Mark: Today on PowerTips Unscripted, we talked to David Crane, CEO of Crane Builders LLC in Nashville, Tennessee. There are many debates that will rage on forever. Pepsi or Coke? McDonald’s or Burger King? Captain Kirk or Captain Picard. Cost plus or fixed price remodeling. David is here to tackle at least one of those controversial topics. We’ll hear which side of the fence he falls on and why he thinks it’s the right choice for most.

Mark: And we’ll hear all about it in just a minute.

Victoria: Hi, I’m Victoria Downing, and welcome to PowerTips Unscripted, where we talk about tips, tactics and techniques to help you build a strong, profitable remodeling company. And I’m here with my co-host, Mark Harari.

Mark: Good morning Victoria.

Victoria: How are you?

Mark: Pleasant. And yourself?

Victoria: Yeah, pretty darn good. Had a good workout today. Feeling strong. Ready to rock.

Mark: Oh, what’s with the language?

Victoria: Language?

Mark: Pretty darn good. Jeez, you’re really getting out there now.

Victoria: I know, hi, George. Oh. You bet.

Mark: Golly, gee.

Victoria: So this is going to be a really interesting episode because, as you said, the these days when people feel one way about cost plus or fixed price, they feel pretty passionately about that choice. That decision to go in that direction.

Mark: Just like Pepsi or Coke.

Victoria: That’s right. So, this is going to be really interesting to hear from somebody that has a position that we don’t hear as often as, the other side.

Mark: So yeah.

Victoria: So we jump in and tell people what we’re talking about.

Mark: Yeah. Let’s let’s clue everybody in.

Victoria: Okay. David Crane, as Mark said, is CEO of Crane Builders in Nashville, Tennessee, where he has been for 34 years following a ten year stint in New Orleans. So David’s been around the block a few times, knows this industry inside, and out, and is one of our most generous members because not only is he going to be speaking today about his favorite form of working in a remodeling company, but he’s also sharing the same information at our upcoming summit in Arizona, which is really cool.

Victoria: So, David, welcome.

David: Thank you. Happy to be here.

Victoria: Good. Well, we’re glad to have you, too. Now, you know, as we said, there’s been a lot of controversy about cost plus versus fixed price. Tell us where you stand and why that is.

David: Well, I am almost always done. Cost plus building and remodeling. And probably 20 years ago I was in a business group that a number of people said, oh, you can’t make money in cost plus remodeling. You need to do six price. So I tried doing that for about a year, and I had so much get back from existing clients that said, gosh, we’ve always done Cost Plus and it’s always a trust relationship and we trust you.

David: You trust us and we share the risk and all that, and we don’t want to things fixed price. So I went back to Cost Plus and have done that ever since. And we there’s a lot more accountability to it. But we make very good money doing cost plus remodeling.

Victoria: So I’ve heard that too, that it’s more difficult to make money at cost plus. And of course I’ve seen it because I see financials from so many different remodeling companies. And it’s not that you can’t, but a lot of people make mistakes in the structure around it, which causes it to be less profitable. Don’t you think?

David: I think so, and I think one of the things that you, that one of the tricks to it is you’ve got to put as much cost above the line in your job cost as you possibly can, including project manager and all of that. And our project managers go into costs, including all benefits, and get marked up. And our goal is we pay our production manager and our company bonuses out of the markup that we make on the project managers.

Victoria: Okay. Well, let’s back up for a minute because I want to dive into that in a little more detail. But so so that’s one of the keys to success. And doing cost Plus project right is packing the costs as much as you can up above the line. Are there other keys. And then we can delve into them a little bit in detail?

David: Absolutely I think. Well, I think cost plus does is forces you to look at your numbers very regularly and to know when you’re meeting budget or not. What it does is it forces us and our project managers to write, not change orders, but we call them additional work authorizations or aways because it sounds like you’re getting something for your money.

David: But we very quickly realize when something is over budget and go and address it with an additional work authorization and make sure we’re not caught eating costumes that happen to go over budget.

Victoria: So when you’re selling a job with cost plus, how do you explain to the client.

David: Not waste money, like I said earlier, is that we do cost us because we feel like it’s the most honest way to work. We share the risk. If there’s 100 variables in your job, if we’re going to fix price, I’m going to put 70 of them into my cost and hope I run the 30 of them. And you’re going to be up and running to 90 of them.

