The benefits of outsourcing

The start of a new year is the perfect time to implement the Profit First cash management method in your business. Not sure how to get started? We’re sharing first steps and common mistakes to avoid this week. Join us and start your year off strong.

Topics we cover include:

• Why the start of a new year is an ideal time to implement Profit First
• The best way to fast-track implementation and make sure it’s done right
• The biggest hurdles people face when implementing and how to get past them
• Common questions about Profit First including around owner’s comp, payroll, and the tax account
• How to adjust your percentages based on changes in revenue and overhead
• Lifestyle congruence and how to use it to set meaningful revenue goals

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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com

TRANSCRIPT

[00:00:00] Rob Williams: Welcome to the Contractor Success Forum! Today, we were talking about outsourcing. Should you do it yourself or should you hire it out? So today at the Contractor Success Forum, as always we’re discussing financial strategies for running a more profitable, successful construction business.

And in one corner, we have Stephen Brown with McDaniel-Whitley buttoning, an insurance agency. And in the other corner, we have Wade Carpenter with Carpenter and Company, CPAs. I’m Rob Williams with IronGate Entrepreneurial Support Systems. And all three of us have decades of experience in the construction industry.

So today guys, we are talking about outsourcing. What is outsourcing? That was one of the first questions.

[00:00:56] Wade Carpenter: Well, one of the things I wanted to kind of address is, I think a lot of people are having a lot of trouble finding help just in their own business right now. I know we’ve talked about, what’d they call it? The great-

[00:01:07] Rob Williams: The great resignation. That’s what we should have called the show. How do you deal with the great resignation?

[00:01:14] Stephen Brown: Okay.

[00:01:14] Wade Carpenter: Yeah. And I think everybody’s like, for 25 cents more they’ll hop jobs right now. And it’s tough to find some people. Stephen, have you seen that?

[00:01:24] Stephen Brown: It is. And when you just talk about outsourcing, then you gotta worry about your subcontractors. How are they staffed? Can they get your job done? And everybody’s busy right now.

[00:01:33] Rob Williams: Trying to get my house rebuilt, I got a tree in it. And nobody’s showing up for five days. Normally it’d be like one day for lines on the ground or something like that. There’s so much, it’s not just that the storms. It’s that people are out, COVID and so many different things, and people are just leaving their jobs and starting their– there were over 4 million businesses started by September this year. I don’t know what the final year was. So that’s all these people leaving their jobs, starting their own businesses to be independent. And they’re coming from somewhere. They’re coming from your jobs, your, your companies. And so they’re leaving. I guess there are more things outsourcing. I’m outsourcing more than I had in the past.

[00:02:15] Wade Carpenter: I think there’s so many disincentives right now. Well, we’ve had extra unemployment and things like that. The child tax credit that people were getting during the year, there’s, there’s a lot of COVID incentives that are ending and I’m hoping the job market’s going to get better– or the supply people.

[00:02:31] Rob Williams: –which side you’re on.

[00:02:33] Wade Carpenter: Yeah, exactly, exactly. But I kind of break this down in a couple of different ways. Should you be looking for somebody for your core functions or the services you provide? And can you find those people?

[00:02:46] Rob Williams: I was calling electricians and they were so much further out than normal, even before the storm came. Cause I called them as soon as the storm hit and they’re like, man, we’re already lined out from regular work. We couldn’t get to you for a week or two anyway. And these are these emergency line down services.

So, I said that earlier, but…

[00:03:06] Wade Carpenter: It’s sad to see right now. And a lot of people are trying and having trouble finding people as well as even doing the core functions. So I kind of want to talk about, number one, the services you provide. Finding those core people. Sometimes people are doing some jobs that they shouldn’t be doing. And we try to do anything and everything for some people. And sometimes you can be a lot more profitable if you stick in the niches. That you’re very good at.

Rob. I know you talked about that sweet spot.

[00:03:36] Rob Williams: Oh yeah. That’s a big thing for me because I did the opposite. I’ve said this a couple of times in some of these shows that, the one day I was awake in finance class, it was about diversification. So I thought I should be doing everything differently, but the problem is that you, you’re not doing anything efficiently to make money.

So I had my hands and way too many different things. So I had a lot of revenue, but then my costs to do those, underlying costs, that’s indirect costs or operating expenses, were just enormous. Because I was always getting something new in the background, always buying something. Always changing something, looking for an opportunity.

I was always investing in some new thing. Every time I’d make money, it’s going right back into some other investment to get some other line of business going. You gotta balance that out and focus on your core which we’re in this thing, we were talking about our services that we’re providing for other people and stay in that core. You want to scale your business instead of growing it, not smartly. So your revenue grows faster than your costs as a percent, right?

[00:04:46] Wade Carpenter: Well, it’s a question of, you know, a lot of contractors think I need the money. And I can figure out how to make this work, versus, I can outsource it, pick a smaller margin and then hopefully do some more things.

