How this plumbing company took a proactive approach for its future.

It's 1952, and Jack and June Owens have started their new business, Tucson Plumbing and Heating Inc. Business is steady and plentiful in Tucson's new construction market - it is estimated that the company installed plumbing in one of every five homes during those early years.

Fast-forward to 1982 when they sell the company to their nephew, Chris McGinnis, and two other partners. McGinnis is a little green to take the reins of the company by himself but, with his two veteran partners, manages to sustain the business.

Now, in 2005, McGinnis has built Tucson Plumbing into a thriving plumbing business, still focused on new construction. At the time he took over, the company was working on about 1,200 houses per year. McGinnis says the firm should hit the 4,000-houses-per-year mark in 2006.

Part of that success comes from the people at Tucson Plumbing. About 20 percent of his 180+ employees have been with the firm for at least 10 years, and a few are third-generation - third-generation plumbers and third-generation employees.

But a large part of the company's success comes from the innovative ideas that McGinnis and his team come up with to streamline itself and its workforce. And what they did was come up with a three-pronged business model unique to Tucson Plumbing:

1. Inventory management;
2. Decentralization; and
3. Financial incentives.

The Whole Package: One part of the business model, materials or inventory management, encompassed a radical change for the company - the single wholesaler concept. Tucson Plumbing partnered with the local Ferguson branch (then Familian) in 1987. About 95 percent of its purchases are from Ferguson, which inventories materials for Tucson Plumbing, as well as packages and stages materials for just-in-time delivery.

“Going to a single-wholesaler model means there is no adversarial relationship between us because Ferguson is closely tied to the health of Tucson Plumbing,” McGinnis says. “Because of that commitment by both of us, they are able to anticipate our needs and deal more efficiently with the manufacturers we have jointly chosen to use.”

Ferguson dedicates 18,000 sq. ft. of warehouse space and a 1 1/2 acres of yard space to Tucson Plumbing. When Tucson gets a start order for a job, it sends a purchase order electronically to Ferguson for all three phases (called electronic data interchange). Ferguson then begins to get the materials ready for packaging and staging.

Even the packaging process is unique. McGinnis and his team came up with the “universal packaging” concept. With about six to seven styles of houses being built in the area, they realized that about 70 percent to 80 percent of those homes used about 75 percent of the same materials during each of the three phases of jobsite operations - rough in, top out and trim. So universal packaging was born. Ferguson designed a system to “bag and tag” these universal items into “kits” of pipes, fittings, parts and fixtures for each phase of construction at each jobsite.

Kits are delivered by Ferguson to the various dispatch centers when they are needed, and labeled by project and phase. Every morning, each Tucson Plumbing technician is issued a dispatch sheet detailing the materials needed for his work that day, depending on what phase he is working on. The tech picks up his kit and does not leave the dispatch center before ensuring that the materials in the kit match what is listed on the dispatch sheet. If he does, he is responsible for any missing items and whatever time it takes to retrieve them.

With these kits assembled at Ferguson and delivered to Tucson Plumbing's satellite locations on a just-in-time basis for each phase of each project, Tucson has no warehoused inventory. That brought the firm's inventory value down 80 percent, McGinnis notes. They save space and time, and reduce loss and damage.

Ferguson also manages returns for credits. Sometimes all the parts in a kit aren't used on a job. They are collected in bins in a small area of the dispatch center and, about once a month, sent back to Ferguson, which returns the materials back to Tucson's dedicated space in the warehouse or in the yard. Eventually, these materials are “recycled” back to Tucson in the form of a new kit, but Tucson doesn't have to store it.

“It's like a marriage,” McGinnis says. “We're obligated to our commitment to each other. And we make sure our employees know that our commitment to Ferguson is tied into our ability to bid work. This wouldn't work as easily if we used a local wholesaler. Ferguson gives us the strength of a national wholesaler.”

The symbiotic relationship also extends to manufacturers reps, who in turn promote Tucson Plumbing in the market.

You Can't Get There From Here

Tucson is located in a valley between five mountain ranges: the Rincon Mountains, the Tucson Mountains, the Santa Catalina Mountains, the Santa Rita Mountains and the Tortolita Mountains. Most of the new residential construction is in the surrounding suburban areas, and most driving is on surface streets.

To alleviate frustration and long commuting times to jobsites, Tucson Plumbing decentralized the business by establishing four satellite locations, or annexes, positioned about 25 miles to 30 miles from the main office, with a possible fifth location in the near future. These satellites have administrative offices as well as supply facilities.

This may seem like a costly and counterproductive idea, but McGinnis says it's quite the opposite.

“Before we implemented this system, we were trapped in this web of surface and side streets,” he explains. “Now, our workers become familiar with these satellite areas, as well as the types of homes that are being built there. This plan has allowed us to grow by 30 percent in the last five years.”

McGinnis says that permanent, physical sites were needed instead of just material yards because of communication issues - it is much more efficient to have phone, fax and computer lines at each location to facilitate communication between crews and the main office. The company also has added real-time scheduling via the Web for all its techs. These sites have significantly reduced travel times and fuel costs, as well as simplified the staging of jobsite materials. And the system is flexible so that, as new home building areas change, Tucson Plumbing can change its satellite locations.

One of the biggest advantages for McGinnis is no more micromanaging. “We've empowered a whole level of managers to better lead people,” he says. And that delegation has allowed him and his executive team to focus on other areas of the business.

Another part of this is the influence of the National Association of Home Builders' National Quality Certified Trade Contractor program. The program “provides independent, third-party evaluations of participating contractors who have documented and implemented quality management systems that enable them to consistently meet code and regulatory requirements, builder specifications and homeowner expectations,” NAHB states.

