American manufacturing and retailing has become so competitive that it is impossible to make money selling only product. Over half of the Fortune 500 companies are service organizations. Selling service in building materials means installation, that is, Preferred Contractor and Installed Sales programs throughout the market.

Many building product lines are an oligopoly, with a few manufacturers dominating:

                     1) Appliances: GE, Whirlpool, Maytag, WCI

2) Roofing/drywall/insulation: Owens Corning, US Gypsum, Georgia Pacific

                     3) Forest products: Georgia Pacific, Louisiana Pacific

4) Paint/flooring/plumbing: Armstrong, Kohler, MASCO, Sherwin Williams

Other product lines are fragmented, but major manufacturers take an increasing market share:

1) Windows with Andersen, Pella, Marvin, Jeld Wen and Certainteed emerging

2) Kitchen cabinets with Merillat, Kraftmaid, Aristokraft, American Woodmark emerging

Traditional distribution exists in many areas, but the changing marketplace affects the overall picture. The growth of two major home center chains, Home Depot and Lowes, is squeezing independent lumberyards out of the DIY market. By 2002 there are likely to be 1150 Home Depot and 800 Lowes locations, serving all areas with 50,000 or more households. The increased purchasing power of these larger chains and buying groups is leading manufacturers to bypass two-step distributors and dealers. What is more, major chains, such as Home Depot Expo and Sears Great Indoors, are beginning to target the high-end market as well.

The leveling off in the DIY market, off, plus the marketing tactics of home center giants, have changed the building material business into a commodity-oriented, price-driven marketplace with decreasing margins.

Professionally-installed remodeling often controls product lines and concentrates on middle and upper price spectrum

With few exceptions (mostly in the specialty field), manufacturers have not developed programs to work with contractors to provide a better quality delivery system. Most rely heavily on national advertising (yet 80%-90% of the time the contractor selects product). Manufacturers are developing contractor seminars, preferred contractor and installed sales programs for distributors and dealers.

Manufacturers have usually failed when they have tried to enter the contracting arena, but are beginning to be involved in installation (for example, Andersen’s program to sell windows direct installed; some manufacturers requiring distributors/ dealers to do installed sales).

As DIY shrinks and home center chains grow rapidly, independent lumberyards are forced out of the DIY business. Most lumberyards face increasing competition for new home construction business, and builders are requiring installation on many products (roofing, siding, windows, kitchen cabinets, prefab fireplaces, closet interiors).

Many lumberyards and distributors still ignore remodeling contractors and concentrate on DIY and new home market, but many cannot compete in DIY. Independent lumberyards and chains must develop programs, including Preferred Contractor and Installed Sales, for remodeling contractors and/or customers in order to survive. This has begun to happen

The changing marketplace is forcing lumberyards and home centers, as well as distributors, to offer installation as customers are demanding it; success stories are increasing. Lumberyards such as Wickes Lumber, BMC West, Carolina Builders are building truss plants, panelization capacity, and more.

With few exceptions, lumberyards and home centers have not succeeded in the remodeling contracting business. There are success stories of lumberyards and home centers entering Installed Sales, developing quasi-partnerships with remodeling contractors, but most have failed because contractors were not allowed to make enough money or the installation process was not handled professionally. Installed Sales remains a high potential opportunity.

According to the Harvard Joint Center for Housing Studies, there are approximately 800,000 remodeling contractors in America. Fewer than 150,00 have a payroll, which means that there are about 650,000 one-person companies (about 200,000 probably part time).

Remodeling still has a fatality rate near 40-50% per year, and above 90% in five years, chiefly in one-person companies.

As a delivery system for remodeling, the present contractor makeup totally satisfies consumers less than 30% of the time (when you are going broke, it is hard to pay the price to satisfy customers), but more contractors are providing top quality and service to their customers.

According to Tom Peters, there is a 40% re-work rate in American service industries (of which remodeling is one). Re-work plus inefficiency is presently at least 40% in remodeling, although use of lead carpenters is reducing that percentage dramatically.

Under $600,000-$800,000 volume, the owner typically handles all selling, production management, and administrative direction. But professionalism requires specialization. There is a "new breed" of contractor, becoming more professional, developing management skills, computerizing and having an impact on the industry.

The labor shortage in remodeling will get worse. Remodeling companies that control the labor supply, and lumberyards with good installed sales programs, will control the marketplace. A one-person company with the owner doing the work cannot produce more than $150,000 annual volume. Lead carpenter employees are able to generate more than $300,000 annual volume -- which will certainly help to solve the labor shortage.

