollars ($396,000) by those hours, and you will get $38.82. Price jobs by adding this amount your gross profit per hour to your burdened average hourly cost of a field person.

By marking up only labor, this method may make you less expensive for jobs that are light on carpentry, and more expensive for jobs that are heavy on carpentry. It also commits you to actually use all 10,200 hours to reach your annual goal. Underestimate labor, and you are in trouble.

Gross profit per week. This method works whether you use employee crews or you use subcontractors, but it requires accurate scheduling.

Divide your needed annual gross profit by the number of weeks your crews work. As you price jobs, calculate the gross profit they will produce by the week. The difference will indicate if you should raise or lower prices.

You’ll definitely get a new perspective. I know one remodeler who realized he couldn’t make any money doing bathrooms.

The relative complexity of these two methods is a key reason for the popularity of across-the-board markups. I recommend that you price at least two ways. Use your best judgment for the job and always always watch your profit-and-loss and work-in-progress reports like a hawk.

Linda Case is founder of Remodelers Advantage, a national company that gives remodelers the tools to achieve consistent profitability and success through one-on-one consulting, the Roundtables peer program, and an online learning community, Advantage Associates. 301.490.5620; linda@remodelersadvantage.com; www.remodelersadvantage.com.
Student of Success
A positive mindset reinforces behavior that leads to success under any market conditions.
By: Mark Richardson
From: Remodeling magazine June 2010

Over the last couple of years, many businesses (and some industries) have shrunk or even failed. Most observers attribute this outcome to market conditions or the overall economy, and as a result many business leaders have dramatically adjusted their goals and direction. While it would be naive to think that market conditions do not have a major influence on the difficulty or ease of achieving goals and results, it is important not to hand over your business and destiny to an environment that you cannot control.

As I have watched businesses both inside and outside the remodeling industry over the last few years, I have found a common denominator among those that have seen positive growth and profitability while navigating these stormy waters. That common denominator is what I call “being a student of success.” It is a mindset, it is a behavior, and it is an investment. And while it may sound a little too evangelical for some, I believe it directly affects the behaviors of success and a positive outcome.

Positive Attitude

When you adopt the student-of-success mindset, you believe that “failure is not an option,” that an extra 1% is the difference between winning and losing. You begin to make positive attitude and team morale a priority in your business decisions. Henry Ford said, “I refuse to recognize that there are impossibilities”; Napoleon Hill’s book is titled, Think and Grow Rich. They both believed that attitude is important to create success.

In addition to positive attitude, a success-focused mindset is also about work ethic. In tough times, each individual needs to step up so that work ethic becomes a cultural dynamic and is not carried by just a select few individuals.

Take inventory of both individual and collective attitudes within your company, and grade your “success mindset.” Then talk with the owners of businesses that have seen positive growth over the last couple of years and compare notes. I think you’ll find that a positive mindset is a key ingredient to success, particularly in difficult times.

Changing Behavior

In addition to adopting a success mindset, you also need to translate it into behavior. Paraphrasing Ken Blanchard, author of The One Minute Manager, intentions without actions aren’t worth squat. Giving motivational speeches and singing company theme songs may help to build a positive attitude, but positive business effects are not sustainable without developing specific habits and actions. Companies and leaders who are students of success reward creative thinking and improvement even in tough times.

Watch your colleagues and employees and ask yourself if they are “students of success.” If not, you may need to devote some time and energy to training, marketing strategies, or even new processes or systems that embody the “student of success” concept.

As much as many people would like their business to “hit the lottery” and achieve overnight success, that is not a strategy you can count on. Being a student of success requires an investment both in hard cash and time; it also involves some risks. But without risk and investment, gains will be minimal.

Try to quantify how much money you want to invest annually into being a student of success. One successful friend of mine spends two weeks each year away from his business in an entrepreneurial program at a major university during that time he is literally a student of success. Investments like this push you out of your comfort zone and stretch your business “muscles” in new ways. As you know from your experience with physical health, you achieve better results when you vary the exercise routines you use.

I truly believe that what will separate the successful leaders and businesses moving forward may be less about the market conditions and more about becoming real “students of success.”

Also, new recommended Hourly Labor Rates (HLRs) have been posted. 

All subscribers should have received a notification email from RemodelMAX. Some of the pricing trends that RemodelMAX chose to highlight are as follows:

Lumber Products Rise Steeply

• Dimensional lumber prices increased 15% in the last 3 months.
• Plywood pricing up 15% in most areas.
• Wood stud pricing up as much as 15%.
• Fiberglass insulation on the rise by almost 10%.
• Fiberglass shingle prices dropped by 5% during last quarter.

