This is a question that perplexes homeowners internationally. It’s common knowledge that a very high percentage of renovation projects end in some of dispute. This outcome would be considered outrageous in any other industry, but for as far as memories go back it has been seen as normal in this sector. It’s particularly outrageous for this to be the case in the home renovation sector, given the home is the most important asset owned by most people.
Worse, industry research shows that on average, 30% of the money spent on projects is wasted. In New Zealand, for example, the current renovation spend is $8.2 billion annually. If 30% is being wasted this indicates that annually, $2.46 billion of the money spent on home renovations in New Zealand is wasted. That’s $2.6 billion that should have gone directly into improving the nation’s housing stock.
How can this be?
The main reason is the structure of the industry. Harvard University has identified the residential renovation segment as “the most fragmented sector of the entire US economy”. There are 716,000 renovation builders in the US, with 70% of them being one person operators. As an analogy, if you were going to purchase a new car, would you ask Bob who built your neighbour’s car to build yours for you? Worse, would you start with an unclear design and pay more and more, as things were remembered that weren’t quoted for? It’s crazy, but this is what happens in renovations, which are a far larger investment than the average vehicle purchase.
What the fragmentation issue really causes is a high level of disorganisation. A small operator can very easily take on too much work. Tradespeople don’t try to deliver poor service, but with too much work to do combined with unclear planning and scheduling processes, things fall apart very quickly.
In the new home sector there are large brands. The problem has been solved in that sector. What is required is scale. Fragmentation is the major driver of the issues within the renovation sector. Many people intuitively think that a larger renovation company with a brand and systems and processes might be more expensive due to increased overheads. The opposite is in fact true. Most people think about the cost of products when they think about scale, however, while larger companies generally have more purchasing power, the impact of product cost plays a relatively minor role in determining overall project costs. Scale provides many other, much more impactful cost benefits related to productivity. For example overheads can be spread more thinly over greater revenue, resulting in a lower overhead percentage per dollar. The ability to invest in marketing creates a high volume of projects which can be used to aggregate demand and create efficiencies across a large number of contractors. Larger total revenues allow larger companies to invest in better systems and processes, which further increase productivity. There are many more examples of these economies of scale.
Customer service also improves with larger companies. They have brands to protect, whereas trades people being largely under the radar, can afford to provide poor service. They only require one or two projects at a time, so can usually find these. A large company can’t afford to operate like that, and must have a much greater focus on customer service.
What large companies do is consolidate demand. They can schedule and manage large teams of trades efficiently across a range of projects, sending them in to do the precise work that needs to be done, when it needs to be done. Renovations are complex and an overarching project management process is what delivers these efficiences. This can only be achieved efficiently at scale given the costs of investing in these systems and processes, and continually improving them.
The renovation sector needs larger companies to solve this age old issue. Harvard University has identified that what is required is management skills, sales, marketing, systems - all of the core processes within larger businesses. Trades people know what they’re doing with relation to their particular trade, but what is required is a layer of organisation and process control above those trades people.
Re-thinking the industry to focus on creating and supporting scale operations is the only way that the poor customer service and wastage (leading to overly costly renovation projects and a high level of stress for consumers) can be addressed. It should be far more difficult for tradespeople to create companies and promote that they can deliver “renovations”. The dispute rates and wasted money provide all the evidence that is needed to support this view. A far better model would be for tradespeople to work for larger organisations where they can apply the specific skills they’ve learned in their trades. The qualifications and investment criteria for running a “renovation business” need to change.
It will never be perfect and there will always be issues with individual projects, but if there were more large renovation companies, the situation would be far better. And one more tip - don’t get Bob to build your car. Go to Toyota.
Jon Bridge is a co-founder of Refresh Renovations.
In the media
Jon also gives comment in this Stuff.co.nz article about whether it is time to abandon sole tradies, read the full article here.
Take a look here at Refresh customer, Paula who had an experience with the fragmented industry before using Refresh on her project. Another happy customer.
Want to avoid the very fragmented industry and get in a renovation project management company to manage your renovation from start to finish? Get in touch for a free consultation to tell us about your plans!