From file "021_pss" entitled "PWrisk.qxd" page 01
From file "021_pss" entitled "PWrisk.qxd" page 01
From file "022_pss" entitled "PWrisk.qxd" page 01
From file "022_pss" entitled "PWrisk.qxd" page 01

Scherer Bros. Lumber recently found itself replacing cement board siding on 60 homes, siding that had been installed by a subcontractor the dealer had hired four years ago. Back then, the Brooklyn Park, Minn.–based pro dealer's project management “wasn't what it should have been,” admits COO Mark Scherer, and the dealer's contractor subbed out the job to another contractor that installed the siding in such a way that separation at the seams eventually became visible. “It's not a construction defect, but it's ugly to look at,” Scherer says. Both subcontractors are out of business now, but the pro dealer felt that it couldn't abandon a project it had done for a builder that gives its yards a lot of business. “I don't think we had a signed contract with that builder at the time,” says Scherer, who declined to disclose to cost of the reinstallation.

Many pro dealers provide installation services just to be able to bid for production builders' purchases, especially when they're competing against large chains like Stock Building Supply, Building Materials Holding Corp., and Builders FirstSource, which also offer turnkey options. But installation can be an operational and profit headache, and several leading pro dealers either avoid the service altogether or dip their toes into installed sales gingerly.

“We don't see ourselves as being that efficient in providing this service, and we're assuming a huge liability,” says Jim Cavanaugh, chairman of Broken Arrow, Okla.–based Hope Lumber & Supply, which currently installs windows, doors, and millwork. Paul Vaughn, Hope's CFO, adds that builders have been adept at “passing down” new-home construction liability to their suppliers, which in turn usually attempt to transfer liability to installers.

That shifting, however contractually binding it might be, doesn't automatically absolve dealers when problems arise from installation projects. Jim Hynes, vice president of risk services for Indianapolis-based Indiana Lumbermens Insurance, continues to be “amazed” at how lax dealers can be about getting subs to sign contracts that assign risk. “In many cases, dealers aren't adequately protected when they diversify into installed sales,” asserts Mike Russell, national accounts executive for Owatonna, Minn.–based Federated Insurance.

Taking Responsibility Most dealers would probably agree with Rudi Lokkart, director of design centers and millwork for Monterey, Calif.–based Hayward Lumber, that one benefit of offering installation to builders is that “it gives you more control over the [distribution] process.”

But all of the dealers contacted for this article have fixed problems for valued builders beyond their one-year labor warrantees. “When we sign on with a [builder], we assume the liability, but then flow it down and, contractually, 100 percent falls on the subs' shoulders,” says John Parker, general manager of the construction services division for Suwanee, Ga.–based Williams Bros. Lumber. “That's the textbook answer. But it's different in the field because the customer always comes to us first if there's a problem.” Williams Bros., which generates between $2.5 million and $3 million in installed sales annually, makes every subcontractor sign a contract based on a template from the NAHB. (Those contracts, say other dealers, typically include “subrogation rights” that provide avenues of redress from insurers or subs if a project's installation is found deficient.)

Dealers usually require subs to carry $1 million in general liability insurance and an equal amount of personal injury coverage. Williams Bros. even uses an Excel program to track the expiration dates of each sub's certificate of insurance. In their contracts with subs, Hynes says dealers should ask for “hold harmless” clauses that clear them of liability in the event of a construction defect or shoddy workmanship. He and Russell note that dealers should insist on being named as additional insureds on their subs' policies. But insurers are reluctant to include additional insureds in policies, and often charge for those changes. “The irony is that insurers requiring us to get these liability agreements from subs are the same insurers telling dealers not to extend that coverage to their builder-customers,” observes Scherer.

Own It or Outsource? Scherer Bros., which generates more than $13 million in installed sales annually, uses subs for siding and framing, and a combination of subs and its own employees for other installations, such as shelving. Lokkart notes that Hayward Lumber's installed sales—which account for less than 3 percent of its annual revenue ($155 million in 2004)—have been limited by the availability of subs. For that reason, and to gain control over their own risk, more dealers are bringing installation in house.

Knoxville, Tenn.–based Tindell's Building Supply, which gets 9 percent of its $52 million annual sales from installation, maintains a crew of 23 installers and doesn't use subs at all in order “to control our [liability] exposure and costs,” says Ed Mahaffey, Tindell's vice president of sales.

St. Petersburg, Fla.–based Cox Lumber has about 45 installers on staff that it coordinates with 80 to 90 subs. Cox expects to generate at least $40 million from installed sales in 2006—a “big increase” over 2005, says David Swisher, general sales manager of its installed sales division—and to eventually expand into truss installation and shell construction. Swisher predicts those moves probably would require Cox to acquire companies with expertise in those areas.

As another example, over the next two years Omaha, Neb.–based Millard Lumber intends to add eight to 10 installers to its existing crew of 12 to 13 installers, and to use subs “only as backups,” says Tom Janing, Millard's installation superintendent. Millard is part of Andersen Windows' dealer services network, which requires dealers to meet insurance thresholds, so he didn't think his company would need to alter its coverage as it brings installation in house. But Hynes says dealers must add a “contracting class” to their policies when installers become part of their workforces.

Get It Right the First Time Regardless of whether they use subs or their own people, dealers say one sure way of minimizing construction risk is to have a safety-training program in place and skilled supervisors on the jobsite. Hope Lumber stopped offering turnkey framing because, explains Cavanaugh, it couldn't charge builders enough to cover the cost of its supervisors. Indiana Lumbermens'Hynes says that when his insurance company has subcontractor exposure, it “always” asks whether the dealer provides supervision.

Mahaffey adds that “quality inspections” are one of the keys to successful installation programs. Lokkart says that Hayward Lumber has avoided litigation by requiring subs and its own 12-person crew to follow installation practices that are more demanding than other pro dealers'. Supervisors, says Lokkart, provide the “best defense” against defects and callbacks by ensuring that installers “do the job right the first time so you don't have to hide behind a contract.” —John Caulfield is a contributing editor for PROSALES.