The pluses and minuses of labor-only jobs: Contractor's Corner - May 2016
By Dave Stafford
Labor-only work has its appeal, like bigger margins, but as with any other endeavor, it also has its shortcomings, and it is not for everyone. When it comes to installation in the flooring industry, there’s a common refrain that goes something like, “Oh, if I could just sell the product and not have to worry about installation, my life would be complete.” Or, “I’ll save a bunch of money by just buying the product, having it drop-shipped to the site and then bid out the labor.” And finally, “You want me to do what for a lousy $3 a yard?”
There is some truth to all of these statements. We’ve all heard them, and probably said some of them. We’d all agree, though, that high quality installation labor is getting tougher to find and is going up in price at the same time that installations workrooms are leaving the business. There are plenty of opportunities for labor-only work, but there are several issues to consider before you start.
Limiting financial risk. What are the good things about labor jobs? One big advantage to the flooring dealer is that the owner and the mill are responsible for figuring out the terms of payment, and the mill will take the loss if the owner doesn’t pay. With large jobs featuring 20,000 to 100,000 square yards of carpet tile or 500,000 square feet of resilient, most dealers don’t have the financial backing to shoulder the risk of non-payment and thus have to forgo most of the profit on the product sale. This, then, becomes a direct sale by the mill to the owner.
Another plus for those specializing in labor-only installation is a much lower start-up cost. You’ll need a vehicle, tools and quality experience (and certifications), but you won’t need a storefront, elaborate office space or personnel. More than one successful labor-only provider started with a couple of four-man crews and the owner’s wife to handle the phones and the billing. The downside is that you work when you’re sick, and there are rarely any days off. Saturday is just another workday and frequently so is Sunday.
Fewer dollars of profit but a greater margin. While fewer dollars may be generated on a labor-only job, the margin of profit will be greater. As an example, on a very large job, one might expect a gross of 18% to 22%, whereas a margin 10% to 12% higher might be the minimum for labor only. In more than one case, we ended up making more money with less risk by forgoing a $500,000 product sale and just negotiating a labor deal.
From a flooring contractor’s point of view, a large labor-only job will be a disaster if the project requirements are not synchronized with other work. After all, if you have to use several of your top crews for weeks on end to get the labor-only job done, they cannot perform other work. While you’re making 32% on the labor-only job, it is still only a $100,000 sale. You could have made 22% on a $300,000 product and labor job within that same period, thereby doubling your gross profit. Having been there, it’s always nice to have some of both types of jobs. Just make certain of crew availability to get sold projects installed.
The menu of services. One smart idea, if you’re going to do labor-only work, is to create a detailed menu of services to make sure you’ve left nothing out. This would include product accessory items like cove base, reducer, patching and floor leveling compound, specialized adhesives and other labor charges for receiving, warehouse processing, inspection, storage, delivery to site and project management. However, my experience has been that when an owner is confronted with such a menu, he may reconsider the wisdom of buying direct. “I think I’d just prefer to have you handle it all, turn-key, if you can get a little sharper on the price.”
An owner’s risk. With a direct product sale, the owner has to assume the responsibility of receiving, storage and delivery to the site unless there is some other agreement made. Effort must be put into staging materials according to size of installation segment, site prep that is appropriate for the product being installed, debris removal, and installation of the product and accessory items. In addition, he will have to supply personnel to handle field inspection and overall project management. The wise owner will bundle much of this into the bid package and have the installer assume those duties.
However, what happens when, based on a low-ball price quote, an owner picks an installer that is unqualified for the task? In one case, a company was selected for a large job because it satisfied the government’s small business set-aside requirements. In another, the bidder’s-only experience had been with cookie cutter type apartment installs. A million dollar disaster can be the result. An owner will rue the day he got involved.
Different perspectives and fixing problems. One big issue is that an owner, the mill and the installer all come from different perspectives. The owner wants a new floor at the lowest cost, best visuals and least hassle possible. The mill wants to sell its product at a fair price for its intended use and have it stay on the floor. The installer wants to make a reasonable profit for the hours he puts in and limit his risk and responsibility. When there is a glitch, and there are often several, a lot of finger pointing takes place, and it usually falls to the installer to figure out a solution.
