Is contract work worth it if you’re a KBB retailer? Many see it as low-margin and risky, others find it a vital extra string to their bow that helps balance out any ups and downs in demand. Chris Frankland investigates…
More KBB retailers than you might think have found that undertaking work for developers and house builders has become a significant part of their business.
In a survey of our kbbreview100 retailer think tank, 57% said they did undertake contract work, while in a separate poll of retailers on LinkedIn that figure was 58%.
Many regard adding contract work to their business as a useful additional income stream. With recession stalking the country, the latest figures from Deloitte’s Consumer Tracker suggest that 24% of consumers are planning to reduce their spending on big-ticket items, although the British Retail Consortium is predicting an upturn in consumer activity in the second half of 2023.
Meanwhile, in the construction sector, while the latest survey for 2023/24 from specialist Glenigan suggests that private housing projects may see a 5% dip in 2023, it predicts a strong comeback in 2024 with a 24% upturn – the largest in any construction sector.
Sector experts also point out that confidence among consumers will also have been buoyed by predictions made in the Spring Budget suggesting inflation will have been slashed to 2.9% by the end of 2023. This would see the return of a significant amount of spending power.
Any market sector, especially in turbulent times, will suffer its ups and downs, but many of the retailers we spoke to believe that having a mix of retail and contract customers helps balance the risks.
Nathan Hopper, a director of Simply Kitchens in Plymouth, sees it this way: “It is regular and consistent work and we find that by maintaining a balance between contract and retail – typically 70% retail, 30% contract – it helps flatten out the peaks and troughs.”
Ciaran Leyne, a director at Trilogy Design in Essex, also sees the value in having contract work in its portfolio of clients. He says: “The repeat business is very useful to us. As we start each year, we know we have a certain value of contract work in the pipeline throughout the year. It helps us forecast and allocate resources accordingly.”
Constant revenue
At Hutton Kitchens in Billericay, managing director Ed Scott thinks the same way, but adds another positive reason for doing contract work: “We undertake small new-build projects for several local house builders. This is regular repeat business without having to spend anything on marketing.”
Lisa Palmer is a director at Elgar Kitchens in Worcester, where 50% of their business is contract work, dealing with anything from single plots up to 150. She also confirms that “while margins are lower, contract work is a constant revenue stream”.
That brings us neatly on to one of the main reasons retailers say they steer clear of contract work – margins and price.
Stewart Woodruff, owner of MBK Design in Maidstone, is in no doubt about what he sees as the pitfalls and risks. He tells kbbreview: “They take up too much of your time, so you need a dedicated contracts manager. The profit margins are far too low for you to service them at the same quality as a domestic client. The payment terms can be in their favour, unless you stick to your own payment terms as part of your contract with them.”
One positive he acknowledges is that “they can supply a good percentage of your turnover, if managed right”, but adds that “as a small company, we cannot spare the time chasing after small-margin work”.
Russell Buckley, a director of Stuart Henry Kitchens in the Wirral, shares many of Woodruff’s misgivings: “We do not have the capacity to offer contract work, as we are only a small independent. Also, contracts can be fraught with financial dangers as the companies you are doing it for often don’t pay on time, leaving a cash-flow problem.”
Rubina Hughes, owner of Zara Kitchen Design in Wokingham, has done contract work in the past, but shares some of these concerns: “Margins are low unless a volume of work or regular work can be guaranteed. Payment terms are not favourable for the retailer who delivers all the goods before full payment is received, which can cause cash-flow problems and leave us open to not getting payment if the developer runs into problems themselves.”
But there are plenty of retailers who do make a go of contracts. What do they feel about the accusation that there is little or no profit in it?
Michael Pearcey, MD of C&C Kitchens in Essex, which has supplied thousands of kitchens to house builders, disagrees with that sentiment. “It is not always about price,” her said. “A lot of smaller, regional developers need expert advice. These developers are not going to get the hand-holding that they require from national suppliers.
“Smaller house builders are looking for quality and the ability to alter the design to suit
a purchaser’s requirements. We will often meet with the purchaser of a property. National suppliers can’t offer this bespoke service.”
Service
Toby Scott, head of contracts at RFK, agrees price is not the only motivation and that some developers are happy to pay more for good service: “The lower-quantity, more exclusive developers like to set themselves apart from the big sheds and the way to do this is on kitchens and bathrooms. Even with the larger-scale developers, all they want is an easy life – for us to be on time and offer good service. If this comes in at a slightly higher price point, they are happy to pay this to get all the extra benefits we offer.”
That is not to say that margins may not be lower than on retail projects. Derek Miller, general manager at Scope Bathrooms in Glasgow, says: “Contracts are certainly price-sensitive and margins are lower than retail sales. However, it is all about scale of operation and ensuring that margins aren’t eroded. Strong partnerships with the supply chain are hugely important, as is strong commercial awareness.”
Palmer at Elgar agrees that margins are lower, but reiterates the point about contract work being regular, repeat business.
Picking up on the comments from RFK’s Scott, Keith Barker of Neü Projects, who founded Nobilia GB, where he handled many large-scale contracts, confirmed that relationships are crucial.
He says: “It’s all about building relationships. The contracts business is purely relationships and those relationships could take nine months to build. You go very slowly with them and you let them control it. From small acorns, it will grow into a big business.”
Leyne at Trilogy Design agrees that relationships are key: “There is a core group of developers we have worked with for many years. The relationship and trust we have with them is very important to us. When designing their kitchens, we already know what they like/dislike, their typical spend, their favoured appliance brand etc, which leads to fewer revisions. When installing, we know their site procedures and expectations. When we add new developers to our client list, our aim is to build a long-lasting relationship – to become their main or only supplier for years to come.”