Professional remodeling contractors control the brand selected by customers more than 85% of the time. For building and material manufacturers to sell their products, they must sell and support the remodeling contractors.

American consumers have changed from blue collar to predominantly white collar and are more sophisticated, more demanding but also less knowledgeable about houses. They are more difficult to sell and satisfy.

The baby boomers, those 76 million people born between 1946 and 1964, will be responsible for over half the remodeling dollars spent in the next 5 years. Many have gotten their children through college now, and have more discretionary income available for remodeling. Ability to sell and satisfy this segment of the population will determine the success or failure of most remodeling companies.

American consumers have less time to find a contractor, plan the project, etc. (on average, 16 hours of leisure time a week). Both husband and wife work, so the wife can no longer function as unpaid supervisor.

Americans view their home as the major part of their financial future. They are concerned about protecting equity, not getting the cheapest price on remodeling. They are willing to pay for professionalism.

In older, large cities such as Washington DC, Chicago, Cleveland, Philadelphia, St. Louis and even Detroit, there is a trend to move back to the city, which means increasing remodeling and whole-house renovation.

The consumers' change of focus to speed, choice and convenience as well as value—not price—is starting to be reflected in the marketplace.

American consumers are brand name conscious. One expert says anyone under 29 won't buy anything but a brand name. (If you don't believe that, buy tennis shoes for a teenager.) Brand name remodeling will dominate, as will lumberyards and home centers recognized as brand names in home improvement and installation.

American homeowners are living longer in their houses — 11 to 12 years on average, up from 6 or 7 years in the 1980s — and are more likely to remodel.

Vacation homes, many new and many needing remodeling, are increasingly popular.

Ethnic markets are growing rapidly as a percentage of the total population, but are still sharply underserved by professional remodelers. This is a major opportunity for remodeling companies.

Remodeling customers today are not being well served except in the high end design/build sector.

Until recently, the building material industry believed that consumer advertising and product availability through distribution was sufficient to serve the industry, including remodeling.

Remodeling contractors have been left to develop the delivery system for one of the most difficult businesses imaginable, although an increasing number of manufacturers and retailers are beginning to participate.

Success achieved in remodeling at any level has been in spite of the system, not because of it. If the industry ever got its act together, increased volume and profits could well result.

Strategic brand partnership/alliance between manufacturers, retailers and contractors can be the key to success, and manufacturers and retailers are beginning to realize it.

Remodeling will experience the "industrialization of services" revolution that happened in other service industries, and will consolidate. By 2005, the top 40,000 contractors will control more than half of the market --perhaps as much as 60%.

Brand names will develop in remodeling, in different forms:

1) Franchises like Case Handyman, Archadeck, California Closet and others

2) Manufacturer dealer programs analogous to the automobile business, with much greater involvement in installation

3) Lumberyards and home centers, through Preferred Contractors or Installed Sales, in quasi-partnership with contractors

4) Home builder remodeling divisions, using builder showroom selection centers and mass customization to gain remodeling market share

5) Foreign companies who set up remodeling entities

6) Buying groups patterned after lumberyard/hardware such as True Value, Ace, BMA (two buying groups already in place in kitchen/bath)

7) "Rollups" such as Enrecon’s rollup of 21 insurance repair companies with over $100 million in gross revenue

Showrooms will be absolutely essential, to make it easy for customers to shop for remodeling. Building material dealers will develop showroom/selection centers for use by their remodeling and home building customers.

Specialty retailing, stand-alone or within a home center or lumberyard and including installation, will sweep the industry, especially in roofing, siding, window and door replacement, cabinet refacing, decks and sunrooms.

There will be strategic brand partnerships between manufacturers, retailers and contractors, sharing the costs of distribution, sales and installation, combining to provide an efficient, cost-effective, customer-oriented delivery system

Computers will standardize yet customize remodeling, including:

1) Order entry

2) Pricing and databases

3) Computer design

4) Estimating and proposal generation

5) Computer/virtual reality showrooms, product displays, etc.

6) Cost control procedures (QuickBooks Pro is already used by over a million contractors of various types

7) Free software and training offered by material suppliers to steady customers, allowing download of material prices at any time

         8) Scheduling

Strategic alliance/brand partnership will provide the system for recruitment, selection and training of field, management and sales personnel. Training costs will be spread throughout the system to allow remodeling to compete with other industries for excellent people at all levels.

Present methods of distribution will change dramatically, with single supplier relationships, just-in-time delivery, cooperative buying, etc. Brand partnership will be just that between manufacturer, retailer and contractor, with all involved in installation.

