My goal was to get the kitchen in “good enough” shape to
sell since it was the room that needed the biggest improvement. I suspect this
will aid in getting a better sale price, we’ll see soon enough. I initially
budgeted $5000 for the remodel, which included refinishing most of the
cabinets, the floor and putting it a countertop that was a little higher
quality than the existing one.
I hired a guy to do all this, and while he didn’t provide me
with a concrete estimate (mistake #1), he was confident that the work and
budget were reasonable. We also agreed that the job would take 2-3 weeks, again
given the assurance that this may not be exact, but it is reasonable. The deal
was that I pay for materials and labor at an hourly rate. He’s not an
experienced contractor, but I don’t mind working with a guy trying to get
started and help out a local.
Ultimately, the job took about 6 weeks and over $9000. Ouch!
While that’s certainly not ideal, it’s interesting looking back what I
should’ve done differently. I haven’t worked with a ton of contractors
directly, so I might have unrealistic expectations on what they will agree to.
However, my experience with the contractor that remodeled my bathroom was far
better in this respect, and I think I pinpointed three interdependent reasons
why.
Risk Ownership
One issue that didn’t occur to me when agreeing to the flat
hourly rate was that I owned all the risk. I don’t expect the contractor to
assume all the risk either, but any delay to the work, any problems, and
changes to the plan (even a non-existent one) fall on me. In retrospect, this
is wasn’t a wise move. One reason for that is that it’s extremely unlikely to
reap the rewards of this risk. Are there really any serious expectations that a
job like this will go significantly under
budget? Yeah, right.
In class, as we keep going through valuation of business and
risk analysis, generally everyone is looking to at least balance risk and
reward, if not find opportunities with high reward for low risk (a feat that if
I could do reliably would negate the need for school, and I’d currently be
having a beer with Warren Buffet).
So, given a chance to redo this remodel, I’d probably insist
on some way to mitigate the risk ownership. On the previous remodel, I’m sure I
paid for labor somewhat directly (it isn’t clear from his invoice), but this
was also never discussed. We agreed on a budget and work to be done and it was
done. So, either everything stayed on schedule and I didn’t notice that I paid
direct labor or he was just charging me for the work and assuming all the risk
on his own. Unfortunately, I just don’t have enough data to know what a
reasonable labor payment scheme that shares the risk appropriately would be.
Estimation
Next, we never agreed on a clear estimation of the work
required. He had concerns about how much time the cabinet refinishing would
take. Aside from that, I never got a clear estimation on how much and how long
this would actually take. This ties to the risk ownership in that I agreed to
the job with no estimation and all the risk.
We’ve been working a lot on valuation, which definitely
requires some reasonable expectations. I’m curious to see how this goes in
practice. It seems incredibly difficult, and everyone says that you end up
throwing out the plan on day one anyway. As Mike Tyson has said, “everyone has
a plan until they get punched in the mouth.”
We ended up never even trying to estimate the job in any
formal sense. In retrospect, even with some serious unknowns, I wish I had
written down some estimates, it would have naturally created triggers when the
estimates were off. Which leads to…
Measurement
Throughout the weeks of work, I’d ask, “how we doin?” and
get a response, “alright, some minor hiccups but we’re making progress.” Sounds
good, now that that’s under control, time to get back to accounting homework,
right? Well, lesson learned. Had I actually been tracking the labor hours along
the way, I wouldn’t have been shocked by it at the end. Near the end of the
project, he gives me all his worked hours, and I about spewed tea all over the
place. When I was at around the budget of the project, it was roughly half
done! The huge shock of this was not a welcome surprise.
In the end, I was a horrible manager. I was in charge, I had
the ability to collect the necessary data, and I decided to work on homework
instead. Lesson learned, homework is never the answer. With tongue removed from cheek, I do have to admit this was a valuable learning experience on setting expectations, measuring progress and dealing with some difficult conversations.
