While Lonny Rutherford traveled his state as president of the New Mexico Home Builders Association a couple of years ago, big trouble was brewing back at his office in Farmington, N.M. By the time DeAnn and Harvey Weber hired L.G. Rutherford Construction to remodel their kitchen in 1999, the pot of trouble was starting to steam. And before the Weber job commenced in 2000, Rutherford’s company was boiling over with trouble.
But you wouldn’t know any of that from talking to the Webers. DeAnn says, “Seems like [the project] went pretty well.”
“That’s great,” says Rutherford. “That’s a coup.” Especially considering that the Webers’ job fell right into the boiling pot.
The remodeled kitchen features light, natural hickory, and a suite of recessed and can lights illuminating work zones, cabinets and circulation area. Ceramic tile with radiant floor heating replaces carpeting. A garden window over the sink gives the feeling of being outdoors.
The Webers’ kitchen was very 1970s — dark, small, boxed off from the eating area — and DeAnn was eager to update it. She knew L.G. Rutherford did good work, so she was ready to get started when she visited the company’s showroom in August 1999 and met with Rutherford’s salesperson — we’ll call him Bob Rogers. Within a few weeks Rogers had developed a design that the Webers liked, presented an estimate they accepted, collected a deposit to reserve a spot for them in the production schedule and picked up a commission on that deposit based on a percentage of the estimated gross margin.
Sounds normal enough.
But in late 1999 Rutherford discovered a troubling disconnect in company operations. “We had a lot of work going — five or six jobs bidding all the time,” he says. “We’d produce jobs, but we were losing money.”
PROBLEM POINTS
What was the problem? Turns out there were several.
Rogers was showing a false margin in his estimates, says Rutherford. He sold the ceramic tile on the Weber job at $9 per square foot, for example, completely omitting a margin. Marble tiles on another Rogers job also were installed at a loss. Yet the totals he submitted to accounting proclaimed a healthy gross profit. He wasn’t giving production the right information to plan and construct jobs. A job would be in production and Rogers would say, “Oh, by the way, we need this,” according to Rutherford. The unexpected extras threw off the production schedule, lengthening the job. Yet the customers were not charged for these unbudgeted “by-the-ways.” The expense came “right off the bottom line,” says Rutherford.
The company was experiencing a revolving door of bookkeepers. “We had four bookkeepers in a row who said they could do the work. I had to try them to find out they couldn’t.” Without a bookkeeper tightly monitoring spending, money was flying out the door with no questions asked.
As if that weren’t enough, Rutherford learned that “a production manager and four or five of his helpers were lying to me.” In weekly production meetings they would give “great reports on customer satisfaction and job progress.” Then Rutherford started getting complaints from customers. The dishonesty went even further. One of the men stole company tools. One racked up 1,400 minutes monthly on his cell phone, and most of that telephone time was not attributable to job-specific details.
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The Weber remodel was in line for production when these problems bubbled to the surface. Rogers left the company under pressure on Jan. 15, 2000, and Rutherford took command of all the company’s jobs. When he opened the file on the Weber job, he was astounded at what it contained — and what it did not. There were some measurements, a preliminary design, a poorly calculated $13,893 estimate, records of a cabinet order and notes showing that $10,410 had been collected in two deposits. Yet there was no contract; “that still amazes me,” says Rutherford.
He was shocked that the job had been under development for five months without a contract. He was equally shocked that the Webers had been asked for such a huge deposit — normally “we get $500 or so to reserve a spot” in production and $250 to prepare a preliminary kitchen design, says Rutherford — and that they had agreed to pay it without a contract. He can deduce only that the initial $2,910 was “a number [Rogers] pulled out of the air” to inflate his first commission check, since it exceeded the 50 percent cabinet company deposit. Rogers regularly neglected to charge for design, so not even that fee was part of the deposit figure.
