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Discussion Starter · #1 ·
We are a remodeling company in our 4th year of business (started at the end of 2009). I am starting to question if this can truly be a profitable business we have made. Can someone from this industry tell me if we are doing something horrifically wrong? Because we haven't broken even yet and I can't put any more money into this business. We have grown every year, learned a lot (and lost a lot because of it), and made a very good base of customers that are giving us pretty consistent referrals. But if this is doomed to fail, then I'd like to have any insight on that. We are not ready to give up, but also not so naive to know there may be something we are not seeing that could be hindering this company. If anyone can tell us that this amount of losses is crazy and we should get out now, that could help. If there are people out there that have had similar losses and made their way out of it, that could help, too. Here are some numbers for us:

2 Partners of company. Gross profit is meant to cover all overhead and partner's salaries.

Year 1: $265K rev, $64K gross profit (24%)No employees, just the 2 of us doing the labor.
Our goal was 40% gross, but my partner got injured and we had to hire out his work. Major hit to the pocket book.
-This was a loss of 32K for the year

Year 2: $529K rev, $101K Gross profit (19%) 1 employee.
Our goal was 30% gross, but we had large cost overruns on big projects.
-This was a loss of 56K for the year

Year 3: $552K rev, $120K Gross (22%) 2 employees.
Our goal was 23%, but with a revenue of $720K. Didn't make rev goals because we couldn't produce enough fast enough and we were naive to think we could grow as fast as we did from year 1-2
-This was a loss of 32K

Year 4 (current): Goals were: $650K with 26% gross profit giving a 2% net profit after we are paid.
-We are on track to do $815K with 3 employees and pulling 19% gross.
-This will be a loss of $14K

Obviously, we don't price our projects with a 19% margin (except for projects over $150K). We have margins around 20-30% depending on the project. But we don't pull that off all of the time because of overruns (a very frustrating thing, I might add).

Employees get paid holidays, workers comp, and 1 week paid vacation. Obviously, employees and their benefits/taxes are expensive. But we want to run this company legitimately. Is this injuring us??

Are our overhead costs too high?? 2 partner's salaries with all overhead costs ranging around $160K?

Our typical project size is $30-40K with some $100K+ projects. We try to always have 2 projects going on at once to keep our employees/crews busy, with an occasional 3rd project we will sub out.

Any insight from veterans in this industry would really help!
 

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Talking Head
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The rate at which your sales are increasing hardly indicates that you are doomed to fail but it sounds like you need a long sit down to review expenses and job costs and determine where you're overspending(if anywhere). If you aren't overspending then you aren't charging enough. Most companies do a little bit of both.

It's better to lose some jobs that you can't make your profit on.

It is very hard for us to just look at the numbers without knowing exactly what you are doing yourselves and what you are subbing out. There are some areas of remodeling where you can have 70% gross and others where you can only get 10%. It's a very diverse field.
 

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Discussion Starter · #4 ·
Gross profit is before we pay our overhead and Partner salaries.

Gross profit = revenue-COGS (cost of goods sold)

COGS is all labor, subs, and materials needed to complete the job.

Overhead is cost to run the business (ie. licenses, insurance, cell phones, utilities, etc.)

While our Gross profit may have been 100K, if our overhead and salaries is 150K, it is a NET loss of 50K.

Does that make more sense? I know a lot of people seem to have different use of terms on this and I hope I have them correct.

Thanks,
 

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My advise would be to first purchase Micheal Stone's excellent book: Markup & Profit: A Contractor's Guide, Revisited

Your estimating processes can either make you or break you. In his book he shows you how to establish all specific job costs (labor, materials, etc, including your own wages), then simply multiply this figure (labor and materials) by a specific number (e.g., 1.48) to arrive at your selling price. There is a formula (very simple) he shows you to calculate your specific number based upon such things as all non-specific job costs (those things that cannot be associated with a specific job), all overhead costs of staying in business (which vary from on company to another, and includes everything from insurances, office supplies, phone bills, etc, which would be anything that cannot relate to a specific job cost, and is required in order for you to stay in business), and your net profit, as well as your salary (if you take one) in order to arrive at your markup and profit number.

For example, if your number (which would be different than anyone else in the business) was, say, 1.56, and this is what you would have to get in order to stay in business based upon all overhead and profit you've calculated or projected, you merely multiply the labor and materials total by 1.56, and viola, you have your set price. Any deviation from this price will result in having to either cut back on something, or do without; ergo, there can be no price reductions from this number. It is what it is, and calculated precisely for your business. Once you figure out your specific number, then you have it whipped. All you do is calculate the job costs, then multiply by your number. Easy, peasy, Japaneasy.
 