“Something doesn’t look right with this carpet! You screwed up the installation; I can see a seam.” Seams are not guaranteed to be invisible, only imperceptible. Furniture was realigned in an area, and the problem was solved. “I vacuumed the carpet tile area and the edges are curling. Didn’t you use enough glue?” Sadly, there was a tension defect and the product had to be reworked. “What the @#$% is happening here? We’re supposed to move in furniture on Friday morning!” Okay, we’re bringing in an additional crew and will work overtime to get back on schedule. “Hey, Bob, I see water coming up along the seams of the floor. What’s going on with that?” Uh oh…
Getting paid. One other potential issue is how quickly you will be paid for a labor-only job. Most installation personnel, whether paid hourly or piece rate, expect to be paid next week for work performed this week. Contrast that with an owner or general contractor hiring you for labor-only work and expecting to pay 30 to 45 days after billing. There should be an agreement that labor performed will be invoiced at the end of each week, emailed or faxed into accounts payable, with payment to be generated the following week. Unfortunately, it rarely happens that way. The typical “float” may be 20 to 30 days, even with a prompt payer, and 60 to 75 days in slow-pay scenarios.
You always want to ask these questions: How will you process my labor invoices? Who will handle the approvals? How fast will processing be done, and how soon will a check be issued? Also, where may I pick up the check, or will you generate an EFT to my account? Get that information in writing. And you’d be smart to have it as part of any written agreement along with the all important Scope of Work.
Defining the job terms. A Scope of Work should outline the method of installation to be done and include all ancillary items, such as floor prep, and specify what products are to be supplied by the installer. In one classic case, the owner and the installer each thought the other was supplying direct glue adhesives, since it was not spelled out. Another owner thought all floor prep labor and supplies were part of “getting the products on the floor.” A labor warranty is usually given for a specific time, say one year, not for the life of the product as one owner thought. An astute installer may offer some additional period as a deal sweetener or for an extra amount of money.
Hours of work and expected time for completion are always an issue, especially with flooring installation usually taking place after other trades have finished. “You told me you would get it done. I don’t care if you have to work Saturday, Sunday or around the clock.” Overtime and extra crews can be a real killer. If not clearly specified in your Scope, and unless there is a signed change order, you won’t get paid in spite of the “sweet nothings” that may be whispered.
Exceptional service quality. Another bonus with labor-only installation may be in the type and quality of the work you get. If you have a reputation for exceptional work quality, are certified and bondable, and have a security clearance or can get one, you can command above average prices. Who do you think does work in the White House, the Pentagon, Federal Reserve banks and other high profile buildings? Well-connected, reputable, reliable flooring contractors. Most products used are specified at the mill rep level with a well known designer. The selection of an installer who will make their vision into reality is critical and very much like an arranged marriage. “We need a crew that can pass a background check—no illegal aliens or green card holders, U.S. citizens only.”
You have to control the crew and punch out your work as you go, provide your own field inspector, no mistakes or second chances. If you decide to do labor-only of this caliber, you have to have trained personnel with the right emotional mindset that can handle frustration, tight deadlines and anal inspectors who are unreasonable. The good news is that you can charge a premium price. The bad news is it never seems quite enough, given what you have to go through. I once declined to do any more business with a large defense department location because of the incessant demands, frequent drama and unreasonable requests. “No, I can’t have a crew there in an hour. If you’d like to provide a helicopter for my crew, I can get there by 1:00 p.m. Otherwise, we’re dealing with a 20-mile backup on the beltway.”
If you are offering labor-only, this may also be a way to keep highly skilled personnel busy when other sales are slow. Nothing is more frustrating to a company or its personnel than when there is no work. Yes, they may be getting paid some hourly subsistence rate for downtime, but everyone would rather be working. In order to avoid a “brand conflict,” some dealers have even run their labor-only work through a different company name or location so as not to impair their own sales efforts. This is particularly true when doing work for designers or high-end specifiers.
The labor-only niche. As companies grow in size, unless there is a labor-only niche, such installation will become less important and probably non-existent. The downside of labor-only work is that you are dependent upon someone else’s sales ability and have limited chances to raise prices. This is why large commercial workrooms have evolved into full service commercial flooring companies. There is only so much high quality labor to go around, and if you are already working your teams six days most weeks, they need a break. Fewer profit dollars will be made with labor-only jobs compared with products furnished and installed.
However, when a talented, experienced installer enjoys the thrill of satisfaction that a superbly installed job brings, there is nothing better than having daily opportunities to excel. Those individuals gain rare certifications like that of a CFI Masters II. They can provide the nucleus for your own special niche. Labor-only work is not for everyone, but it may be just right for you.
Copyright 2016 Floor Focus