By paying the deposits, the Webers clearly demonstrated that they trusted L.G. Rutherford Construction. Rutherford was determined to “honor their trust.” Because Rogers failed to include the company’s standard markup on materials and labor, his estimate would have yielded a money-losing, 15-16 percent gross margin, instead of the target 40 percent. But Rutherford left Rogers’ pricing unchanged — and told the Webers he was doing so. He also allowed a larger-than-usual final payment.
SALES SMARTS
In mid-January Rutherford met with the Webers, explaining that Rogers had left and that he was stepping in to manage their kitchen remodel. DeAnn Weber said then and still says that she thought Rogers “did fine,” providing a good design and helping with product selection. Nevertheless, once Rutherford “took over the job and started listening to” Weber’s remodeling wishes and needs, he realized that several important improvements were missing from the plans, Rutherford says. He suggested upgrading the electrical system, for instance, installing radiant floor heat and adding three more trough lights to make the kitchen brighter. The result was a design that better met Weber’s needs. And by including a standard markup on the add-ons, Rutherford was able to pull up the gross margin to 21.7 percent. The Webers signed a contract on Feb. 7.
Thanks to the Webers’ goodwill, the production schedule never became a contentious issue. Origi-nally they had hoped to complete the kitchen by Thanksgiving, but a backlog at the cabinet factory squashed that plan. Besides, problems on two other Rogers’ jobs were tying up Rutherford’s crews. By the time the Weber project started in mid-February, the Webers had no pressing deadline and simply wanted an efficient, quality job.
Project manager Pat Daddario was on site daily and kept the job rolling once work began in mid-February. A few times he and Rutherford encountered bumps in the road. First, they discovered that “the valley rafter came right across where we were to install” a header at the location of a wall that was removed. Rutherford changed the design so that the header could be slid into place. Next, the recessed lights arrived damaged. To keep the job moving, Daddario and Rutherford decided to install the damaged units temporarily; they replaced the units when new lights arrived.
Daddario put up a scaffold to hold a new garden window that he maneuvered into a tight spot outside the kitchen of the split-level house. He discovered water-damaged particleboard under the old carpet, meaning that sections had to be replaced before the new subfloor and tile could be installed. And when making new wood trim to match the old, he had to fabricate a pattern “and rabbet in a notch to hide the edge of the tile.”
By adding a desk at the end of a row of cabinets in the breakfast room, Rutherford equipped the breakfast area for double duty as a phone center.
COOL UNDER PRESSURE
Weber never was aware that these tasks presented challenges because Rutherford and Daddario quietly devised solutions and implemented them. Even when Weber knew there was a problem — “I came home one day and here was this black pipe coming up” where the wall had been removed — she saw a positive, problem-solving attitude. The vent pipe came from a never-used kitchenette in the downstairs den. “We forgot about it,” says Weber. “I said, ‘Take it out.’” Daddario did so, and the project moved forward.
A year after the remodel, Weber has rave reviews for her bright, airy kitchen. “I love it,” she says. She has recommended L.G. Rutherford to several other people, and her husband has already asked the company to do more work on the Weber house.
FAILSAFE SYSTEMS
The company is looking good internally, too. Since January, “all has been going smoothly,” says Rutherford. “Nothing goes out the door now without my approval.” He reviews and approves every bid and payment schedule. He ensures that every proposal is a correct and “complete package” before it goes to customers. Along with Rutherford, the new bookkeeper keeps a close watch on the numbers. Paperwork must be complete and dated. Cash-flow calculations must be written so the bookkeeper knows when to generate invoices.
Rutherford cleaned house and now has an honest, competent crew in place. So far, he is handling all sales himself; he has not replaced Rogers. If he does eventually hire a salesperson, he will not repeat the mistake of bringing in the person without checking references and testing his understanding of estimating and markup. Even then, the salesperson will be “commission only and will have three months to prove himself,” says Rutherford.
“A black cloud hung over us for a year or two,” Rutherford states. “But we got it worked out.” Now that the problems are history he can even say that “it was kind of fun to pull it all together and make it work.”
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Project Spotlight: The Financials