The "soft" costs of remodeling will be analyzed, and the most efficient method within the partnership will be applied to areas such as:

1) Advertising (3-10%): duplication will be eliminated between manufacturer, retailer and contractor

2) Sales (8-10%): brand name recognition, showrooms and professional sales techniques will increase sales proficiency and reduce sales costs

3) Training and education (½-1%): costs will be controlled when spread over larger numbers

4) Insurance, including Workers Comp and medical benefits (1-1½%): this rapidly growing figure can be controlled with large group purchasing

5) Computer hardware and software (1-2%): manufacturers, developers and suppliers will share computerization with contractors and installers, supplying training and reducing costs, including internet use

6) Credit and bad debts: shared brand partnership will greatly reduce failure for contractors, cutting credit risk and bad debts

7) Production supervision: use of lead carpenters will eliminate the production superintendent function, reducing the 5-7% supervision figure by 2% or more

8) Re-work and inefficiency in the field: with lead carpenters and one-person crews, the present 40% "re-work" figure will be dramatically reduced, cutting labor cost in remodeling projects

9) As manufacturers/retailers develop and produce higher quality products for remodeling, cost efficiency should pass through the distribution chain through rebate programs or lower prices

10) Home improvement financing will be used by remodelers as much as financing is used by automobile dealers, furniture stores or home builders

Use of lead carpenters and lead installers will become the rule rather than the exception. Certification programs will raise the level of respect for leads, and this bottom-up management approach will be the major catalyst to increased customer satisfaction.

Repair and maintenance, or handyman work, will flourish in at least the following ways:

The Internet is rapidly becoming a major factor in remodeling. Internet referrals will become increasingly sophisticated, including localized pricing for an assortment of projects from handyman to kitchen/bath remodeling and room additions, probably with brand-specific products on any particular referral site.

Every national referral site will need at least 40,000 contractors across the country to provide coverage for all types of products and services. This should lead to the birth of a "non-franchise franchise" which, in order to be successful, must have a brand name, an operating systems and ongoing support/training.

The referral site company will become the brand name, and will set up a complete system for its contractors to follow, from first sales call to final project completion. Of course, training will be necessary for participating contractors. Such a highly organized approach will raise the standard for delivery of remodeling, home improvement and handyman projects.

Referral companies will probably make most of their Internet money by providing products and services to their contractor universe. The Internet is likely to have a major impact on how building materials are sold, to remodeling contractors and to end-user customers.

Remodeling has come into its own as a viable, stand-alone entity with its own characteristics and requirements. It is, however, at present one of the most unsophisticated, disorganized, inefficient and ineffective means of delivery of products and services to the final consumer in the world.

The goal of streamlining and improving the delivery system cannot be achieved without development of strategic alliances among manufacturers, retailers and contractors.

Manufacturers and retailers who do not recognize the need for improving the distribution and installation process, and using strategic alliances to improve the quality, price and value of the end product, will lose market share to those who do. There will be a shakeout of players at every level.

Manufacturers and retailers are likely to take an increasing role in the installation process, across the entire spectrum of products and services.

Perhaps the single most important innovation in remodeling for the 1990's is predesigned packages. Designing every project from scratch is eliminated for all customers except the rich. Standardized, predesigned kitchen, bath, deck, porch, addition and dormer plans and specifications would be a must for success for remodeling companies.

But almost no one has even begun to develop and use such packages. The reasons why are understandable, but not very logical.

Many remodelers take great pride in the design-build concept, analyzing a client's needs and coming up with a unique answer to those needs. Selling a prepackaged solution "off the shelf" seems demeaning.

Failure to recognize the similarity of the 30 or 40 million tract and semi-custom homes built since 1945 has been a major stumbling block. There have been variations of only 4 or 5 house types: the 2-story colonial, the split level, the ranch, the split foyer and the Cape Cod. Every bathroom built before 1970 was 5x7 or 5x8, and every kitchen was 10x10, 10x12, or 10x14. It isn't difficult to create kitchen and bath remodeling packages, with a low, medium and high price ensemble.

There has probably been too much emphasis on standardization in packaging, and not enough on the importance of predesigned customized options. Today's customers do want choice and a variety of selections, and they will not accept "cookie cutter" packages. Fortunately, with computerized design, it is easy to offer a base package with almost unlimited options — all predetermined and predesigned.

One of the major benefits of predesigned packages is that they dramatically reduce the amount of construction knowledge needed to estimate and sell. But except for specialty sales organizations, very few remodeling companies recognize that the best remodeling salesperson is not necessarily someone who has grown up as a tradesman and taught to sell, but might be a professional salesperson who knows construction. The automobile salesperson does not know how to fix a car, and the new home salesperson does not know how to build a house.