David: So you come out to the advantage and you start kind of a competitive, you know, thing. Who’s going to come out on top. And it costs us. It’s a total trust relationship. We say we share the risk. And if lumber goes up 20% well I’m sorry, you pay 20% more, but if lumber comes down 20%, you’re going to pay 20% less.

David: And so it’s a it’s the most honest way of dealing. And most people don’t research who they’re hiring to do the remodeling as much as they do on much more trivial things. And I think you need to know you can trust the person you’re hiring to remodel your house.

Mark: So, David, like, right now, something like kitchen cabinets and and things like that, or ridiculously times, right. To like 16 or 18 weeks or something. And in a situation like this, I, I don’t want to assume that’s what I’m going to ask question like, okay, so right now you’re going to place an order today for a project and maybe 5 or 6 months from now, probably because of the lead times.

Mark: And then the prices start dropping later. But that’s all worked out right. They’re not going to come back to you. It’s it’s the pricing is when you bought it.

David: Yes. Because on something like cabinets we get a fixed price at the time we order it. The difficulty has become which has nothing to do with cost plus is the fact that we have to before we ever start a job, we have to order stuff like cabinets and windows and doors and plumbing fixtures and stuff to make sure that they’re going to be there.

David: I’m picking up a contract today for a new kitchen, and we ordered the cabinets two weeks ago and we were ready. We could start the job, but we will probably wait about 6 or 8 weeks to started so that we don’t have somebody’s kitchen ready and our cabinets for a month. Okay. So I think across the remodeling board everybody’s dealing with.

Victoria: No kidding.

David: It passed directly on. And the thing that does vary, Mark, is like lumber. You know, we signed a contract. And here’s the price we got the week before we signed the contract for lumber. And that could go up $10,000 or down $10,000. Right. We explained that homeowners and we had more. You know, the difference is in fixed price, a lot of people are eating with the price increases and that’s really affected their bottom line.

David: We’re having some very uncomfortable conversations where we’re going in our typical conversation before we start a job is, gee, I’m sorry, but your price has gone up 10%. Here’s why. Most of its lumber, but its cabinets, because it has lumber in it. And trim because it has lumber in it and all those things. And the good news is, with the economy the way it is now, people are saying, gee, I’m really sorry to hear that.

David: When can you start?

Mark: Yeah, that’s good news.

David: That’s a hard conversation.

Victoria: Now, one of the things you mentioned earlier was that, you know, if you’re exceeding the budget but isn’t, one of the things about Cost Plus is that there’s no top end, right? The client drives it, right? I mean, they choose things.

David: Yeah. So one of the things that we have a reputation for is coming in on our budgets. So we have a line item budget with probably 60 or 70 items on it. And our project managers approve every deal that gets paid on that job. And when there are proving that, they’ll they look at the budget of the proposal we have from the.

David: So before I started the job. And if there’s something different than that, they start looking and asking questions. And if it’s different, we write an additional work authorization to make sure that we educate the client. To know that we say, okay, yes, you started with $3,000 for plumbing fixtures and you think $4,200 worth. We did. We want to eliminate surprises.

David: So we’re adjusting the budget to $1,200.

Victoria: Okay, I gotcha.

David: Up on that. And so now you’re budgeted $4,200 for a plumbing.

Victoria: So it’s not that you have to hit a predetermined budget. It’s that you’re consistent in constantly adjusting it to reflect the reality of what they pick.

David: Exactly.

Victoria: All right.

David: So it says it’s gone. It’s saying, gee, I’m sorry. You know, we told you that lumber prices were fluctuating. And on your $30,000 lumber package, you really came in at 34 or 5. So we got right at $4,500 a year for the additional cost of lumber. And we’re really sorry it happened, but we just want to eliminate surprises at the end of the job.

David: There you go.

Victoria: Okay.

Mark: So, David, are you up front when you’re just getting the contract signed and getting started? Are you making sure that clients aren’t at their 100% capacity? Do you kind of try to hold them back to a certain percentage, because you don’t want somebody get into a situation where, you know what, I just flat out don’t have the money to finish this job.

David: You know, we don’t specifically have that question. But yes, we do say, you know, here is our best guess what it’s going to be. And we typically come in at within 3 to 5% of our budget one way or the other. The caveat I’ll give you is when you go big plumbing fixtures or ceramic tile or countertops, you say something you really love.

David: You also want to have room that you can, you know, change that and still fit it in your budget, right? So you give them a heads up. This is not at all a fixed price. And then if you go in fixed price, you get a nicer countertop or nice apartment fixtures or, you know, more features on your cabinets.

