Many contractors aren’t making what they should on their jobs. Even if you’ve got your bidding down, you may still be bleeding profits. What are the things to look for and what can we do about it? Find out on this week’s episode.
Topics we cover in this episode include:
- Don’t get burned by change orders
- Make sure you’re billing everything you have the right to bill
- Double check the math on your bids
- Get on top of your job costing and make it as real time as possible
- Streamline and actively manage your supply chain
- Put systems and workflows in place so critical steps are not missed
- Adopt lean construction principles
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com
[00:00:05] Wade Carpenter: Many contractors aren’t making what they should on their jobs. Even if you’ve got your bidding down, you may still be bleeding profits. What are the things to look for and what can we do about it?
Come on in, let’s talk about it. This is the Contractor Success Forum. If you’re new here, I’m Wade Carpenter with the Carpenter Company CPAs. With me, my co host, Stephen Brown, with McDaniel Whitley, Bonding and Insurance. Stephen, initial thoughts on this one, Bleeding Profits?
[00:00:31] Stephen Brown: Well, this is titled The Seven Ways to Stop Bleeding Profits from Your Construction Project. So, if you’re not aware of these seven items during the course of your construction project, odds are you’re bleeding profits, wouldn’t you say, Wade?
[00:00:47] Wade Carpenter: Well, there’s a lot of hidden ways that we lose profit every day, I suppose, and
[00:00:52] Stephen Brown: Well, I guess that’s the point that we wanted to get across. There’s lots of ways, but I think the seven that you laid out, Wade, are the most common ones. They’re the easiest ones to wrap your mind around and get a hold of. So let’s wade right into them. No pun intended.
[00:01:10] Wade Carpenter: Okay. Well, like I said, we probably won’t hit all the leaks in our profit.
Don’t get burned by change orders
[00:01:14] Wade Carpenter: But the first one I had on my list is Change Orders, getting them documented and secured, signed. I see that all the time. A lot of times we’ll just do this for me. We’ll take care of it later.
And I’ve seen a lot of contractors burned. You see that?
[00:01:30] Stephen Brown: the time, nonstop.
So many contractors will do a job for someone that they expect will lead to more business. And they’ll do it at cost or below cost to get their foot in the door. But I don’t think we’re talking about that so much as change orders have costs. Even if there are huge change orders, there’s costs associated with those.
And you bid in that cost before you’ve given the owner the change order. And if you don’t get that documented, first of all, signed off on by the owner, it’s no good. It’s no good. And my thinking is getting it secured by not only having it signed, but by getting it in your accounting system and accounting for it.
If you’re not doing that, you’re going to bleed profit.
[00:02:16] Wade Carpenter: Right. I mean, I see it as well.
I’ve seen some contractors burned really badly. And as you said, a lot of times we want to, hey, we’ll get in good with this general contractor or the owner, and they’ll give us some more work. And so we do these little things and they end up maybe it’s a little bit here, a little bit there, but a lot of times we don’t document these things.
And I actually had, one of the contractors, it was rather interesting because if they put it in an email, at least you got some kind of start to it, but a lot of times they’re on a job site and they’re just telling the PM just, can you just do this for me?
And I had one contractor that was– I think he’s in Arkansas. I’m trying to remember where he is. He had a little like recorder on his phone and he’s like, at least say it here into the phone.
And they also created a workflow to say, hey, this is how the change order should be.
Because a lot of times change orders are just the wild, wild west of construction contracts. It just–
[00:03:16] Stephen Brown: And there can be a lot of them.
[00:03:17] Wade Carpenter: Right.
[00:03:18] Stephen Brown: Especially when that owner notices you’re not documenting them or giving them firm costs to do that. It’s almost like you have to just stop with the owner and say, this is the cost. And I think that’s great getting it recorded, having some confirmation that not only was the change order agreed upon, but also that the person issuing the change order has the authority to issue the change order. That comes up as well.
So, right. Getting change orders documented and secured.
[00:03:49] Wade Carpenter: Well, one other thought on that. All these programs that will transcribe. Some people are doing Zoom meetings now for project, but a lot of people still like to do those in person. But you can put that recording on the phone as well, and not just the voice notes, but it will also transcribe those notes, for both the general contractor as well as the subs.
So a lot of times that kind of documentation can help go a long way. So that was the only thing I wanted to add there.