Commenting on its relationship with Miller’s Scope Bathrooms, Marc Gardiner of Stephen Gardiner Homes, says: “Scope will note all of the requirements the client sets when choosing their sanitaryware and will provide us with costings and images to pass on to the clients. This takes a lot of weight from our shoulders and work off our desk. We are advised if there are long lead times and manage this into our programmes.”
So how do those that are doing a lot of contract work deal with payments and credit terms?
C&C’s Pearcey sets out his experience: “A smaller house builder may not have set payment terms and will pay on an ad hoc basis. A larger developer will have set payment terms and often withhold a retention against remedial works that may be required. The second half of the [payment] is sometimes not released for 12 months. That said, you can set your own terms.
“If the prospective house builder won’t accept them, and they are reasonable, you must decide on whether you want to take the job on. Always ask for 25% on the first contract with a house builder. Check out their finances. Allow whatever credit you feel comfortable with and stick to it religiously. Halt works if you don’t feel comfortable with the situation.”
Scott at RFK also advises caution: “For new developers, we negotiate favourable terms to try to limit our exposure. For pre-existing clients, depending on how good or bad they usually are, we put credit limits in place, ensure we can handle a late payment or two in terms of our cash flow or perhaps negotiate early settlement discounts to tempt them to pay us early.”
Miller at Scope Bathrooms advises robust credit control procedures: “Most contract customers have credit accounts with us, so make payments a month or so after taking delivery. Strong credit control procedures and practices are required to stay on top of this and to avoid extended delays. The only way to deal with the cash flow situation is to ensure that strong working capital is retained in the business.”
So what kind of contract work should you be looking for to break into this potentially lucrative market?
Miller is clear on this: “Initially, retailers should target low-volume, high-end, local builders, who effectively build one plot at a time. Knowledge on completion dates and numbers is critical as things increase. Once the supplier deals with multiple builders, it effectively becomes a numbers game, however, with many boxes being shifted.”
Palmer at Elgar agrees and advises newbies to “only approach sites you can handle”, adding that “there is no point tendering for a site of 150 properties if you don’t have the manpower to handle it”. RFK’s Scott adds that “you may be better off with five-or-so plots in rural settings with a much more bespoke feel”.
Targeting manageable projects is a point picked up by Buckley at Stuart Henry Kitchens, who adds: “Big kitchen suppliers who supply KBB retailers – the likes of Symphony, and Omega etc, also have contracts departments, so you are battling for business with the people who supply you.”
But have things got more cutthroat as the cost-of-living crisis bites? Our retailers tell us that while some builders are cutting back on the cost of a kitchen or bathroom at the lower end of the market, at the higher end, many are happy to continue to pay for the quality.
Either way, all who are doing contacts recommend having a team dedicated to that side of the business. Scott believes this is a good idea “because contracts operate in a different way than retail and keeping them apart avoids confusion”.
So what are the best ways to find contract work? Elgar’s Palmer advises to regularly check local planning applications, but they also have a sales rep who goes out and builds relationships with local builders. Others keep an eye out for new developer boards going up, look out for tender opportunities online, and RFK’s Scott also says that finding a local estate agent that specialises in new builds “can bring in a lot of business”.
So should you consider it or not? Elgar’s Palmer is enthusiastic, advising: “Definitely give it a go. To begin with, approach your local builders, building one or two mid- to high-end properties, maybe one or two bespoke properties a year. These are the guys who normally want something a bit different and a step up from your off-the-shelf Howdens, Benchmarx and Magnet offering.”
“It’s definitely not for the faint-hearted,” adds RFK’s Scott, “but it can be a lucrative addition to your normal income stream and helps spread the risk of exposure to varying market conditions.”
And Pearcey at C&C ends with some sound advice: “Start small, set out your payment terms clearly. Most smaller developments are no more complicated than a retail client who is building a new house or extension.”
WHAT HOUSE BUILDERS WANT
We asked a developer that works regularly with retailer RFK what they are looking for from a retail contracts partner
Q: What are you the main things you are looking for from a retailer hoping to supply you with kitchens or bathrooms?
A: A high-quality and durable product at a reasonable price point alongside excellent customer service, both pre- and post-installation. Well perceived brands are important to our purchasers, particularly in respect of specified sanitaryware/brassware and appliances, as they want to know that we are fitting products that are in line with their expectations of the houses that we build. As the kitchen supplier may be less well known to them, it’s important that we can show them a wide selection of well-presented quality samples on-site at the sales office or at the kitchen retailer’s showroom.
Q: How important is that they work hand in hand with other trades on-site?
A: This depends upon the complexity of what is being supplied. For example, the electrical subcontractor may want to meet with the kitchen supplier to discuss more complex lighting. Generally, however, this is managed by the site manager and any liaison takes place between the office, site and the supplier.
Although we specify the sanitaryware and brassware with our chosen bathroom supplier, our plumbing and heating subcontractor places the order directly with them and calls off the products in line with our build programme.
Q: How critical is it for retailers to hit deadlines for delivery?
A: It’s really important that they work closely with us to ensure timely and correct delivery of products. This is critical as delays to one aspect of a build programme delays the trades that follow on. This can delay completion, which means increased costs to us. It can also impact upon the end customer, financially and emotionally, and have a negative effect on how they perceive us as company.
Q: With an uncertain economic outlook, how crucial a factor is price, or is quality of product and service the first priority?
A: Price is always a crucial factor, however the quality of the product is vital, as is the speedy remediation of any issues following installation and handover, as we pride ourselves on building high-quality homes with an extremely good specification