David: You’re still going to pay for that.

Mark: So and just to follow up on that, do you ever have a situation where, you have had somebody say, you know what, I’d rather not do this. Can you just give me a fixed price? And then what do you do if you do?

David: Well, we we occasionally have that. And the bottom line is we’ve gotten to say no, we’re sorry. We only work on fix on the no cost to us. And it’s because that’s, you know, we can’t do one job differently than we do. And we feel like it’s the most fair way to work and we will not do fixed price.

David: We also have people that ask, well, will you do a guaranteed max or will you do a penalty if you go over budget. And we’ll turn those down as well and say check with our references would come in on time and on budget. And you know this is the way we work at you and we try and explain that on the front end.

David: One of the best lessons I ever learned from Sandler sales is go for that now. And I know from somebody don’t make six trips out of their house and spend 30 hours putting together one budget after another after another, to have them say no in that first phone conversation and see if it seems like a good fit in every meeting after that.

David: Keep saying that it’s a good friend and upfront ask them for permission if we ever, you know, one of us ever sees that we feel like we’re not a good fit for each other. Let’s pull the cord then and not go on and cause misery for us.

Victoria: Right? Okay, let’s dive into a little bit of the nitty gritty of this cost plus concept. Now, do you do you have your own in-house carpentry staff or do you use subcontractors for your labor contract?

David: All labor. The only thing we have a project manager is a production manager. My son in law Tyler and I, they do all the sales, and then we have one guy that we call our unicorn that sells his jobs, and then he runs them when he’s doing them, and he’s, and he’s and he’s great, and I love it.

David: But when he leaves, we won’t replace him.

Victoria: Okay, that’s a little bit of an unusual silo thing, right?

David: Yeah. So he’s kind of just out there doing his thing. And then we have an office manager and a part time administrative assistant.

Victoria: Okay, so when you’re putting as many costs as you can above the line, the way that I understand it is that you put the companies that do cost. Plus we’ll put everything that they can possibly apply to the job as a cost above the line. So they would put administrative time and cost, the cost of copies, the cost of admin, the anything they can think of like that goes above the line.

Victoria: Is that how you do it?

David: No, we don’t do that. We charge our project manager should if we buy a first aid kit or a wheelbarrow or a fire extinguisher, those get charged to the job and hopefully we’ll have a fill in next job. But if we don’t buy another one from the next job, we don’t charge him for it. But anything that is directly related to the job gets charged.

David: But we do consider all the administrative and copying and all that is a part of our overhead.

Victoria: So when you’re charging your project managers, do you use their straight burdened cost or do you create a billing rate?

David: We create a building for our guys. We pay, you know, 30 to 36 bucks an hour, and we charge an amount at $60 an hour, which calls because there’s all insurances, taxes. The patient says, hey, holidays and we have enough on top of that that we pay that we hopefully and they are production manager out of that. Oh.

Victoria: Okay. So your production manager is not keeping time cards on the job or for the job costs, okay.

David: It is a part of overhead okay. Yearly consistently more than that. His salary with what we have left on that $60 an hour for our project managers.

Victoria: Okay, so another thing that I heard is a bit of a drawback oftentimes to this kind of pricing is the is the administrative workload the like do you bill the client every two weeks? Do you have to give tons of paperwork, tons of details and things?

David: Well, we do not give them copies of individual invoices. We build that once a month and in our contract is a spreadsheet with here’s our budget for each line item. And then when we do an invoice we just make a spreadsheet of that. And here is the budget. Here is any changes by additional work authorization. Here’s our cost today.

David: Here’s what’s left in that category okay. Every time we send them a bill it gives them a snapshot from day one to today as to what they spend or what we spend on their behalf. And then at the bottom, they do that for what they’ve already based. Okay.

Mark: So I’m curious about, again, I’m moving back to the beginning of the process, but I’m very curious about the sales part of, of of this. And when you’re going, well, actually I should start with, do you go against are you bidding it quote unquote bidding against people that are fixed price.

David: Yes.

Mark: Okay. So when you’re sending in your you have to do you get try to get all the appliances and their selections and all kind of project it out to I guess I’m, I’m wondering how these two completely different proposals compare and then what that challenge is.

David: And the only we one of the downsides to what we do is we get them to make as many selections as we can on the front end, but we have we go in with a lot more allowances in those fixed price companies. We don’t have a designer, they don’t do any in-house design here. So that’s part of the deal.