If Mercedes can come out with a $29,000 car when for years their lowest price was over $40,000 (and it is selling like hot cakes), and is said to be thinking about a model under $20,000, remodelers should be able to catch on. Customers with little equity in their homes in a flat real estate market will be happy to swap custom design for more space and value, if the package design is good to begin with.

Review sales for the past several years, looking for similarity in projects. One contractor found that he had estimated 5 bathrooms from scratch in recent months that were within $50 of each other. Even custom architects standardize much of what they produce, including their customizing flourishes.

Look at new homes in the area, for design ideas and standard options being offered. Look at houses built between 1955 and 1975, for the most common floor plans for kitchens and baths, and the most common add-ons in decks, porches, additions or dormers.

Consult with the production manager and lead carpenters, and ask them for their opinions. Get assistance from manufacturers and retail suppliers in developing brand specific specifications, brochures to be included in sales presentations, and training of salespeople and installers, as well as coop advertising and marketing assistance on getting leads. Talk to subcontractors about developing standardized procedures, including using lead installers (one person on the job).

Come up with some basic designs in the company’s best categories. A remodeler who is strong in kitchens and baths may want begin there. The most likely targets are kitchens, baths, sunrooms, porches, decks, roofing, siding, and windows and doors.

Price out one of these projects with a lower and higher end price, and several options: a bumpout, a skylight, a bow, a bay or a sliding patio door, whatever. Include options such as cabinet style, and color coordination choices (fixtures, floor and wall tile, vanity top and accessories, paint) so that customers can choose an ensemble, not just item-by-item.

Include predesigned projects in the company presentation book. Show elevations, floor plans, specifications, price and financing costs. Show some customizing options, and options for style and color coordination. Involve company salespeople here, getting them involved in research on which products are most likely to sell, such as hot products being offered by new home builders, and benefits to customers.

Be prepared for home improvement financing. Work out an arrangement with a financing company, know what the options are and when the price of a project is given in advertisements or the sales presentation book, show the monthly payment based on the longest possible time that it can be financed.

The remodeling market today can be compared to the new home market in 1946. Before World War II, new homes were built by custom or small-scale builders. When the veterans came home in 1946, the demand for new homes increased dramatically, but the existing builders didn’t capitalize on this and grow. Entrepreneurs such as Levitt in New York and businessmen from other industries saw the opportunity, and became tract builders. Today, companies that build over 100 homes per year are producing 70% of all new houses (25-99 annual volume builders produce about 16%, and under 25 annual volume builders produce the remaining 14%).

Until about 1970, remodeling efforts focused on pre-WWII houses, and from 1970 until 1990, most homeowners moved instead of remodeling. Most remodeling was high end, design/build work, and in the real estate boom of the 1980s, many more people could afford it. The total remodeling market has grown from $13 billion in 1967 to an estimated $150 billion thirty years later.

Now, there are 30 or 40 million single family homes built between 1945 and 1975 that need remodeling, and a customer market dominated by the 76 million baby boomers who are now 35-55 years old and ready to move up or remodel, especially those whose children have finished college. These customers need additions, dormers, finished basements, decks, kitchens, baths, upgraded windows, and more, but they demand maximum value and many require home improvement financing because they don’t have much equity.

In the early 1990's when most of the country was experiencing a large reduction in housing starts, lumberyards and home centers were scrambling for ways to replace this loss of business. Many turned to the remodeling market as their salvation.

One of the ways they’ve been trying to do this is through Installed Sales. I firmly believe the future of remodeling and home improvement includes collaboration between retailers and remodelers in Installed Sales and Preferred Contractor programs, particularly for remodelers accustomed to the middle and upper-middle class market.

These efforts have been failures more often than dramatic winners, and I think I know why.

To begin with, most building material retailers have not recognized that setting up an Installed Sales department is like starting a new business and not just adding a new product line. It requires a financial commitment in developing a showroom, hiring new personnel and training.

It requires a space commitment, not only for office space but also increased showroom selection area, especially if kitchens and baths are a major part of the program.

It requires a personnel commitment, that is, a full time manager for installed sales, who can be expected to run no more than 2 or 3 locations in a relatively small area.

Second, lumberyards and home centers have not recognized how important it is to actively involve their contractor customers, educating them in the benefits of the concept. Installed Sales should not be competition, but partnership. Smaller contractors, who may be weak on selling, can make money as contract lead installers, paid on a flat rate that rewards talented craftsmen for efficiency. Larger contractors, who cannot make money on installation only, can benefit from a good Preferred Contractor program.

