By my reckoning, more than half of all remodelers lack the
knowledge needed for success in business. They either don't
understand basic numbers like overhead and gross margin, or
they don't use those numbers in their decision-making. Time
after time, they base major decisions on opinion or gut
feelings — not on good systems and objective
My conclusion comes partly from my own experience and partly
from in-depth conversations with hundreds of remodelers. I have
taught more than 100 certification courses and countless short
seminars, where I've listened to attendees talk about their
struggles to make a profit. Some of my 35 employees have been
self-employed in the past, and they've told me about their
uphill battles to stay in business. Everyone tells the same
I've drawn on those stories and experiences in compiling the
following list of the remodeling industry's nine most common
business sins. All are potentially deadly, with consequences
ranging from personal burnout to business failure. If they
don't kill a company, they will certainly keep it from growing.
Even experienced contractors make these mistakes. I know I do
— even though I've been in the business for more than
three decades and manage a $4.5 million company.
So think of the items in this list as red flags. If any of
them pertain to your company, address them immediately.
1. Pricing competitively
It may sound counterintuitive, but if you price jobs based on
what you think the competition would charge, you're playing a
To charge enough, you need to know your job costs, overhead,
and labor burden. Your labor burden consists of any production
expenses you cannot charge directly to a job, including
employee benefits, bonuses, truck expenses, and tools.
Once you understand your costs, you need to know how much to
mark them up.
Yes, you have to stay competitive to stay in business, but
competitiveness is more than just price. You have to learn to
sell yourself, your company, and then the project, in that
order. A truly competitive company is one that customers hire
for its reputation for quality, reliability, and
2. Using a poor payment schedule
More than any other business blunder, poor payment schedules
are what give remodelers a bad name. Typically, the remodeler
runs out of money before finishing a job; then he starts a new
job to get a down payment and maintain cash flow. Too often,
the result is what customers call a 98 percent company
— one that makes a strong start on jobs but has a
tough time finishing that last 2 percent. Earning a reputation
for leaving jobs unfinished is the deadliest sin of all.
We fell into this trap on a job we did in the mid '90s. At the
end of the project, the customer owed us $17,000, but the only
outstanding items were a faucet and a special-order panel. I
sent my head sales guy over to tell the customer that she could
hold back $1,700 but had to pay the rest. He came back looking
like a whipped puppy. The customer had told him in a very nice
but firm tone that if she couldn't get us to finish the job
owing $17,000, she'd never get us to finish owing only
That experience taught us the importance of having clear
payment schedules for all jobs. Say we're doing a $30,000 room
addition. We get $5,000 at the contract signing plus any money
needed for special material orders. We get another $10,000 when
we start work, $10,000 when we start the drywall, and the final
$5,000 at completion.
The payoff is that we are never called a 98 percent
3. Saying, "I'll make it up on the next job"
Remodelers often take work at discounted prices to keep their
crews busy, or they do extra work without charging the
customer. The rationale in both situations is that the company
will make up the money later. That almost never happens.
My company doesn't like to lay people off, so in the past when
times were slow, we took jobs at cost — or at cost
plus 10 percent — just to keep everyone busy. The last
time we made this mistake was in 2001, when we reached out to
past customers and offered to do some larger projects for them
at a "deep discount." We did three such jobs and lost over
$100,000 combined. In each case, we thought we would make up
the loss on the next job, but we never did.
How do we handle slowdowns today? If work is slow, we might
need to cut everyone's working hours by 10 percent to 20
percent or go to our trade contractors to get job-cost
concessions. But we take jobs on our terms or not at all.
4. Saying, "I've got $20,000 in the bank — some of it
has to be mine"
It's easy to rationalize using business funds for personal
expenses. But a business owner who monitors job costs and
expenses — and manages his company according to
numbers rather than hunches — is much less likely to
indulge in this kind of flawed thinking. It's most common among
small contractors who see money in the bank for the first time,
but owners of more established companies are also
I'm no exception. At the beginning of 2001, my company had
some cash reserves in the bank. We hadn't touched it for a
while, and I was feeling burned out, so I decided to use some
of it to travel with my wife. After all, we "deserved" it. I
took a good chunk of the money and went on an extended
vacation. During that time, interest rates rose and sales fell.
Had I not touched the money, my company could have used it for
operating expenses; instead we ended up having to borrow money
at a relatively high interest rate.
I was lucky. I know one contractor who used $15,000 of the
$20,000 in his business account to buy a hot tub and make a
down payment on a new car. Despite working 60 to 70 hours per
week, he went out of business a year later, and now works for
me as a salesman.
The solution? Have a written business plan and a written
budget with a minimum cash reserve, and stick to it.
