Life in the Heartland
Steve Schau has spent decades working in a rural market driven by agriculture and small industry. His business is based in the small town of Donnellson in the southeast corner of Iowa. He runs the company pretty much the same way he did back in the 1980s: by managing one crew of well-trained, skilled carpenters; building one or two custom houses a year; and filling out his schedule with siding, roofing, and repair work.
“One contractor in my area has been in business 40 years,” says Schau, “and his theory is, ‘Don’t ever turn a job down. If they come to you, just take it.’ He’s 70-some years old, and he’s still in business. So that’s my theory, too.”
Schau’s story is a reminder that even though the national news is dominated by an economic turmoil, not every local market is part of that narrative. In some places, life has continued on a much more normal track. “We never get real wild out here,” says Schau. “It’s one house over here, one house over there. It’s just kind of a steady thing, so we don’t see the big drops that a lot of places do.”
To keep himself and his crew busy, Schau needs to line up only a couple of houses a year, along with enough side jobs to fill in the gaps. Right now, he says, he has a house that he’s just finishing up and another he’s starting. Typically, his crew does the framing, siding, roofing, drywall, and trim. “We can do plumbing and electric,” he says, “and we have done it — but usually we just don’t have time.”
What bothers Schau most about a slow economy is the fly-by-night competition — people, he says, who “aren’t running legal — farmers that want to do carpentry work when they’re not working in the fields. Every farmer thinks he’s the best carpenter in the world.” Schau’s employees, who he typically hires out of a local trade school, are fully covered by workers’ comp insurance, get paid vacations, and have simple Keogh IRA accounts. Schau also covers half their health insurance premiums. That’s tough to do when the competition is strictly off-the-books, he says, “and I do it all on $24 an hour, paying my best guy $18 or $19 an hour. So you know I’m not making much money.”
The Financing Fight
In King County, Seattle, Scott Crader’s company, Reality Remodeling Resources, is set up to live lean. In years past, Crader has run a full-on contracting business with 15 hourly employees and two all-terrain forklifts — the kind of company, he notes, where “I needed ten thousand bucks a week coming in, to cover everything and justify that much risk.”
But these days, he’s working from a radically different model. By himself or with one partner, he specializes in second-story add-ons and whole-house remodels, working entirely with subcontractors and serving either as a GC or simply as a construction manager for the homeowner. For his crew, Crader draws on an assortment of independent tradesmen who carry their own state licenses and insurance and who team up for one project at a time and then go their separate ways. “And if one of those guys gets some work and they could use my services, then I’ll jump in and help them,” he says. “It’s like a co-op. A cooperative effort of pooled resources.”
These days, he says, he’s not always busy. “My sell rate used to be about one in three. From the first contact to signing a deal, one out of three calls would end up as an actual job. Now it’s more like one in 10.” Financing has been the killer, he says. “In the last 18 months I’ve had four people get right up to the starting line, and financing was the deal-breaker.”
In one case, a customer had a loan commitment from IndyMac Bank — until the bank failed in July. Twice, customers made verbal commitments, but Crader has learned to be cautious. “Their financial person told them that they had the money, and they were ready to write me a deposit check to start the job. But I said, ‘Unless you have the financing set up for the whole job, I’m not going to start it.’” Because he does mostly “pop-top” remodels, Crader notes, “once you start, you’ve got some serious consequences for taking the roof off and then having no money.”
For now, Crader is holding his ground. “When it’s just me, my overhead is very low, and my risk factor is really low, so I still have a viable business entity.” And in the future? Says Crader, “I know what a serious hard slump is — and in King County, we’re not experiencing that. But that’s not to say that in three months we won’t be. It all depends on how quickly they can circulate some money around here.”
Bill Baldwin and Devon Hartman
HartmanBaldwin Design/Build, Claremont, Calif.
Design-build (remodeling, historic restorations, custom homes)
$10 million annual sales; 35 employees; 30 years in business
Bill Baldwin and Devon Hartman’s company, HartmanBaldwin Design/Build, is headquartered just outside of Los Angeles, where home sales and housing starts have sunk to record lows and foreclosures are epidemic. It’s a tough place to do business; few spots have been hit harder by the financial crisis. On the other hand, few remodeling companies can top HartmanBaldwin’s credentials: With 30-plus employees, the partners have been in business since 1978. They’re well-known and have a strong track record and a wide range of competencies.
And, says Hartman, they also have plenty of work — though not for long. “Currently we’re logging more work per month than we ever have historically,” he says, “but we see the end of it. We’re working off jobs we sold a year or a year and a half ago. And we’re coming to the end of that era.” The company has 15 or 20 jobs in the “feasibility study” stage, he explains, “but the sales cycle from feasibility study through architecture and construction has slowed to a trickle. People are waiting. Some people are simply dropping out, because their 401(k) funds have dropped to the point where they have no more disposable money to spend. So it’s a very grim picture.”
Belt-tightening has become an imperative. “We do financial projections 18 months out, and we have budgets going,” says Hartman, “and these days we are analyzing budgets every two weeks. And we are making cuts in employees, we are making cuts in overhead, and we are going through everything — everything — with a fine-tooth comb. The only thing we are not cutting is marketing and sales.”
The company’s marketing program is extensive and sophisticated. “We have advertisements in local magazines and newspapers,” says Baldwin, “and we send out close to 200,000 direct-mail postcards during the year. And we have a whole educational wing that will do at least a couple seminars a month, sometimes more.”
Baldwin knows what the company needs to accomplish: “We need about 10 big jobs a year to get us through. And we know there are going to be a lot more jobs than that being done in a big market like Los Angeles. So this is going to be a creative, rock-and-roll time for the marketing and sales departments — because it’s just a matter of pinpointing who those customers are, and getting in front of them at the right time and being in the right place to get the work.”
Like other contractors large and small, HartmanBaldwin is diversifying. “We’re out looking at a lot of things right now,” says Hartman. “We’re thinking about churches, theaters, educational buildings.” One major initiative is a move into “home-performance contracting,” which involves performing comprehensive diagnostic testing and energy analysis of a building and then implementing a broad program of energy upgrades. “Older existing homes, built pre-energy code, are using more energy by far than the newer homes,” says Hartman. “But what we’re also finding is that every home — including Energy Star homes that have been built brand new — can still easily save 25 percent on their energy costs, because they have been built from a prescriptive and not a performance point of view. With testing and targeted upgrades, their actual performance can be drastically improved.”
Hartman sees energy retrofits as the biggest opportunity around, long-term. “Technologies and businesses related to energy will be the next bubble,” he predicts. But in a time of crisis, he says, immediate, radical adjustments are needed across the board. “When things are going south like this, you have to tighten up a little bit everywhere. If you don’t start making some hard decisions and pull the trigger sooner rather than later, you can implode from the inside out. Because the market has changed dramatically overnight. And so you better be making some moves overnight, too.”