An important difference for both retailers and contractors to realize is the difference between the simple projects that make up retailing of services (Installed Sales), and the more complicated projects that are not appropriate for a retailer to do (Preferred Contractor). No retailer would go into installed sales if they didn't have to, but today’s customers are demanding it.

Third, retailers have believed they could hire installers and, without any training, expect them to produce quality work and satisfied customers. A successful Installed Sales or Preferred Contractor program must be better than a typical remodeler in order to survive -- just as good is not enough. It must be clear to customers that this program is on a completely different playing field than the competition.

What’s needed are the benefits of a successful franchise: a brand name, an operating system and ongoing support. The retailer already has the brand name, but must develop the professional operating system that is follow by everyone involved, and then provide continuing support and training for participating contractors and other personnel.

The process in a good Installed Sales program will look like this: The salesperson and customer sign a contract, any necessary financing is arranged, and the job goes to a lead installer who takes it from pre-construction conference to completion, handling customer relations, collecting payment, writing change orders if necessary, and conducting a quality control punchlist at the end to ensure that the customer is satisfied.

A key feature of a good Preferred Contractor program, which comes into play when customers want more complicated, multi-trade work done on their house, is that the supplier gives each customer lead to only one contractor, who then benefits from the backing of the retailer. If the customer gets names of several contractors from the retailer then the remodelers’ only differentiation is on price, and any hope of profitability is gone. Preferred contractors do not pay the lumberyard for the lead or the jobs that they get, but they must buy 75%-80% of their material from the lumberyard. This is the payback to the lumberyard and cements a close partnership between the lumberyard and the contractor.

Remodelers need to offer financing to meet the demands of the marketplace, just as much as the automobile manufacturers, furniture makers and new home builders do.

As far back as the early 1960s, FHA Title I financing was available with a maximum loan of $3,500 for 5 years (the maximum has increased to $25,000 since then). And of course other types of loans were offered by financial institutions, often at high interest rates.

During the 1980s there was a real boom in home equity loans, largely because real estate values were growing at 10% or 20% per year, and Title I financing diminished.

Then came the 1990s, with flattening real estate values and crisis in the savings and loan industry. Home equity loans are still available, but many people do not have enough equity in their home, and banks are now much tougher on appraisals. Title I financing is growing, from about $700 million in 1994 to more than $30 billion in 1998. And even conservative estimates suggest that the total potential for home improvement financing is perhaps $20 billion or more per year.

Home improvement financing companies have already begun to recognize the increased benefits of offering their services through established channels, such as the manufacturers and retailers who have Installed Sales and Preferred Contractor programs.

Remodeling contractors as a whole have traditionally not used financing as a sales tool, except for the more sales-oriented specialty companies -- roofing, siding and replacement windows -- who have always appreciated the power of financing to sell their products and services.

Financing enables customers to improve their home even if they can’t pay cash or qualify for a home equity loan.

Financing makes it possible to increase the size and scope of a project, and do all the work at one time instead of waiting. I know a contractor in the Southeast who went out on a shower stall repair job. As he was writing up the job, the customer mentioned that she really wished they could build a screened porch. The contractor said he was a dealer for FHA Title I and could easily finance the $9,000 cost of the porch over 10 or 15 years at a favorable interest rate. The customer went ahead with both projects, because financing made it possible.

Offering financing does more than present the remodeler as a full service company and expand its customer base -- which might be enough reasons to do it right there.

When offering financing, it is easy to focus on the remodeling project as a solution to the customers’ problems and needs instead of focusing on the total cost.

Advertising that offers financing is likely to bring more leads. And it is easier to qualify those leads for price because it’s easier for customers to talk about making monthly payments than about how much money they have in the bank.

There is less likely to be negotiation on price when financing is offered. Customers who will argue about $2000 on a contract may not argue about $5 or $10 on a monthly payment.

Perhaps best of all, the contractor keeps control of the sale. No more submitting a proposal where the customer goes to the bank, which wants them to get 3 bids and may even recommend another contractor, and the customer is never heard from again.

I know a contractor in the Northeast who increased his business more than 20% in the first six months he offered financing.

Here are the most common objections I hear from remodelers about financing.

                    "I’m a contractor, not a banker. The paperwork is just too much trouble."

"The process is so complicated I’ll never learn it well, and I’ll look bad in front of my prospective customers."

"I can’t afford to wait until the job is done and a certificate of satisfaction is signed. My cash flow can’t support a $25,000 kitchen for weeks or months, and then there’s the risk that the customer will hold up the entire payment for one small item."

