I have been asked recently if margins in reconstruction are changing and if it is still possible to achieve the same margins as they were several years ago. Below is my response:
Here are some differences of the influences: (The companies that I work with are not combining costs and revenue from water/fire and construction – they are separated into different ‘jobs’)
- Is the program work typically from Third Party Administrators? These jobs are smaller and managed much more strictly – they are doing there best to limit margins and cut areas that are more profitable than others. Many of the typical TPA projects are under $10,000 so this may not influence your discussion. Some other vendor programs are tight as well and it depends on which company you are working for.
- States and regions impact margin. Some are easier than others. I have a client in Florida that has been averaging over 50% margins. They are not on any vendor programs and all is self directed – that being said they are typically working in the Xactimate environment. Not being on vendor programs will allow a small bit of pricing flexibility. Some states have higher costs of labor and limited subcontractors that drive costs higher and Xactimate does not keep up with changing costs since the TPA and vendor Xactanalysis feedback confirms the lower pricing causing downward pricing pressure.
- Managing a group of in-house staff requires a lot of management – getting labor and materials to the job site with low costs is difficult. If you are running in-house labor then managing the staff is one of the most important elements in maintaining margin.
- It is much harder to maintain a 45% margin than ever. Some companies are able to squeeze subcontractors and suppliers but that only goes so far and ultimately has an impact on quality.
- Changing margin expectations is consequential for restorers. Accepting that margins are going to be 5 points lower has a huge impact on cash and profits. Managing the process and having coaching and accountability tied to the numbers helps companies hit expected targets. I think that 50% used to be achievable but difficult. Now 45% is achievable but difficult. I do think that 40% is more common. Companies that start to accept 35% need to be very focused on their overhead because there are many companies that are running a 32-35% overhead. The expectation of a 3% net margin is way too low – it should still be 10-15% depending on the revenue numbers (which impact the overhead %).
The reality is that the cost of labor is way up and materials appear to be stable or increasing and the Xactimate unit costs rarely increase. There is truth that margins are much more difficult to maintain. British Columbia was one of the most difficult pricing/cost markets that I have ever worked in. I worked with a company thad 14 project managers – each was able to maintain a minimum of 34% margins and some were able to hit 40%. This required focus on proper estimates, proper and consistent change orders, appropriate supplements and limiting the amount of customer credits and discounts. Too often companies write off deductibles, throw costs at jobs when they miss completion dates, don’t get signed change orders or ask the customer to pay for upgrades, don’t create a budget and then buy out the job before starting, etc. Making margins requires focus and discipline.