My phone call records of recent months indicate that there are bunches of construction-focused contractors considering jumping into the service-and-repair arena. This survival reaction is to be expected with every contraction of the new home market. Whenever a market shrinks, there are casualties among the providers to that market. In other words, when the music stops, someone ends up without a chair. In most cases, the winners will be the contractors who have been doing a good job of taking care of business, regardless of whether they focus on construction or repair.
This month, we’re going to explore some of the similarities and differences between these two market segments. If you’re eyeing the grass on the other side of the fence, this column is for you.
Know Your CostsOn the list of similarities is the need for profits. In my experience, new construction contractors are more susceptible to market fluctuations because their margins are so slim, even when times are good. The main reason construction contractors’ margins are so slim is that most let someone else set their prices. If you’re a new construction contractor, here’s a quick quiz that will demonstrate how your pricing is influenced by someone else.
Fill in the blanks for the first part of the test:
Plumbing contractor: My standard price per fixture (rough, top, set) is $__________.
HVAC contractor: My standard price per ton (or square foot) is $__________.
Did you have an answer for that blank? If you’d like, go ahead and preface your answer with the standard hem-hawing line: “If so-and-so conditions are just this way and if I know it’s a good builder … and etc.” I know there are going rates in the business because I talk to builders who can tell me what they pay. But this is just the first part of the test.
Here’s the next part of the test:
Plumbing contractor: My standard cost per fixture (rough, top, set) is $__________.
HVAC contractor: My standard cost per ton (or square foot) is $__________.
I hate to sound like a broken record, but this theme has been a Plumbing & Mechanical theme since its inception, yet it is rare that I come across a contractor who has a realistic grasp on what it costs to deliver a finished product.
One might think that service-and-repair contractors who price according to the “going rate” are better off than piece work construction contractors since they have more, and smaller, jobs. This gives the service/repair contractor more opportunities to stumble into higher margins and they get hurt as deeply when jobs go sour. But service-and-repair contractors carry considerably higher overhead per job than do the construction contractors, so they still crash and burn when they don’t know their costs.
New construction contractors crash when their big-ticket jobs go bad but, since the margins are slim even when things are going well, they don’t have as much opportunity to build up reserves.
The bottom line? If you insist on running your business without knowing your costs, you might be better off in an orange apron.
MarketingFinding something to stay busy with is crucial. That’s why it’s called a “busy-ness.” In the new construction world, one contract can keep a shop busy for several days, or even weeks. All you have to do is make sure that all the builders have your phone number so that when their current contractor finally crashes, the builder can call you and put you to work. (Oh, how I wish I were being sardonic right now!)
If you choose to go the service/repair route, you’ll need to expend considerably more effort to attract customers because you need a steady supply of new ones. The cold, hard fact is that your marketing budget may nearly equal your materials budget. Marketing is a talent combined with skill combined with discipline and sometimes topped with a dash of serendipity.
You cannot ignore this facet of your business, but there is just about nothing in the new construction world that will prepare you for it. If your new construction business is on the edge of the vortex, don’t even think about jumping into service/repair without first getting some education about the challenges of marketing.
SalesAttracting customers isn’t all there is to the service/repair game. In the new construction world, the end-user of your product is seldom the true customer of your product. For the most part, you don’t even have a customer. Don’t kid yourself. With rare exception, you are just a commodity. The builder sells location, aesthetics and little else.
In the service/repair world, however, customer contact is mandatory. This is not a problem if you’re able to carry on a conversation and aren’t too scary to look at. That “loathsome,” four-letter word spelled s-e-l-l will be an important part of your success. Sales, the process of presenting options and information to a customer resulting in a business transaction, should not be confused with words such as scam, deceive, scare, cheat or any of the derogatory terms often assigned to it.
As far as your business goes, it does not matter how skillful you are at your craft. If you don’t sell it, you won’t stay in business.
Recruiting And TrainingIn construction work, the ability to read prints, calculate and measure are more important than a sparkling smile and a “G”-rated vocabulary. Your best installer may not be the sort of person his or her co-workers would want to bring home to dinner, but if they get the job done accurately and efficiently, they can be very productive.
In the service-and-repair world, however, it is not uncommon for customers to prefer the mediocre mechanic with good interactive qualities over a seasoned professional who cares more about the installation than about the boot tracks on the Berber carpet. This means that your existing crew, as good as they may be, could meet with disaster in the service/repair world. You’ll need to recruit for technical ability combined with communication skills, a neat appearance and the ability to complete the paperwork.
This in no way should be construed to mean that a service-and-repair professional is somehow superior to a construction professional. It’s just that some of the skills overlap, some don’t.
COD Or COD?Speaking of paperwork, one of the premier skills your service crew will need, one that usually isn’t needed in the new construction world, is the ability and willingness to collect payment when the job is completed, also known as Cash On Delivery.
In the construction world, the contractor is usually in charge of the COD chore, only it’s more like Chasing Our Dough! A construction-focused trades person prefers to focus on completing the job and just isn’t interested in tallying up the invoice, getting credit card approvals and turning in the paperwork.
This doesn’t mean a construction pro can’t be taught and/or motivated to bring in the checks, but to ignore this fundamental chore can spell disaster for your cash flow.
EfficiencyAnother major difference between construction and service operations is the role materials play delivering efficiency. On a construction job, coordination with other trades and timely, accurate deliveries are crucial. It is also important to keep material quantities tight since surplus materials tend to become damaged or just plain disappear. Materials expense can easily surpass 30 percent of the total job price, so careful shopping is almost as important as accurate ordering.
In the service/repair world, materials usually command a much smaller slice of the total sale, perhaps 15 percent or less. But don’t underestimate the role of proper stocking. In the service-and-repair world, if the stock isn’t on the truck, it can mean the difference between a sale and a wasted trip. Overhead is the largest slice of the job cost and windshield time does little to offset that expense.
The construction-focused contractor may feel tempted to complete more jobs per truck, but this results in more windshield time per dollar of sales. The result is higher marketing expense with lower sales efficiency, a bad combination for service and repair.
Considering these differences will help smooth out the bumps of diving into the service-and-repair business. But make no mistake: New construction and service/repair are two very different enterprises, so keep your eyes open.