Thursday, May 25, 2017

Margins in diaster restoration

The following information has been compiled through over twenty-eight years of direct involvement and empirical evidence in the industry. Business Mentors serves as a consulting firm specializing in restoration.  We help restoration companies analyze and improve gross and net margins in addition to working in many other areas.  Our background is in the restoration industry and we are business consultants and restoration business advisors.  

For purposes of this paper we will examine margin by types of work and will also discuss the various deviations.  There are many ways to figure job costs and this paper does not necessarily endorse any methodology.  Individuals need to manage costs and have a plan to meet profitability expectations.  The key in measuring margin is to be consistent in your approach. 

For purposes of this paper the items included in job costs will include: direct labor plus direct labor burden, direct materials, subcontracted labor, and equipment rental.  Some companies apply greater detail to their job costs.  There is not a right and wrong way to manage your job costs.  The material issue is that you are consistent when figuring job costs.  The more information that you apply to the costs, the more information you will have for managing performance and understanding your operation.  That being said, you want to measure information that you have the ability to manage.  Most companies can measure and manage direct costs for jobs and for that reason that is the information that will be reviewed in this report. 

Construction gross margins range from 35-50%.  This means that the direct cost are 50-65%.  The margins can be achieved through direct labor or subcontractors.  If you manage a large in house staff then you have the potential for higher margins. That being said it is very difficult to apply and manage staff labor in a manner that allows you to maximize job profitability.  The challenge with staff labor involves facilitating labor and materials to the jobs as well as managing non-reimbursed time.  When utilizing subcontractor labor either your company or the subcontractor can provide the job materials.  It is strongly recommended to apply some indirect costs to the jobs, which includes shop materials, supplies, dumpsters and other unapplied indirect costs.  In the event that you utilize a superintendent the costs for your job manager should be applied to the job either through direct labor costs or through an allocated percentage. 

Water Damage
Water damage margins are perhaps the most misleading and hard to measure gross profit item in a restoration company.  A restoration company prepares and staffs to respond to jobsites in a marketplace twenty-four hours a day, three hundred sixty five days a year.  Each company needs to provide training and equipment for each job and they are rarely costed to the job.  There are formulas that a company can use that will figure an exact cost.  Previous analysis has shown equipment costs to be approximately ten percent of the rental rate.  Direct costs range between 75% to over 85%.  Margins on water damage work have been decreasing due to the tracking and control of the claims management programs.  Margins in the water damage industry are still strong and compensate for the specialized equipment, capital spending, training and staffing required in order to meet the needs of our clients.  Companies need to look at the cost of being prepared to respond 24/365 and the substantial training and capital costs involved in mitigation services.  The overhead involved with a mitigation service is substantially higher than for construction. 

Restoration Cleaning
This category of work includes contents and structural cleaning in order to remove contaminates and odor.  The work consists of specialty techniques and cleaning solutions in order to remove the contaminate.  Contents cleaning can take place on location or in the restoration facility.  Companies measuring job profitability rarely take into consideration the substantial facility costs and equipment required to produce the work.  Gross profit for this work ranges from 45-60% meaning the direct costs are 40-55%. The costs consist of labor and cleaning supplies, packing material and any other moving related costs.  The capital costs for cleaning are substantial when you take into consideration vehicles, training, cleaning equipment - especially for in-house cleaning and storage facilities.  A cleaning company will have a substantially higher overhead than a construction - or even mitigation company.  

Mold remediation
Mold remediation consists of the work to remove mold from contaminated items and also remedial demolition of items than cannot be properly decontaminated.  This work does not include the actual replacement and repair.  Job profitability ranges from 40-55% that means the job costs range from 45-60%.   There are a variety of services that can be completed in house and others subcontracted.  These services require a substantial capital commitment.  If subcontracted the contractor may be limited to ten percent overhead and ten percent profit that relates to a 17 percent gross margin.  These services range from laundry and soft contents to furniture refinishing.

The above information is a guideline and not a reflection of the margins that will be achieved on any given job.  There is a dynamic that has changed the industry in the past decade or so.  Previously contractors could assemble their costs and then apply a price that allowed the target margin to be hit.  Today, in most cases, contractors will need to assemble the price and then put the costs in line to meet the margin expectations. Hitting job profitability numbers requires a concerted effort on the part of all participants involved in managing and producing a job.

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