Financial institutions know about these objections, and many are responding to them. Most now require only one document for a loan application. The loan approval process often takes less than one day, so you know immediately whether your customer qualifies. And it is often possible to work with a financial institution on a referral basis, so that the loan is between the lender and customer directly and the contractor runs the project as a cash job.

What does a contractor need to do in order to offer financing?

First, be clear on the differences between a home equity loan and a home improvement loan. A home equity loan is always secured by the house or property and so is tax deductible, and almost always has the lowest interest rate. A home improvement loan will have a higher interest rate, and is tax deductible only if it is secured by the property -- getting a home improvement loan is based on ability to pay rather than on equity in the property.

Next, learn about the application and approval process. Fill out the credit application form used by the financial institution, to know what it says and be able to explain it to customers -- if you haven’t looked at one of these for awhile, you’ll be surprised at how simple it is. Often, a completed application can be faxed or e-mailed to the financial institution, where approval and notification can happen in less than an hour, certainly no more than 24 hours.

Of course, be sure to include financing in the sales presentation book with its customer benefits. To go along with that, have a "sound bite" something like this: "Many homeowners are choosing to finance their remodeling project rather than take cash out of their savings -- just like Americans have done for years to buy new cars and houses. Our company is happy to offer this service to our customers, who can get the additional space or improvement they want in their home for an affordable monthly payment."

Talking about the budget for a remodeling project can be in terms of typical monthly payments instead of, or in addition to, a total cost range. Doing this can help a lot to ease the "sticker shock" customers may feel when they hear how much a project is really going to cost.

A very common question from contractors is, "How do you decide when to offer financing?" While going through the presentation book, be sure to mention ability to offer financing and watch for the customer’s reaction. If necessary, ask whether they are planning to pay cash or to finance the project with a home equity loan or home improvement financing. The reality today is that almost everyone needs or could use financing, so always introduce the subject and ask the question.

Retailers are beginning to realize the dramatic potential in the remodeling market. In 1999, the total remodeling market will likely exceed $150 billion, approximately 78 percent professionally installed. The commercial, institutional and industrial market adds another $100 billion annually.

Remodelers are not easy for outside sales personnel to find. About 95% of them work out of their homes, and most are working on the job, or running production, or handling sales. No more than 15 percent of remodelers advertise in the Yellow Pages.

In states where home improvement licensing or registration is required (20 states so far), this is the place to start to compile a list of contractor prospects. Other states, such as New York, have city and county licensing which can provide lists.

Checking local permit records, getting names from newspaper ads, trading contractor lists with other non-competitive stores such as plumbing suppliers, hardware stores, etc. will help compile a list.

The average remodeler doesn't buy in large truckload quantities. The number of small size orders totals up to real volume, however, and is worth the effort. For example, a remodeling contractor doing about $500,000 per year in gross volume will typically buy $100,000 in materials, and perhaps more. A small, one-man handyman operation doing $100,000 a year in volume might buy as much as $30,000 in materials.

Remodelers seldom need material takeoffs except when they are pricing exceptionally large additions. They usually figure on a unit cost basis, and seldom shop material prices after they have received a job. They do check overall prices, and expect to be treated fairly. They will not stay with a lumberyard if they don't feel this is the case.

What remodelers do need is excellent delivery support. A contractor who can count on delivery—and even next day delivery in emergency situations—can eliminate the delivery "gofer" from their crew. A typical gofer costs a contractor as much as $50,000 per year including wages gas, oil, maintenance, insurance and repairs. Retailers are missing a bet if they don't sell the benefits of timely delivery to their remodeling contractors.

More and more customers are demanding that remodeling contractors offer one stop shopping for product selections such as kitchen cabinets, windows, doors, floor covering, plumbing fixtures, tile, etc. And most small contractors can't afford a showroom. This is a tremendous opportunity for a lumberyard. Gaining the contractors’ trust so they will send their customers in to see the products and make selections is not easy, but it is well worth the effort.

One of the most talked about, and least understood, trends in the building material industry is Installed Sales. Most lumberyards are afraid to offer this service because they believe contractor customers will take their business elsewhere. Others who try Installed Sales fail, because they don't realize how difficult it is to change from selling products to selling service, that is, installation.

No lumberyard or building material retailer in their right mind would ever go into Installed Sales if they didn't have to. The only good reason is because customers are demanding it. Today's customers walk into a lumberyard and look at windows, doors, kitchen cabinets or bath products, and ask about the price. Their very next question is, "How much to install?" If the answer is, "We don't install," they say, "Thank you very much," and walk across the street to buy from a retailer who installs.