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Maybe you should talk to some sort of buisness advisor. Your sales are very similar to some of my previous years but I made more in profits. The only thing I can say is I have changed the size of the jobs I do. I don't do 100 k jobs and 30-40k is a larger job for us. I noticed that when I did the bigger jobs I made a lot less money. Now we do a ton of smaller jobs and it really pays off. It's more scheduling and paperwork but its worth it. We have 3-5 guys working at all times and I jump in when needed. With doing smaller jobs there is more running around and prep for the next job since you will need to get on it next week! As for the employee thing I don't pay holidays or sick time. If they need healthcare it comes out of their pay. I just pay them a good rate and give bonuses when I can. It's hard when you try to run this like a real company but if your not making money then you obviously can't afford to be that way. Just try to take care of them the best you can afford to. When you are making money then give them more. Once you set sick days and holidays you can never go back. This buisness is not for the typical employee mindset. Good luck and keep trucking along. It took me 10 years to see positive numbers. Your company is young. Don't be afraid to charge and do nothing for free unless it is someone that truly needs it! My wife kept track for 3 months of extras that I did not charge for one year and it was close to 10k. I couldn't believe it and it changed my whole attitude on charging.

Remember it is not the size of the job or how much your sales are that matters it's how much you make when it's all said and done. If you can make twice as muck money installing doors as you can building large additions then I guess doors it is. Stick to what you can make money at and weigh out what is more profitable , my crew or a sub? I've noticed that my guys should be cutting wood, tile, and general repair work. 2,of them are excellent painters but I can't make money when they paint so now no painting!

Also don't feel bad to make money on your material. Markup your cabinets, doors, fixtures etc. If not you will lose!! My granite company gives me 15% on each counter. I never did this in my beginning and its amazing how much it helps. All the successful companies do it.

At least you are looking at your numbers. That's the first step!
 

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Gross profit is before we pay our overhead and Partner salaries.
This is part of your problem right there... your salary DOES NOT come out of PROFIT...

Labor
Overhead
Materials
Profit

This tells me you aren't charging enough... Some calculate their salary as part of the Overhead and some lump it into the Labor, but your salary does NOT come from the Profit... The Profit is what you pay your business to HAVE capital reserves, emergency fund, etc. that you can absorb overruns, miscalculations, etc. for revenue you can't recoup for same...

Labor and Overhead are broken down and calculated to come up with an hourly cost which is used in estimating (which INCLUDES your loaded salary). Until you have a strong handle on estimated hours it takes to complete a job, I would encourage you to multiple this number by a factor of 1.25 ... Your Materials are above and beyond this and should include costs of acquisition, handling, delivery and mark-up... Your Profit is what goes on top of this total...

The Profit is NOT what you pay yourselves after everything else has been paid...
 

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As I'm trying to wrap my head around your situation, and I may be wrong in my assumption, but to have two partners with set salaries and the afore mentioned expenses, is a mistake for a company just getting started.

You two, if you are both doing the majority of the labor, then you need to pay yourselves as laborers and then take a percentage of the net at the end of the year. That way, you're not upside down before you even sell a job. You will also be able to control your expenses better and know exactly where you stand at any given time during the year.

On another note, your sales numbers seem quite good. But, your GP percentage seems a little low to me. I firmly believe you need to be closer to 40% after COGS to be at a point where you can continue to invest in the company long term. But that's OUR number and may not be yours. But, I'll bet if you were closer to 40% after COGS, you'd be a LOT happier right now.

Maybe it's time to stop being too "nice" when it comes to your pricing structure and start being a little more hard core business person. If you can't make the type of $$$ on a job that allows you to earn a comfortable living, while at the same time re-investing in the long term health of your company, it's time to start saying no.

Less jobs at a higher profit margin will make things a LOT more fun.... than all kinds of jobs at ultra thin or no margins at all.
 

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Discussion Starter · #9 ·
Thank you, EthanB, for the response.

Can you recommend a good resource to go to about our numbers? I analyze the crap out of them, but I know another set of eyes on it would be extremely helpful.

Unfortunately, our bookkeeper isn't much help because they don't understand our industry.

It is true, however, that in our first year of business we very much underbid projects. With the current leads coming in, we are able to go after the better and more profitable projects. Many times our clients will let us know that we came 10K above our competition, but they still went with us. So, I have a feeling that we are in a good range on selling. Although, I have decided to increase our margins for the next quarter to see if I can continue selling at the higher prices.

Our business expenses (ie overhead), almost always come in perfectly in budget. We don't overspend in that category.