Make sure you’re billing everything you have the right to bill
[00:04:15] Wade Carpenter: Second thing I wanted to add here, making sure you bill everything that you have a right to bill. And sometimes it’s a matter of, hey, did some of these things that were sitting in our contingency, but the project manager got too busy, didn’t communicate that to accounting or whoever was doing the billing.
And a lot of those things get missed. And sometimes you have a right to bill it. And sometimes, well, okay, we’re just going to be the nice guy and not worry about it, but sometimes it will come back to bite you.
You ever see that?
[00:04:46] Stephen Brown: Absolutely. I, I think that topic is self evident, but making sure you bill everything that you have a right to bill seems so simple. Just about getting change orders documented, but that’s what I like about all seven of these. They’re clear and concise and there’s a lot of meat to them.
[00:05:04] Wade Carpenter: Well, I realize, the project managers are busy, the owners are busy, sometimes we have some people that are essentially one man bands, and they get too busy to take care of these little things. But that can go a long way to making sure that you have the profit in your jobs as well as the ability to grow beyond yourself.
[00:05:24] Stephen Brown: Absolutely. Okay.
Double check the math on your bids
[00:05:25] Wade Carpenter: We’ll move on to number three, and this is bleeding profits from the start of your contract is having somebody check and double check the math on your bids. And sometimes just a gut check on hey, did I include everything? You may get that bid because you’re the lowest bidder, but you’ve left out a huge chunk of costs that you didn’t consider. I’ve seen that many times, and I don’t know if you’ve got any stories.
[00:05:50] Stephen Brown: Whoa, do I ever, yeah. I’ll see a big bid spread. In the bonding world a big bid spread is generally any amount over 10%. That’s the difference between the low bidder and a second low bidder.
And say your customer has a huge bid spread. They’re the low bidder and they’re going to be awarded the job. You have a very short time frame to get to the owner and the owners and let them know in writing that you made a material mistake in your estimate and you’re withdrawing your bid. Or you’re stuck and you have so many customers go, look, I don’t know what that said, I don’t know what, what they were thinking. Usually there’s two bidders and that other bidder just must be crazy. He was looking for a home run here.
But when you have two, three, four, five, six bidders on the same project. And they’re way apart from you and they’re grouped together., Then generally you’ve made a mistake. That’s, that’s a good way to look at it. You might not want to admit it, but you have an ability to get out of that job if you made a mistake on your bid.
And so many times just having a separate set of eyes, the comptroller, the CFO, just going over your numbers. Just making sure they all add up correctly. It’s huge.
[00:07:10] Wade Carpenter: And checking your pay applications too. I know this is not really bleeding profits cause you eventually get it, but that eats into your cashflow. So I see a lot of times that people do not do AIA billings right, and then somebody comes back later. And at some point, hopefully you end up with the right amount of the fixed price contract, but having somebody double check is, sometimes it doesn’t take that long to do, but can save you a lot of heartache.
[00:07:37] Stephen Brown: Absolutely.
[00:07:38] Wade Carpenter: Okay, well, enough said on that one.
[00:07:41] Stephen Brown: Number four.
[00:07:42] Wade Carpenter: Number four.
Get on top of your job costing and make it as real time as possible
[00:07:43] Wade Carpenter: One thing I preach all the time, I hate to sound self serving because this is what I do, but get on top of your job costing, and make it as real time as possible. The short answer on this is, if you know where you are and you know you’re bleeding, you can do something about it.
Don’t wait until you’re bled out and you don’t know that you had a hole in there.
Does that make any sense?
[00:08:04] Stephen Brown: Oh yeah.
I, I was watching a Western, last weekend. The guy got shot in the leg and he was too busy to realize that he was bleeding out and he died. So, yeah, that’s a good analogy, the bleeding out part, because it’s just amazing, especially now with material prices going up and down, up and down, mostly up how not having the job costs that are involved with a project and, and you’re seeing, are these tracking with what, what they’re supposed to track? With what we bid and about what our costs are?
And if they’re not, why? And it’s something that you as the owner or manager of construction projects can stop. You can just put the brakes on it until you can figure it out. And a lot of times you have to do that fast. So construction, you can bleed out a lot faster than a gunfighter shot in the leg, I think.
[00:08:58] Wade Carpenter: Okay. Interesting analogy too.
[00:09:00] Stephen Brown: Yeah.