The delivery and installation system for remodeling, home improvement and handyman products does not meet customer demands for one-stop shopping, reliable service including installation, and accountability after the sale. Yes, there are many competent contractors in the country, but most are the high-end design/build type, who won't serve the vast middle market -- and that is exactly where most of the potential lumberyard business is. Last year, half of all the kitchens remodeled were under $5000, and 75 percent were under $10,000 -- but most kitchen and bath specialists won't touch a job under $15,000 or $20,000.

The most common misunderstanding about Installed Sales is the belief that you are competing with your contractor customers, and you will lose them as customers if you do Installed Sales.

Let me explain why lumberyard Installed Sales is not competition, but partnership. A good Installed Sales system works like this: The lumberyard sells a variety of products and projects to retail customers, including installation in the price. That installation is subcontracted to one of the lumberyard’s smaller contractor customers, one or two person organization. The payment for the installation is on a flat rate basis, priced high enough so that an efficient installer can make not only the labor, but a small profit.

These small contractors are usually not adept at sales, and typically sell at an insufficient markup. Doing installed sales with a lumberyard not only gives them work at a fair income, but when they are in a customer’s home they often get additional remodeling projects from that customer. Thus, both the retail customer and the contractor are happy.

It is vital to understand that Installed Sales is only suitable for relatively simple or single-product jobs such as installing a disappearing stairway or a new front door, or installing a prefab fireplace, or even doing a simple pull-out-and-put-back kitchen remodel or remodeling an existing 5' x 7' bath. The actual sale is made by a lumberyard salesperson who may have to go out and measure the job before giving a final price. The project is sold under the lumberyard's name, and a lead installer subcontractor handles the entire installation, getting paid on a flat rate basis.

What about the customer who wants to knock out a wall and build an addition, enclose a porch, or refinish a basement, as well as remodeling a kitchen or bath? The lumberyard’s response should be, "If that is what you want, we can recommend one of our Preferred Contractors -- the best one for your project. The Preferred Contractor will call you within a day, come out within a week, and come back with a proposal within another week. We have qualified our Preferred Contractors, and will stand behind their work."

Here’s how to qualify larger, more professional contractor customers as Preferred Contractors:

• Valid driver’s license

• Insured, including truck insurance

• Licensed if local law requires it

• Mark up jobs a minimum of 50 percent over cost

• Estimate accurately and write precise specifications

• Use a sales presentation book

• Go out to sell jobs, and visit customers on the job, dressed as a professional

• Conduct a preconstruction conference before starting work, with a meeting
    between the salesperson, the lead installer and the customer

• Use lead carpenters, lead installers, and ‘bottom-up’ management

• Complete a quality control punch list on finishing a job

• Service all their work

It is vital to give only one Preferred Contractor name to a customer. If a customer receives three names of qualified contractors, the low bid wins and so the lead is worthless to contractors who want to make money. So how to avoid making Preferred Contractors unhappy?

When a Preferred Contractor program is developed, identify market niches and include three contractors per niche. The niches might be by price: high end, middle end or low end. They might be by type of work: kitchens, baths, additions, sunrooms, porches, decks, refinished basements. They might be by geography: northeast, southeast, northwest, southwest part of a territory. Contractor recommendations in each niche are by rotation, with only one contractor recommended per customer.

Contractors participating in a Preferred Contractor or Installed Sales programs must commit to buying 70 to 80 percent of their materials with the lumberyard for all of their jobs. This is how the lumberyard achieves loyalty, and is able to make a profit from a Preferred Contractor program.

Lou Stern of Northwestern University says that in the 1990's and beyond, manufacturers and retailers who ensure that the end user -- that is, the customer -- is satisfied will control the marketplace. Just about the only way for a lumberyard to ensure that customers are completely satisfied is to control the installation, one way or another.

It’s true that most lumberyard efforts in Installed Sales have been failures. Most building material retailers have not recognized that setting up an Installed Sales department is like starting a new business and not just adding a new product line. It requires a financial commitment in developing a showroom, hiring new personnel and training.

It requires a space commitment, not only for office space but also increased showroom selection area, especially if kitchens and baths are a major part of the program.

It requires a personnel commitment, that is, a full time manager for installed sales, who can be expected to run no more than 2 or 3 locations in a relatively small area.

Second, lumberyards and home centers have not recognized how important it is to actively involve their contractor customers, educating them in the benefits of the concept. Third, retailers have believed they could hire installers and, without any training, expect them to produce quality work and satisfied customers.

A successful Installed Sales or Preferred Contractor program must be better than a typical remodeler in order to survive -- just as good is not enough. It must be clear to customers that this program is on a completely different playing field than the competition.