David: This is our all of ours are either architect or interior designer driven and drawn plans. And then with the interior designer, they usually make the selections in a very timely manner. If not, that falls to our project managers to push and us, because now we have to get a lot more of those selections before we start the job, because so many things have to be ordered up front.

David: But Marc, back to your question on specifically on appliances, the only thing that we do affect your number on in a job is appliances. If we go on a normal kitchen, we’ll go to $10,000 allowance in for cabinets and we’ll say whatever you spend over there, you can write a check directly to the appliance company. We don’t need to make more money because you choose to use a Subzero refrigerator over a G refrigerator.

David: And if we know it’s going to be a big appliance package, a lot of times we’ll put 20,000 in instead of ten with the tell you. But that’s the only thing on the job will do. Now.

Mark: Interesting.

Victoria: Yeah.

David: But we don’t run that additional money through us so it doesn’t affect our bottom line.

Victoria: Now do you find that there is a certain demographic profile of the people who like Cost Plus versus the people that, want a fixed price. And I’m going to compare this a little bit to design build which you are not. And then the architect interior design led stuff is there is, are they different levels of income and that sort of thing.

David: Oh I would dare say that. So we have an next. But for the most part, I’d say our clients are probably a little bit older and a little bit more affluent than many of them, because they’re also already, many of them have already hired an architect and the architect sending them to us. And, they’ve already agreed that we’re going to pay this chunk of money for a design.

David: And we know we’re going to pay, you know, a contractor fee. And so, they’ve already, you know, they’re they’re not trying to pinch pennies.

Victoria: Right. Okay.

David: That’s one of the things that, you know, is one of our questions is we also try not to do jobs under $100,000. Okay. And we explain it to you, so we don’t sound too snobby or whatever is, where we become efficient for our clients. Is jobs over $100,000. You know, if you’re doing a whole bathroom or something, a lot of times it’s good to hire a contractor who has in-house labor and does their own demolition and and training and can do a lot of the things in-house instead of us.

David: We have to solve everything out and that becomes more efficient on a bigger job.

Mark: So Walmart again, I and I keep going back to the sales part of it. But do you get just flat out questions like, okay, so what what what are you trying to make on me? What’s your margin?

David: And yes, and I my line to them, which is somewhat laid out, somewhat not is we, we charge about 28% overhead and profit overhead and about 23%, we try to make a 5% profit. And that usually, an occasion, you know, occasion. We’ll have somebody say, well, you know, it’s a day job. Could you do it for 25%?

David: Right. Yeah. You know, we can we do everybody at the same price, and it just is too much paperwork. And it’s just not fair to our other clients to charge one one thing and another another.

Victoria: Thing, not to mention that be cutting out 90% of your profit there, you know, I mean.

David: Right, gee. And Tyler and I go into your into costs into that overhead too.

Victoria: So yeah. So and you don’t find that there’s any I mean, doesn’t it scare you sometimes to say that out loud to people? I mean, I know there’s a lot of discussion around this, and when it works, it works. I don’t think there should be. But I know there’s some people like, you know, I don’t want to I don’t want to tell about my margins.

Victoria: I don’t want to, you know, if they just can’t handle that sort of bluntness.

David: But every time we sit down with the con and, and on our very first meeting is we’ll tell them we’re cost plus 28%, which is probably higher than the average around this area. And, you know, and from the beginning we tell them that. And when we sit down and go through our preliminary budget, we’ve got a spreadsheet showing 28% at the bottom.

David: Now, one of the things that we also do is we include the cost of our project managers into the cost of the job. So we don’t have a superintendent line. I we have, you know, ten hours under blowing ten hours.

Victoria: Oh, okay.

David: So in our contract, it specifically says here our billable rates for each different for project managers, for carpenters and the carpenter helpers and and so but we do not have any supervision category in the contract. It’s all spread massage through the contract. So then I go on. Oh, you got, you know, 7% for project management and you got an overhead.

Victoria: Yeah.

David: Right. You know, so that’s one thing that we try to steer away from.

Victoria: Okay. All right. That makes a lot of sense.

Mark: Yeah, that’s that’s really, really fascinating to me. I tend to I tend to feel more comfortable on the fact side.

Victoria: You know, let me ask you one question.

Mark: But that’s that’s.

David: Advantage, membership.

Victoria: Well, they do, you know, it’s.

Mark: Just it’s safe. It’s like it’s like a cuddly teddy bear you can go to bed with at night.

David: It’s. But I feel safer today.