Here’s an article that says it all.
Remodeling market should start to come back this year

By Jonathan Sweet, Editor in Chief
February 1, 2010
Professional Remodeler

The good news: the recession appears to be over. The bad news: the recovery isn’t going to be great.

That seems to be the consensus of most economists as we head into 2010 the worst is over, and we’ll start seeing modest recoveries in the housing and remodeling markets this year.

“It was the worst downturn since the Great Depression, but it does appear to be over,” says David Crowe, NAHB’s chief economist. “It won’t be a strong recovery, but there are some positives for housing.”

The fourth-quarter ended up being better than many economists expected, with gross domestic product growing at a 5.7 percent clip in the last three months of 2009. Still, a sluggish job market has many pessimistic about a long-term recovery, especially in housing. (Residential investment did slow from 18.9 percent growth in the third quarter to 5.7 percent in the fourth, probably due to the impact of the new home buyer tax credit.)

“A recovery in the employment market is the key,” Crowe says. “We need to see continued employment growth, and it’s going to be at least several months before we see that happen.”

NAHB is forecasting unemployment to go below 10 percent in the second quarter of this year and below 9 percent in 2011. Those high rates will continue to put pressure on the housing market, says David Berson, chief economist of mortgage insurer The PMI Group.

“The job market is going to look a lot like it did last time a jobless recovery,” Berson says. “That will hold down the strength we see in housing.”

Remodeling recovery

The Joint Center for Housing Studies of Harvard University estimates that the overall residential remodeling market was $246 billion in 2009 down almost 25 percent from the 2007 market peak of $320 billion. That’s still better than the new construction downturn and has lead to the long-predicted surpassing of that market sector by remodeling.

“At this point, remodeling is larger than new construction,” says Kermit Baker, director of the Remodeling Futures Program at the JCHS.

Both NAHB and Harvard are predicting remodeling will start a nascent recovery in the second quarter. The overall remodeling market can be difficult to measure and forecast now because of the Census Bureau’s elimination of the C-50 survey and other indices that tracked remodeling activity. Only improvements to owner-occupied homes can be tracked with any accuracy, but that measure leaves out maintenance and repair, as well as work on rental properties.

That portion of the market fell to an estimated $110 billion for 2009, down from its 2007 peak of nearly $150 billion. Harvard’s quarterly Leading Indicator of Remodeling Activity measures remodeling on a rolling four-quarter basis (see graph). The LIRA is predicting a drop to a $103 billion rate this quarter before starting to rise next quarter, although it would still be below the 2009 second quarter rate. If that plays out, it’d be the first quarter-to-quarter improvement since the second quarter of 2007.

“We’re seeing more interest in discretionary spending,” Baker says. “This quarter will be the cyclical low, and if you project ahead we could be in positive year-over-year territory by the fourth quarter.”

NAHB is estimating improvements in owner-occupied homes to reach $115 billion by the end of 2012, says Paul Emrath, NAHB’s vice president of survey and housing policy research.

Opportunities and challenges

There are several positive signs that point toward an upswing in remodeling and housing, including tax credits for home buyers and energy-efficient remodels.

“Sales of existing homes are on the rise, and home price declines are moderating in most markets across the country,” Baker says.

Analysis of Census Bureau numbers show clear patterns of higher spending on remodeling by recent buyers. The average homeowner spends $2,413 a year on remodeling, compared with $4,275 for buyers of new homes and $4,642 for buyers of existing homes, Emrath says.

“When you have a government policy that stimulates selling homes, you get some extra remodeling activity,” he says.

NAHB estimates that the new home buyer tax credit resulted in $123.8 million in remodeling last year.

While mortgage rates will probably rise this year, the historically low levels combined with low home prices and the extension of the home buyer tax credit should continue to drive sales, Crowe says.

Increased demand for energy efficiency retrofits and other green remodeling is also putting positive pressure on the market. The existing tax credits have already helped and proposed increases in those credits or the approval of Home Star or a similar program could have an even larger impact, Emrath says.

According to NAHB research, 30 percent of remodelers have seen increased demand for energy efficiency remodels, and 5 percent of remodeling jobs last year were driven by the tax credits.

There are also some significant challenges to the recovery. Financing still remains difficult for many home buyers and homeowners to obtain. “The lack of financing will be a significant retardant on a housing recovery,” Crowe says.

High unemployment combined with lower home prices also mean foreclosures are likely to increase leading to lower prices and even more foreclosures.