Streamline and actively manage your supply chain
[00:09:01] Wade Carpenter: But that also does bring in jumping one ahead. Number six, and we’ll come back to number five, but you know, the supply chain. And I think after COVID, a lot of people were awakened to how not only costs go out of control when your supply chain gets messed up, but I think we all know that one major piece that you need to get in on that job and you can’t get the material for it. Basically streamlining and actively managing your supply chain–
[00:09:30] Stephen Brown: Right.
[00:09:31] Wade Carpenter: — long way to–
[00:09:32] Stephen Brown: and the salesman saying, I can only hold these prices for 30 days because it’s just such great demand and it’s so hard to get. So you put in your, you put in your bid and then you find out that you’re not awarded for 30, 60 days. And you’re still stuck on that unless there’s an escalation clause in your contract.
So, I think number six is a great point. Streamline and actively manage your supply chain.
[00:09:57] Wade Carpenter: And I get it too, but you know, a lot of times you don’t have the cash flow. You don’t want to order any earlier than you really have to. But if it’s going to take nine months to get that part, at some point you need to go ahead and order it. And sometimes you have to pay for some things up front. So it’s a balancing act. Because nobody wants the cash flow to go out of pocket, but going back to the whole thing, a lot of things we learned from COVID and supply chain issues is, well, do we need to maybe start doing, cost plus or time on materials and type contracts instead? Or these escalation clauses, you said, because a lot of people got burned on that.
As well as, if we’ve got these late completion clauses and these penalty clauses, that can get very expensive. So, I’ve actually known a couple of contractors that have actually hired somebody to do and manage that purchasing and the supply chain after COVID. And, whether you need somebody to do that or not, I believe actively managing it can go a long way.
Making sure that your project managers know that it’s going to take some time to get certain parts or some, materials or something that goes in on that job can make a big difference.
[00:11:09] Stephen Brown: So going back to number five.
Put systems and workflows in place so critical steps are not missed
[00:11:11] Wade Carpenter: Okay. This is sort of a general one, but number five is basically the systems and workflows in place so that critical steps are not missed. And I think we did one episode I don’t know how many back. We talked about checklists and how those can help, but having some simple checklist of saying this is our process for getting a bill out the door for, making sure that we build this properly and we considered everything. Making sure we do the walkthroughs and those kinds of things.
[00:11:42] Stephen Brown: Sure.
[00:11:43] Wade Carpenter: Picking things before trying to get permits and.
[00:11:46] Stephen Brown: Right. Most importantly, this is our process for starting the job.
[00:11:50] Wade Carpenter: Right.
Getting it started.
So there’s a ton of systems and workflows. And we’ve had a couple of episodes on talking about AI and if you have no processes you know, get documenting something, you get ChatGPT to start you something. It may not be exactly what you want, but you can take what you’ve got and at least it’s a good starting point.
Does that make sense?
[00:12:13] Stephen Brown: Absolutely. Absolutely.
[00:12:16] Wade Carpenter: 20 plus, almost 25 years ago now, when I started my firm after leaving the firms in Atlanta, I read the book, The E Myth by Michael Gerber, and I may have talked about that multiple times on here.
But that’s one of the biggest things that contractors can do is the systems and processes. And I love what that book teaches. And what you find is that for 25 years of documenting processes, a lot of people don’t want to take the time to do it. And this AI, chat GPT, stuff like that can easily do it in minutes or at least have you some kind of starting point in minutes, literally.
[00:12:53] Stephen Brown: You’re right about that. And the more you grow the ability to communicate amongst everyone in your organization becomes more and more difficult and one party doesn’t know what the other party’s doing and it becomes very stressful. Then they don’t like working there anymore. But you’ve communicated something or you think you have, but it’s not a system or process that you regularly use.
So you’re, you’re mad at your employees for not listening to you. That bleeds profit. It just doesn’t need to. If you have those systems and workflow processes in place, and you are monitoring them each step of the way that they’re going along, someone else is monitoring and you’re monitoring them, however you want to do it.
You can see that when part of those processes of getting a project completed stop, you’re bleeding money.
[00:13:45] Wade Carpenter: What you just said too is a absolute another reason that. You should be documenting in these systems. Because, I know anybody running any kind of business is going to have some miscommunications when you have growth and trying to tell your employees what to do.