“We've used the NAHB program as a model for cultural change in the company,” McGinnis explains. “Quality is emphasized at all levels and phases: during installation, when using materials and tools, meeting builders' schedules, job readiness, and more.”

Less Time Is More Money

The third aspect of Tucson's business model is time management, a notion that we all struggle with. McGinnis wanted to give his employees incentives beyond hourly pay. (See Tucscon's recruitment ad on page 132.)

“We needed to have our workforce take some ownership with the time it takes to complete tasks,” he explains. “We established a benchmark wage based on what was happening in our market, taking into account the benefits we provide in our compensation package.”

Those benefits include:

• Free medical insurance for employee and family.
  
• Low-cost dental insurance.
  
• Company-provided uniforms.
  
• Free employee assistance program.
  
• Bonuses paid several times throughout the year.
  
• Matching 401K program.
  
• 50 percent tuition reimbursement with passing grade.
  
• Free professional training.
  
• Credit union benefits, such as direct deposit and paid life insurance.
  
• Safety training.
  
• Jobsite transportation.
  
• Frequent performance reviews, and formalized merit system.

McGinnis established his wage system about six years ago. Each worker's time is listed on the dispatch sheet and everyone knows how much time is allotted to perform a certain task. If a worker completes an activity in more time than allotted, his or her wage is reduced by the percentage of time over the base time. If he or she completes the activity in less time, the wage is increased by the percentage of time less than the base time.

For example, say the benchmark wage is $18 per hour, and the task should take 24 hours. If the employee takes 26 hours to do the task, he is 8 percent over the allotted time, so his per-hour wage is reduced by 8 percent - to $16.56 per hour.

But, if the worker takes 22 hours to accomplish that task, he is 9 percent under the allocated time, so his per-hour wage is increased by 9 percent - to $19.62 per hour.

During training, a helper is half as productive as an experienced tech. It wasn't fair to penalize the lead tech if a job took longer while he was involved in training, so McGinnis instituted a helper/apprentice allowance, which adds 25 percent to the allocated time for the job. As the helper/apprentice gains experience, the allocated time is decreased incrementally until back to the base time.

McGinnis says that about 20 percent of Tucson Plumbing's techs do the work in exactly the allotted time, 30 percent do the work in less the allocated time (about 10 percent under), and 50 percent do the work in more than the allocated time (about 10 percent over). A red flag for management occurs if any tech takes 20 percent over the allotted time to finish a task. The employee's work habits are examined, and he or she may have to take a time management refresher course.

“We want our employees to make as much as they can,” he says. “With this system, each employee determines his or her wage.”

A New Endeavor

While Tucson Plumbing is primarily a new construction plumbing business, Chris McGinnis started a service and repair business about six years ago. Covering residential, commercial and emergency repairs, the service/repair arm provides leak detection, drain cleaning, water treatment, backflow prevention and gas line installation, as well as traditional plumbing repairs and replacement.

The company also offers a coupon for 10 percent off any drain cleaning or scheduled repairs just for visiting www.tucsonplumbing.com.

“There is quite a learning curve with this business,” McGinnis says. But he is confident it will be a successful operation, and hopes to get it up to 12 trucks in the next two years.

Research Money From Uncle Sam

Did you know that you may be eligible for a research and experimentation credit from the federal government? Neither did Tucson Plumbing until just a few years ago when Sandi Baird read about it. She asked the company's certified public accountant, Jon Mitchell, a partner at Clifton Gunderson LLP, if he knew anything about the credit.

“He said that, yes, he had heard of it, but that more people out East were using it than in the West,” she explains. “When he asked if I wanted more information, I said I was curious about the credit, even if it didn't apply to us.”

The r&e credit (also known as the research and development credit) allows taxpayers to claim a credit equal to 20 percent to 25 percent of the excess of qualified research expenses paid or incurred for the taxable year over the base period research expenses.

Tim Ross, from Clifton Gunderson's Joliet, Ill., office sat down with Baird, asked her some basic questions, and determined that Tucson Plumbing qualified for the credit.

“Then I had to tell Chris (McGinnis) about it,” she says. “He just raised his eyebrows and asked me if it was another one of my 'harebrained schemes!'”

After the credit was explained to McGinnis and how the company qualified, he and Baird decided to go for it.

In order to qualify for the credit, Tucson Plumbing had to meet certain criteria:

• The research must be undertaken for the purpose of discovering technical information, such as engineering or computer science;
  
• The research must constitute a process of experimentation, where the result is uncertain - trial and error; and
  
• The experimentation must relate to a “permitted purpose,” such as for new or improved functionality, performance, efficiency or quality.

Baird also had to go back through the company's records to 1999 to determine its “base period research expenses” for the credit. She says it's very important to document what you do and keep those records on file.

What did Tucson Plumbing do that qualified for the credit?

1. It developed its own dispatch software package; commercially available software, even if “personalized,” does not qualify. In fact, McGinnis is working on a new version of the program, as well as developing scheduling software for the company.
2. McGinnis developed the “kitting” or universal packaging design.
3. The company tried pre-fabbing, but it didn't work out. Failure of a project still qualifies as research.

“Going in, we thought we'd get a small credit, but it turned out to be huge!” Baird notes. “It was well worth our while (to go through the process).”

Tucson Plumbing received an initial credit of $83,000 from the federal government, but it also qualified for a similar credit from Arizona. It has received a credit each year since then. And as long as the company continues exploring ways to improve its processes, it will continue to qualify for the credit.

Regardless of whether you work with a national accounting firm or local CPA, Mitchell encourages all plumbing and mechanical contractors to talk to their tax professionals to see if they, too, might qualify for this or any other tax credit or deduction. The tax laws are constantly changing, maybe for your benefit.