Many bank-owned homes are still being kept off the market by servicers, and what those owners decided to do with them will play a key role in the direction of the market and recovery, Berson says.

“We don’t think they’ll dump new foreclosures on the market, which means it will be longer before we see a recovery in home prices,” he says. “We expect it to be three years before we get back to normal growth, but that’s probably better than getting everything dumped on the market right now.”

PMI is predicting more declines in home prices in the short term, as the government extracts itself from the mortgage market, Berson says.

Those lower home prices will probably continue to make many homeowners reluctant to remodel, Emrath says.

“Home prices are now back in line with income,” he says. “Now we’re facing a psychological problem. If you think the prices of homes are going down in general, you’re going to be reluctant to remodel.”

The new lead paint regulations on pre-1978 homes could also throw a wrench into any remodeling recovery. According to NAHB, 69 percent of remodeling is done on homes built before 1980, and many have questioned whether owners of those homes will be willing to pay the additional costs required to follow the new rules.

“The cost of compliance could discourage homeowners from hiring professional homeowners,” Emrath says. “Our surveys show this is a major concern.”

Finally, remodelers are facing even more competition for the smaller market that is out there. In a recent Professional Remodeler survey, 40 percent of remodelers reported an increase in competitors, with former home builders being the largest group coming into the market. And late last year, when NAHB surveyed its builder members, 66 percent of them reported they either had added residential remodeling to their business in 2009 or planned to in 2010 and more than 20 percent said the same of commercial remodeling.

Also, new recommended Hourly Labor Rates (HLRs) have been posted. Click here to view them!

All subscribers should have received a notification email from RemodelMAX. Some of the pricing trends that RemodelMAX chose to highlight are as follows:

Most Building Materials Subject to Minor Price Corrections

• Dimensional lumber prices increased 4%.
• Fiberglass shingle prices down 2%. Plywood pricing up 2%.
• Fiberglass insulation decreased 2%.
• Wood stud pricing stayed constant.

Here are some other relevant articles:

Not for the Fainthearted

By Patrick O’Toole
Qualified Remodeler
November 2009

The list of motivations for striking out onto one’s own and starting a remodeling business is long, but here is a good start. There is a desire to make more money. There is a strong desire to not let your ideas make someone else rich. There is a desire to chart one’s own course in life, not to be controlled by a course or business path that other people choose. There is a strong sense that you have hit upon a unique value proposition, perhaps a niche in the market that is underserved. These, among other motivations, lead many to start a remodeling business.

Onetime Qualified Remodeler columnist Michael Gerber famously called this moment an entrepreneurial seizure. The humor and the dark underbelly of Gerber’s phrase “entrepreneurial seizure” is that starting a business is not usually based on sound reasoning or even business sense. It represents a leap of faith that you will hit the ground running and never stop. This industry is filled with great carpenters who dropped their tool belts to market and sell jobs, to price them and build them. The hard reality of being in business means having to spend time doing things you may not enjoy or even be good at.

This leap-of-faith is often rooted in an overestimation of one’s own abilities. A lot of very talented designers and trim carpenters create businesses that are craft based. Among many of these, there is a sense that the excellence of their core skills will carry the business forward, and money will follow naturally. This does happen for a lucky few who are well connected to a network of paying customers. But today’s remodeling market is not as frothy on the demand side anymore. And the scope of jobs has shifted dramatically. More people are looking for house doctors and fewer are looking for a modern-day Michelangelo.

Successfully running a business requires a combination of skills that is not often found in one person. In 2010, the remodelers who will thrive will be the ones who see the challenges of the road ahead clearly and prepare to address those challenges ahead of time. Sales and marketing will be the No. 1 challenge for most remodeling firms. Take a day or two days this fall/winter to put a plan together that you feel will work. Then seek out expert opinions to tweak that plan. Lead costs are growing. You need to be sure that your plan is an efficient one.

Challenge No. 2 is really a group of challenges posed by a changing regulatory environment that have been in the offing for many years. How prepared are you to perform lead clearance testing on homes built before 1978 where children are present? Do you have a plan for communicating with your customers about lead-based paint given the April 10th implementation of the new lead-based paint rule? Have you identified a place to get the training you need? The new year will also bring with it new options and requirements with regard to providing health insurance to your employees. Some of you, who do not now offer it, may be required to do so. Is there someone on your team who is prepared to handle the issue of health insurance? Do you have a good insurance professional that you can rely on?