5. Operating without a growth plan
A good business plan details, in writing, how much you want to
grow and how you will get there. I knew a remodeler who wanted
to increase his annual volume from $300,000 to $450,000 but had
no plan for how to make that jump. He simply sold the extra
work and put on his toolbelt. He had no systems in place to
manage the extra volume, and before long he found himself in
trouble with back taxes. A year later he was out of
This is typical. If you want to grow, you need to decide how
much you want to make, the sales volume you need in order to
reach that level, and how you will get those sales. Just as
important, you need to think through how you will manage the
extra work, set benchmarks to gauge your progress, and find
someone to hold you accountable. (I recommend joining a peer
group or hiring a business coach.)
The greater your volume, the more important it is to have
documented systems and processes. I tell people who want to
grow their business to rethink their 10 most important
processes — how they answer the phone, for instance,
or how they get clients; their sales process; their payment
schedules; their billing systems; and so on. I also advise them
to identify all their expenses, including the owner's salary;
to decide how much profit they want to make; and to determine
how much markup they need to pay for it all.
Make sure you have a plan. And — I can't emphasize
this enough — make sure it's based on data, not
6. Biting off more than you can chew
Remodelers sometimes base their decisions to take jobs on fear
or uninformed optimism, rather than on their business plan.
They usually choke on the result.
For instance, my company's forte is room additions, kitchen
remodels, and fire restorations — but in 2002 we took
on a whole-house remodel with a room addition because we were
worried about the future and had decided we needed more sales.
We figured the project's $400,000 budget was high enough to
guarantee a profit.
We couldn't have been more wrong. We lost control of the job,
going so far as to let the customer hire our subs direct to
keep costs down. We still had to schedule and manage the subs,
but since we weren't able to mark up their costs, we didn't get
paid for doing so. We knew this ahead of time, but the job had
so many potential dollars attached to it, we couldn't let it
Although it should have taken only six months or so, the job
dragged on for a year. In addition to costing us more than we
charged the customer, it put our staff under unnecessary stress
Stick to your business plan.
7. Not having clear job descriptions
As they grow and take on more employees, many remodelers fail
to clearly define each employee's responsibility. For example,
until about 10 years ago we didn't spell out whether the
production manager or the lead carpenter was responsible for
closing out a job. We assigned this responsibility on a
job-by-job basis — again, managing by opinion rather
than by system. As a result, we were finishing jobs late and
Today we know exactly who is responsible for what. Our
production manager doesn't go out into the field and doesn't
interact with customers. He gives our lead carpenters the
support and manpower they need and helps them solve problems,
but the lead on each job is totally responsible for getting the
Our lead carpenters line up subs, order materials, manage the
schedule, collect payments, and keep the job within budget. And
they don't get paid their bonuses until the customer signs a
certificate of completion.
We no longer have unfinished jobs.
8. Refusing to delegate
Growing means learning how to delegate. We've all heard how
important this is, but even experienced contractors can fall
back into the trap of doing everything.
I went through a period a few years ago when I insisted on
doing all of my company's hiring. During the course of a few
months I hired three receptionists, all of whom failed
dramatically. Finally I turned the responsibility over to the
managers in charge of the office — the people who
would actually work with this person. They hired a receptionist
who's been with us for three years now and has, in fact, been
promoted. Now I leave the hiring to the head of the team that
the new member will join.
It's important to recognize the difference between delegating
and dumping. A person who knows how to successfully delegate
gives people everything they need to succeed, from training to
follow-up. That means checking in with them periodically and
giving them benchmarks to gauge their progress.
In our company, the hiring process includes a 17-question
interview process plus drug and criminal background checks. For
management hires, we use a 210-question test by Caliper
com). It determines whether a candidate is a good match for
the job and the company, and I've found its results to be quite
accurate. This kind of support prepares the hiring team for
success rather than setting them up for failure.
9. Clinging to misplaced loyalties
Breaking up is hard to do, but sometimes it's necessary. I
learned that 20 years ago, when I had a production manager I
really liked whose salary was more than I could afford. When
interest rates spiked and we were looking for ways to cut
costs, I realized I had to let him go.
After he left, I found out he had a history of shooting down
ideas employees had offered to improve business. As a result,
they had stopped taking initiative. That changed when he left,
and the other employees stepped up to the plate and got us
through the hard times.
As the owner, you need to ask yourself if you have the hard
edge it takes to make your business successful. Having this
edge means being willing to make tough — even painful
— decisions to keep your company in business and
profitable. Most likely, you'll face such a decision when you
have to eliminate a key person on your team. You have to resist
the feeling that you owe your employees something, and take
personalities out of the equation.
In short, you need to run your business as a business.Tom Swartz is president of J.J. Swartz
Co., an 86-year-old remodeling and restoration company in