The remodeling and rehabilitation industry does not have a set of widely known economic guidelines. This is unfortunate since failure to recognize and understand the economics of the business has been the primary reason remodelers have failed. The economics of the remodeling business consists of three components:

Most successful remodeling contractors have found that 50% is a minimum acceptable mark-up (33% gross profit margin), and some have found that a 67% mark-up (40% gross profit margin) is necessary to maintain profitability after covering overhead expenses. A higher mark-up is particularly important for companies exceeding $500,000 per year in total volume.

Very small, handyman type jobs are a different category. The percentage of time required for set-up and estimating is quite high compared to larger jobs, and the mark-up and margin required are also quite high. On jobs under perhaps $2000, it is generally felt that a 100% mark-up for a 50% gross profit is necessary to stay in business. Just one small mistake, problem or complaint on a $1000 job can eat up so much of the profit on the job, that the higher mark-up is vital.

The mark-up is applied to total job costs to determine the selling price.

Labor includes all personnel hired by a company on an hourly basis for a particular job. The labor figure equals the cost per hour before deducting withholding tax and Social Security, plus all fringe benefits. Fringe benefits include Workers Compensation, paid holidays, vacation, medical benefits, and a vehicle or mileage if provided by the company. Fringe benefits must be pro-rated over a standard 40 hour work week to calculate a proper cost per hour for each worker.

8 paid holidays

depreciation $250/month

insurance 75

gas and oil 150

maintenance 50

Materials costs include sales tax, delivery, and storage if you inventory material. The cost you incur for picking up materials at a supplier's place of business should be included as a delivery cost.

Subcontractor costs include all labor charges that are not part of the contractor's regular payroll, and may include electrical, plumbing, heating and air conditioning, painting, drywall, masonry, or carpentry. If cover the cost of workers compensation for a subcontractor as part of your own insurance, it must be included in direct job costs.

The cost of clean-up during and after a job may be part of the contractor's direct labor costs, or subcontracted. It is taken as a separate item to be sure it is included as part of direct job costs rather than overhead. The total cost may include a truck, a driver, and dump fees.

Remodeling contractors often don't realize the magnitude of overhead expenses until it's too late and they have failed.

In the service-oriented, labor-intensive remodeling business, overhead increases in total dollars and as a percentage of sales as volume increases. There are several reasons for this:

The average overhead for a small contractor is 25-30% of gross sales. This includes 7-10% for sales, 5-7% for job supervision, and 2-5% for advertising. Overhead can reach 22% before including the costs of trucks, rent, telephone, insurance, legal or accounting fees, etc. Most contractors with volume over $500,000 per year find that their overhead is 30-35% of gross sales rather than the 25-30% experienced by smaller contractors. This is why anyone who sells at less than a 33% mark-up (25% gross profit) is losing money, and why a 50% mark-up (33% gross profit) is necessary to succeed in the long run.

Many expenses are mistakenly included in operating expenses or overhead that are part of direct job cost. The most common errors include:

ANNUAL VOLUME: $100,000 $250,000 $500,000 $1,000,000

1. Sales, 7-10% 7,000 20,000 50,000 100,000

2. Production Superv., 5-7% 5,000 15,000 30,000 60,000

3. Advertising, 1-5% 1,000 5,000 19,000 50,000

4. Rent, 1-2% 1,200 5,000 10,000 19,000

5. Office Staff, 4-8% 4,000 15,000 30,000 60,000

6. General Insurance, 2-3% 2,000 4,000 12,000 22,000

7. Truck (Sales, Mgmt. only) 5,000 10,000 15,000 20,000

8. Telephone 1,200 2,400 3,600 5,000

9. Radiophone, beepers, etc. 360 720 1,080 1,440

10. Tools & Equipment, 1% 1,000 2,500 5,000 10,000

11. Office Equip., lease/rent 500 1,200 2,500 5,000

12. Office Supplies 100 250 500 1,000

13. Accountant, monthly ret. 300 600 900 1,200

14. Legal Fees 500 1,000 1,500 5,000

15. Dues, Associations 250 500 500 500

16. Educ., Seminars, Travel 250 500 750 1,000

17. Entertainment 100 200 500 1,000

18. Bad Debts, 1% 1,000 2,500 5,000 10,000

Percentage of Volume:      31%    35%    37%    37%

 Overhead $100,000 $200,000

Estimated Gross Profit 33% 40%

Break-Even Point 100,000 200,000

.33 .40

Break-Even Volume $300,000 $500,000

Annual Volume Projection $360,000 $600,000

Gross Profit 33% 120,000 240,000

Less Overhead (100,000) (200,000)