The new year will bring an improving market for remodeling activity, but it will also bring with it a set of challenges that will test your full range of business capabilities. Unfortunately, the fun and rewarding part of the business creating great solutions for customers will not be your sole focus for 2010. The one indispensible trait for successful remodelers will be overall business resourcefulness. The winners will listen to others. They will cast a wide net for business ideas and for people to help them navigate this challenging business environment.
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Indicator Points to Cyclical Bottom for Remodeling, Start of Recovery in 2010

The Joint Center for Housing Studies
October 15, 2009

CAMBRIDGE, MA – The declines in owner spending on home improvements will moderate through the end of 2009 and first half of 2010 according to the Leading Indicator of Remodeling Activity (LIRA), released today by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University. The indicator suggests the remodeling industry is turning a corner. Annual spending levels should start to rise in the beginning of next year causing year over year declines to shrink to 8.9 percent by the second quarter of 2010.

“Remodeling spending by homeowners shows early signs of stabilization,” says Nicolas P. Retsinas, director of the Joint Center for Housing Studies. “While the housing recovery has been erratic, a strengthening economy could produce spending increases on home improvement projects by the second quarter of next year.”

Some positive signs for the industry are emerging. “Favorable financing costs – for those households with access to credit – and a pickup in homes sales are producing more opportunities for home improvement projects,” says Kermit Baker, director of the Remodeling Futures Program at the Joint Center for Housing Studies. Several factors, however, still impede remodeling growth. “A generally weak housing market with unstable prices, near record levels of foreclosures, and other distressed sales are discouraging households from undertaking nonessential remodeling projects.”
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Radical discounting is business suicide
Remodelers won’t survive long slashing prices

By Wendy A. Jordan, Contributing Editor
Professional Remodeler
October 1, 2009

Can remodeling contractors survive a strategy of radical discounting?

- Kitchen and bath designer, California

The short answer is no. If you slash prices deeply to generate business, you may see success in the short-term, winning contracts from bargain-hunting homeowners. In the long run, though, you are setting yourself up for failure.

Radical discounting is a topic that stirs strong emotions among established remodelers. I contacted several around the country, and they said it is business suicide for all but extremely large companies, and eventually those giants, too. As design/build remodeler Iris Harrell of Harrell Remodeling in Mountain View, Calif., put it, the only way to survive radical discounting is to stop doing it. Now.

Say you cut prices by 20 percent or more, which is one general definition of radical discounting. You’ve fried your profit and probably a good share of your overhead coverage. Even if the low prices draw new business, your company has only so much sales and production capacity. You’ll never be able to make up the lost revenue through increased volume.

Radical discounting carries another danger as well. It devalues your company. And once you start down that road, it’s hard to turn back. Jesse Morado is a remodeling pro who now runs a residential remodeling consulting firm, Renovation Coach, in Atlanta. He warns that repositioning yourself as a low-price company moves you into the market niche of bottom-dollar companies. It’s a whole different world where buyers fixate on price negotiation and don’t think about the workmanship, customer service and reliability. You will have to cut corners to save money perhaps reducing the number of workers on the job, providing less frequent production oversight, scheduling fewer dumpster pickups, doing less painstaking site protection, and so on. All this raises the risk that you will make more errors, fall behind, disappoint your clients and sow the seeds of negative PR. That’s a deadly price to pay.

Moderate price reduction is a different matter. Many remodelers are tightening their operations to lower their estimates a few percentage points. The difference is that they are calculating the price cuts around careful cost cutting that protects the quality of their remodeling product and safeguards their profit margin.

Morado says that by doing a line-by-line analysis of projects completed in the last year you may be able to identify a 25 percent savings without altering your margin. Look at the schedule: Is there waste? Can you shave off some labor hours? Could you save money, without hurting quality and control, by subbing out some aspects of production? And so on.

Over the past five years, Dave Bryan has systematically cut costs within Blackdog Builders in Salem, N.H. Today it costs $1 million less to run the $5 million-volume operation.

At Atlanta’s Small Carpenters at Large, Danny Feig-Sandoval is doing a company-wide cost analysis now. He’s looking not only for savings within the company; he’s asking suppliers and subcontractors to pass along savings. He’s also shopping other high-quality trades, which he figures may uncover better prices and keep him more attuned to competitive rates.

Belt-tightening may enable you to reduce your bids somewhat, but they are likely to be higher than the prices quoted by low-ball companies. So be it. You also can offer multiple options, including modest, economical designs, along with more full-bodied plans. For example, says Harrell, you could base estimates on grade A or good-quality-but-less-expensive grade B cabinets, depending on the homeowners’ priorities and budget.