May You Live in Interesting Times...
September 24, 2008
The Chinese proverb in the title of this article expresses the reality that we currently may be experiencing in the restoration industry. We feel our industry is immune to business cycles and the economy in general, yet we are finding that today’s economic troubles are having a real impact. How can this be, since fires and floods are not dictated by business cycles?
It seems as though the downturn in the construction industry has been so drastic and rapid that many remodeling contractors and builders have seized the opportunity to expand their business offerings, which has added instant competition. Pressures on banks, mortgage companies and the insurance and financial community are certain to have a direct and indirect impact on the restoration industry as well. Many restoration companies are finding that these conditions are adding a new level of complexity to their businesses.
I spoke to a contractor the other day who was lamenting the loss of jobs to remodeling specialists. This is a common problem in markets where remodeling companies are struggling due to lack of work. There are some barriers to entry that will limit companies from establishing a substantial restoration presence; however, it does not preclude them from taking several quarter million dollar jobs. This added competition can be very detrimental for companies that maintain several large jobs in their backlog.
Restoration companies in Florida, California, Michigan and other states with troubled mortgage markets need to be very vigilant. It doesn’t take working on too many jobs for homeowners in default on their mortgage to sink a quality restoration company. If not asked, mortgage companies will not volunteer this information; they will often just leverage their first lien position to clear up back payments on the mortgage. You will be left to collect direct from the customer who may not own their home or have any equity to draw on.
I spoke to another restoration owner working on five jobs where payment was in question due to mortgage issues. I do not envy his position, and my recommendation for contractors is to make sure you do not let yourself get into the same position. A contractor I know in south Florida checks the status of the mortgage online before starting work on any projects. He is also very serious about draws and final payments. They will stop work on any jobs when draws are not made on time. This is a serious step that often carries consequences, but so does losing tens of thousands of dollars on a job due to lack of discipline.
The mortgage meltdown has several indirect consequences that may have a far-reaching impact on the restoration industry. Historically, the insurance community subsidizes a negative claims loss ratio through gains in investments. This means insurance companies often pay out more in claims than they collect in premiums. If they enter into an uncertain investing environment, I suspect that they will work to tighten the claims-loss ratio and endeavor to make money on insurance. This will offset any reduction in investing activities. The big question in my mind is how will claims be managed if the mortgage company that secures the property becomes insolvent. This is not out of the question; look at the current status of Countrywide or IndyMac bank. In the event of insolvency, I hope that the rights of the contractor will be protected and you will be paid, but we are entering uncharted territory. Even if you are paid, I cannot imagine it would happen in a timely manner. The last statement is purely conjecture, but make sure you are timely in your collections with mortgage companies, and make sure you know the status of your client’s payments. There are frequently county records that will show you the finance amounts and even lien holders for most mortgages. It would be a good idea to check the records and establish a contact at the mortgage office when starting work on larger projects. A little extra work on the front end will be worth the effort.
Recessionary pressures affecting your clients may impact the amount of claims being submitted. If a property owner is having challenges putting food on the table, they may live with a small problem rather than turning in a claim and being forced to come up with the funds for the deductible. In the event that a claim is filed, it is less likely that the deductible will be paid. In relation to the other problems discussed in this article, payment of deductibles may not be a large issue; however it is relevant. When possible, collect deductibles in advance or have a system for accepting payments or a plan for trading out the work. Either way, it is important to include the issue of deductibles in your project planning; don’t wait until after the job to discuss the issue even if you are required to wait to collect the money.
Regardless of the state of the economy, you will experience slow periods in work volume. This is a natural part of any business. There are several business strategies to consider when you are in a slow period. The first is that you do not want to be there, so you should take steps prior to any slowdown. Companies often do not work on relationships and marketing until work slows. This is the absolute worst time to start a marketing campaign. Usually your competition is slow at the same time you are. This is a very difficult time to take a new account from your competition since they are begging the same sources for the next job. You want to make sure to stay close to your current accounts when you are working on jobs, and you also want to spend a lot of time prospecting when your clients have a large volume of work. This will be the easiest time to get an audition on several projects.
The next step you want to take is to work to improve your position when the market eventually slows. This is the time to have a very focused plan and strategy to obtain new accounts and get on new lists, even if it is in a second or third position. You want to make sure that when you are getting out of any slow periods that you are stronger than when you entered. Set sales challenges and goals during this time to get your team onboard and focused on getting through the tough periods. In the event you get a job from a new account, you need to realize that this is an audition and you should deliver your very best. Your goal should be to obtain a letter of recommendation from the client; this will make getting the next job much easier. You need to give the new client a reason to call you the next time and make it very difficult for them to go back to your competition.
Companies need to provide support for marketing efforts by maintaining a high closing ratio for the estimates you write. For good reasons, you may not want to close every job, but you also want to make sure that you get the ones that you do want. You need to teach your estimators to tune up their sales approach and be more than just order takers. The sales process is an important investment in your company’s success, and restoration staff often needs coaching, training and reinforcement to ask for the job. This does not need to be high pressure; if you provide the best quality product in town, it is in your client’s best interest to work with you. The effort you make on improving your closing ratio will go a long way toward giving you a better company and improving your top and bottom line revenue.
When you are experiencing a slow period, it is a good time to take a serious look at your overhead and general business practices. You should question the money that you area spending on vehicles; extra staffing; promotional material; travel and other discretionary overhead items. This is a good strategy at any time, but may be more relevant and important when money is tight. Make sure you are maximizing the return from your capital expenditures, staffing and general administrative costs. When companies slow, they look to keep employees busy by cleaning the warehouse, washing the vehicles, sweeping the lot or other make-work tasks. Look at these activities critically and make sure you are spending your labor dollars wisely. Create a shop time budget and manage your unproductive labor to assure you are using your resources in a productive and planned manner.
Cost-cutting activities often revolve around controlling overhead costs, yet the biggest area most companies can control is in properly managing the job costs. It is much easier to get five percent more in gross profit than it is to cut five percent from the overhead (I might recommend doing a little of both in many companies).
The real issue in improving job margins is in managing the budgets. Real inefficiencies often come in job slippage from the budget to reality. The causes and solutions would (and will) make for an entire other article, but the reality is, you can capture a lot of potential cash and profits by assuring you meet your production budget. The first step in this process is to engage your peers in the industry to learn where your margins should fall. When you understand you are shooting for the right target, you can put your plan in place to achieve the right margin.
A final note on getting through slow periods: improve your customer service. Customer-focused companies usually find it easier to maintain clients and grow their business. If you are slow, know that your competition is working as hard at getting your clients as you are at taking theirs. Do not make it easy for this to happen. Set the bar high and work to dramatically exceed your property owner, insurance and management client’s expectations on every job. This will improve your cash, your production quality, your job margins and your company.
Economic problems are often not as widespread as the media might make you believe, yet real problems exist. You may find the economic situation is no worse than in other times in your life, yet we do live in interesting times. A solid understanding of the situation and a critical look at your business practices are necessary.
Whether the economic situation will impact your business or not, it is a good time to tune up your business and put your company in a position for success.