And you can get mad all you want at your employees, like you said, but, if they’re not clear on the process, maybe you’ve told them, but are you going to be able to discipline them if you don’t have it written out and they don’t know really what that step is, or they did it–
[00:14:18] Stephen Brown: It’s not getting a change order in writing.
[00:14:21] Wade Carpenter: Right. Again, there’s a lot we could talk about there, but getting employees to understand what the processes are, as well as, following the process. If you got something at least documented, at least, you’ve got something to go back and say, hey, you screwed this up.
[00:14:36] Stephen Brown: Gotcha.
[00:14:36] Wade Carpenter: Really not the point of today.
But anyway, seven is probably even more wide open than the last one.
Adopt lean construction principles
[00:14:43] Wade Carpenter: Adopting Lean Construction Principles. And that embodies a lot of things. It’s like figuring out where your customer values the most in the project.
Optimizing in the planning. Eliminating waste, looking for continuous improvement in your processes, empowering your workers to help you build the system and improve the system, focusing on the quality in the work, so you don’t have go back and, you know, warranty type work that obviously can play into the profitability. Use of technology, make a lot of contractors are technology averse, and they don’t do things like ChatGPT or they’d like to see some of these softwares, but they’re really not that tech savvy and they’re afraid of it.
[00:15:27] Stephen Brown: Take for example you’re, you’re a construction manager and you approach an owner. about managing the project. And you’ve got to convince them that you have all seven of these items in place, especially the lean construction practices on the job that you are in charge of enforcing so the owner doesn’t have to.
That’s how you get your profit, managing a construction project. So, but that same lean construction practices, principles they apply to everyone. It’s where can I make it a little leaner?
We don’t want to make everyone miserable and we don’t want to slow the job down over it. Because time is money, right? But, lean construction principles, it’s always changing and there’s always something more you can learn about a lean construction practice.
And the folks that like tech will say tech’s the best way to go on that. Other times it’s just adopting a safety program that really lets your workers know this is coming from management. You’re going to lose your job. If you get hurt and you’re not doing what we’ve been preaching to you to do. It’s your fault and there’ll be consequences.
[00:16:39] Wade Carpenter: Right,
[00:16:39] Stephen Brown: There’s lot going into it and I would say that all seven of these, I think having lean construction practices or principles since the last one is perfect because they all tie in together, don’t you think?
[00:16:52] Wade Carpenter: They do. And I’m sure there’s other nuances that we didn’t hit in this. Maybe we didn’t stop all the bleeding, but maybe we slowed it down quite a bit. And–
[00:17:01] Stephen Brown: Okay.
[00:17:01] Wade Carpenter: –if you’re in growth mode, a lot of these things you gotta adopt is putting all these systems in place as you grow.
[00:17:07] Stephen Brown: Okay. Well, I’d like to, before we close out the podcast, just go over these seven again. Can I just read them out?
[00:17:15] Wade Carpenter: Absolutely
[00:17:15] Stephen Brown: Okay, number one, getting change orders documented and secured. Number two, making sure you billed everything that you have a right to bill. Number three, having someone else double check your bids. Number four, get on top of your job costing and make it as real time as possible.
Number five, have systems and workflows in place so that critical steps are not missed. Number six, streamline and actively manage your supply chain. And number seven, adopt lean construction practices, principles. There you go.
[00:17:48] Wade Carpenter: Enough said, I think.
[00:17:50] Stephen Brown: We may do another podcast called Another Seven Ways to Stop Bleeding.
But I think this is a great start, Wade. I hope people get something out of it. Like I told you before the podcast, I have a customer I’m literally going to email this to as soon as we finish podcasting.
[00:18:08] Wade Carpenter: Well actually it’s a topic I’ve enjoyed as my myself, but anyway.
[00:18:12] Stephen Brown: That’s what we’re all about on the Contractor Success Forum is keeping your profits in your project. Cause if you make money, all sorts of good things happen. Good things for you, good things for your employees good things for your vendors, good things for everyone. So we want to keep you going strong and we want to keep you around for as long as you want to do business.
[00:18:34] Wade Carpenter: Okay. Let’s go ahead and wrap this up. Thank you all for listening to the Contractor Success Forum. Check out the show notes at contractorsuccessforum.com or on the Carpenter CPA’s YouTube channel for more information. We would appreciate it if you’d consider subscribing and follow us every week as we post a new episode.
And we will look forward to seeing you on the next show.