Where we do go over budget is in 2 places:

1. Project overruns: labor overruns (punch list killers) or mistakes that need to be redone. We used to underbid on our subs (like not putting enough in the budget for the electrician), but those are very few and far between nowadays. It really comes down to punch lists and fixing things.

2. Project timeline overruns: As you can imagine, if our overhead/Partner salaries are around $160K for the year, then that equates to about $600/day (5 days a week working week). If our crew does not get a job done on time that is budgeted to pay us for 4 weeks and they take 6, it's 6K in losses to our company.
-Sometimes, this isn't even the fault of the crew. We have had subs come in and drag their feet and waste a week or 2 on our projects. How do you make up that money??

Number 2 is probably our worst of the 2.

As far as what we do and what we sub:
-We sub out elec, plumb, drywall, granite, and hvac. We do all carpentry, framing, flooring, tile, cabinetry, and finish work. (our employees do). We put the same margins on everything across the board 20-30% depending on project size)
-I primarily work in the office and on sales, so my salary comes 100% from our profit margins.
-My partner recently tried to pull out of the field to be more of a project manager to our crews, but it didn't go well and we didn't do enough revenue to support it, so he leads one of the crews as a working Lead Carpenter. His labor costs from the job will go towards his salary.

Before the recession, we used to only do kitchens (under another company not owned by us). It was 1 lead carpenter to each kitchen remodel and they would hire a helper when needed. This wasn't very often, because that would mean the lead carpenter would have to give money out of the labor to give to a helper which they normally wanted for themselves. 10-15% would be allocated to the carpenter. So for a 50K kitchen that takes about 5 weeks, they would get about $6K, about 60K a year minus helper costs.

What I worry about now is that we still have about 15% for labor on our projects, but now we have full time helpers and lead carpenters. Yet I don't feel they can get the jobs done twice as fast. Is a full time crew of 2 excessive for each project? Am I crazy feeling that they aren't getting things done faster as intended?

Keep in mind these percentages are AVERAGES as each remodel is unique.

I just can't figure out what we are doing wrong. I hope some of that info helps.
 

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You must have had some deep pockets to start out with to stand losing that kind of money. Wow...

You came to the right place for advice. There are some very good business men here. Welcome. :thumbsup:
 

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Discussion Starter · #11 ·
Spencer, yes, unfortunately we had an inheritance we have been drawing off of. I say unfortunately because I would rather have her in my life than the money. We also have a few houses we made smart investments on many years ago.

But I agree, everyone's responses have been extremely helpful.

mk5065, this has been a lesson we continue to learn over our years as we constantly try to be "nice" and inherently lose money doing it. Although we are getting MUCH better, it's still a struggle.

I heard from another contractor the other day that he puts in a certain percentage line item (about 5%) of the overall project for overruns and shows it to the client. He says this is HIS money first, and then if he doesn't use it, it it the client's to use for change orders/upgrades. For example, if he misses a flue pipe that needs extending with a new addition roof, he can take from this pile.

The way we do it now is we eat a cost if we didn't catch during a bid. Does anyone else do what this contractor above mentioned does? And can you sell it without problems?

Are we also crazy to eat the cost on a miss like that, or is that typical?

CompleteW&D, Thanks for that insight. Although we love doing additions, maybe the profitability of kitchens is a better option. Do you think specializing is the best way to be profitable? Or do a lot of GCs make a good living doing the range of everything remodel?

Thanks again for all of the responses. They are so very helpful!!
 

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CompleteW&D, Thanks for that insight. Although we love doing additions, maybe the profitability of kitchens is a better option. Do you think specializing is the best way to be profitable? Or do a lot of GCs make a good living doing the range of everything remodel?
I can't answer that. We don't do major remodels like Kitchens, Baths or Room Additions. Our projects are strictly limited to exterior work (windows, siding, soffits, fascia, gutters and entry doors) where I have a good handle on our costs before I ever quote a project.

Do I miss things once in a while, sure. And to answer a question you posed to someone else.... when I miss something, it's my nickel that gets spent. But, that's just me. I'm not saying everyone should do that.
 

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I'd like to know how you have a GROSS profit in the positive and still have a loss...
This is where hammer swingers never get ahead, and also why homeowners can't understand how someone can charge so much.

Gross Income: The check(s) that you got.

Less expenses, wages, equipment, material, portional fees, liability insurance, unemployment insurance (if needed), workers comp insurance (if needed), fuel, rental for shop/etc.

(Been a while since I broke it down), but gross income, less expenses leads to NOI (net operating income). I think this is what's called 'adjusted gross income', but never was a bean counter (CPA). There are other deductions below the NOI on a cash flow, but as I mumbled, it's been a while. For what the self employed, non bean counter users need to remember is:
What you get
Less what it (all) costs
is what you made on that job.
On that amount is what you'll be taxed (taxable income).

Big Evil corporation PBS/NPR, or any evil rich thing can make a hundred million dollars a year. But if you subtract out everything to get their taxable income, or return on investment (for you people that have any money in anything for your retirement/investments), you'd be amazed at how low the percentage returns are for your earned dollar invested in that.

Enough blabbering. Lil goth teen chick just walked by the front of this house. Little while later, saw her across the street going the other way, doing the same thing, putting local ad papers on people's doorsteps. Fast food/convenience/retail is all the same. Come to think of it, the only time I see non americans working here is when roofing salesmen come through and their guys are all mexicans.
Weird.
 

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You must have had some deep pockets to start out with to stand losing that kind of money.
Standard business model is/was when you start a business, you won't make any money for the first 3-4 years. Not to be confused with having a check in your hands..... ;) :laughing:
 

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If you are losing money, lower your salaries until you are making enough to pay it. I wonder how many of us starting out pull a blanket 80,000 a year out of our companies. I know I don't.

I'm a sole proprietor, so I buy the equipment needed, pay the expenses and over head and then what is left is mine. Not a perfect system, but it works for now. I couldn't imagine having a huge salary steadily coming out before I even earn it. Pulling from the inheritance, just to make sure you are making a good living is a false sense of profitability. You should be making the money you are spending.

Growing you business with outside money is a hard way to go. Once it runs out and you aren't making an actual profit, things will get pretty tight. It looks like your salaries should be 20-30,000 a year less each and you would be on track. I think your idea of your pay is pretty unrealistic when starting out. Your numbers are showing this.

Could you run the business without the inheritance money?
 

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We are a remodeling company in our 4th year of business (started at the end of 2009). I am starting to question if this can truly be a profitable business we have made. Can someone from this industry tell me if we are doing something horrifically wrong? Because we haven't broken even yet and I can't put any more money into this business. We have grown every year, learned a lot (and lost a lot because of it), and made a very good base of customers that are giving us pretty consistent referrals. But if this is doomed to fail, then I'd like to have any insight on that. We are not ready to give up, but also not so naive to know there may be something we are not seeing that could be hindering this company. If anyone can tell us that this amount of losses is crazy and we should get out now, that could help. If there are people out there that have had similar losses and made their way out of it, that could help, too. Here are some numbers for us:

2 Partners of company. Gross profit is meant to cover all overhead and partner's salaries.

Year 1: $265K rev, $64K gross profit (24%)No employees, just the 2 of us doing the labor.
Our goal was 40% gross, but my partner got injured and we had to hire out his work. Major hit to the pocket book.
-This was a loss of 32K for the year

Year 2: $529K rev, $101K Gross profit (19%) 1 employee.
Our goal was 30% gross, but we had large cost overruns on big projects.
-This was a loss of 56K for the year

Year 3: $552K rev, $120K Gross (22%) 2 employees.
Our goal was 23%, but with a revenue of $720K. Didn't make rev goals because we couldn't produce enough fast enough and we were naive to think we could grow as fast as we did from year 1-2
-This was a loss of 32K

Year 4 (current): Goals were: $650K with 26% gross profit giving a 2% net profit after we are paid.
-We are on track to do $815K with 3 employees and pulling 19% gross.
-This will be a loss of $14K

Obviously, we don't price our projects with a 19% margin (except for projects over $150K). We have margins around 20-30% depending on the project. But we don't pull that off all of the time because of overruns (a very frustrating thing, I might add).

Employees get paid holidays, workers comp, and 1 week paid vacation. Obviously, employees and their benefits/taxes are expensive. But we want to run this company legitimately. Is this injuring us??

Are our overhead costs too high?? 2 partner's salaries with all overhead costs ranging around $160K?

Our typical project size is $30-40K with some $100K+ projects. We try to always have 2 projects going on at once to keep our employees/crews busy, with an occasional 3rd project we will sub out.

Any insight from veterans in this industry would really help!
IMO the reason you're losing money is because your gross Job cost is calculated wrong.
How do you come up to your job cost ?
Material+ overhead % + Profit % = Total Job Cost? if Yes, what is the % for overhead and profit on each job?
 

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If your paying yourself $80k a year and slated to loose $14k by your numbers you really made $72k without showing a business profit. This is good for the allowable time the govt will tolerate you loosing money.

I'd say you might consider paying yourselves $60k for the year and splitting an investment back into the company preferably towards marketing geared towards attracting clients in your most profitable task ie kitchen remodeling.

I wish I would have made $60k/year in my first four years in business...
 
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