But I think, Stephen, I know you and I probably can see various stories of when people should have outsourced and they later regretted it because they tried to do it themselves and they got in over their head.

[00:05:12] Stephen Brown: There there’s a lot of stories about folks that decided to do it themselves. And that creates an incredible financial headache. Not to mention the stress involved. But, you know, like a good story of outsourcing that just recently, one of my customers having to put a lot of concrete mat down in the river and they don’t do it all the time.

They’re contractors that do it all the time for errosion control. Anyway, it’s a big deal. He was going to have to buy and rent some cranes and there was some specialty work to do. And then you’ve got a very short window when the river’s down to get that mat down. Well, the people that supplied that mat for him said, hey, do you want us to go in and install this for you?

And he said, yeah, what will you charge me? And it was less than his cost. He’s yeah. And it’s already done. And the river’s up. So job finished. That’s a happy outsourcing story.

[00:06:08] Wade Carpenter: Well, I could think of some other ones, actually one that comes to mind also is around concrete. I had a contractor about a year and a half ago just pouring a concrete pad for a school. And they got the wrong guys to do it and they just did it and it looked horrible and they ended up having to tear it out and he had to hire it out to another subcontractor.

He lost his butt on a little concrete pad and it was sad to see when, sometimes it’s that wasn’t even really that big of a specialty thing, but sometimes they can backfire.

[00:06:38] Rob Williams: Yeah, I think some of the smart in-house stuff when we had brought it in-house was, well, I don’t even know if it was smart, but it was justified because we could not get the control. We acquired a heat and air company. When we were building our houses, we were building them faster than the heat and air guys couldn’t ever come, and same thing for the plumbing company. So we got in the plumbing and the heat and air business indirectly. We hired somebody, the plumber. And we hired the heat and air guy that was doing it and formed our company around him, just because we wanted to control it. Actually cost us more to do it.

Now with the plumbing, we were able to buy in a lot bigger quantities than the individual plumbers. Cause they, one, they may not have had the money and they didn’t want to take the risk of buying a thousand tubs that he may get stuck with. We’re buying them. We know we’ll use them. We won’t switch vendors from ourselves.

And I, cause I just got in a meeting with a client the other day about they had bought an electrician company because they couldn’t ever get the electricians to come put the temporary meters and some other, and their jobs were getting held up.

So they’re not residential, but they bought a residential company, and then they were in the residential, and then they started losing money on that. So that didn’t make sense instead of maybe hiring a guy with a license. But that was something that they actually brought in instead of outsourcing, but it was for a control reason.

So you know, bringing it in-house can make sense because you can get your turnover, your jobs, if you can’t get the things. Like this market was similar to when we bought those heat and air companies, I think it was early two thousands. Things for us were just going.

[00:08:18] Wade Carpenter: Right.

[00:08:18] Rob Williams: It came with a lot of headaches and a lot of problems. We had more people to manage. Our offices got bigger. We had to take the whole backside of our building. We had, it looked like a maze going through our building.

[00:08:29] Wade Carpenter: Right.

[00:08:31] Rob Williams: Kept growing and people. It was like more and more people.

[00:08:33] Wade Carpenter: That kind of reminds me of the old story about the guy with the squeaky floor. I don’t know if you guys know what I’m talking about, but I mean, he’s a guy with a squeaky floor and he figured he could fix it himself. So you know, he kept walking on the floor, so he’s like go and nail in one place and then he’d find well that didn’t fix the squeak.

And he spent months trying to screw around, nailing boards. And he finally called a guy in and the guy came in and he kinda leaned on one board, he screwed around with it. And then he just put one nail in one place and the squeak was gone and he gave him the bill for a hundred bucks.

And the guy said, well, can you itemize this bill? And it you know, it was a hundred bucks. So it was $1 for the nail and $99 for knowing where to nail. They saved them tons of time if he had just called him to begin with. And a lot of times that time trying to figure it out yourself can backfire on you. And, I think we’ve all seen it.

[00:09:34] Rob Williams: Yeah. Well, that that’s a good point, which reminded me of the story where the end of the story of us hiring all the things. When things slowed down, then we had all this extra overhead. Which was devastating to us. So we sold the company, but they ended up going broke eventually because they brought so many things– well, there were a lot of reasons, but one was for bringing so many things in house because you didn’t want to fire people and you couldn’t, and we didn’t want to do jobs for other outside either. They weren’t set up.

[00:10:06] Wade Carpenter: Right. Well, when I think about subcontracting the services you provide, we’ll talk about the core functions a little bit, but I think about, can you do this more profitably or are you going to spend longer to do it? Is it going to cost you– a lot of those things you were saying, is it going to cost you more in overhead to go get the materials and all the stuff that somebody that specialized in it can walk in and just take care of it and be done with it and you can move on with the job. But I think, one of the things that Rob, Stephen, I think all of us would probably tell you is take a hard look at, knowing where your profitability is on your jobs. And a lot of contractors don’t have the records to really break down their job costs and find out where they’re making the money.

[00:10:45] Stephen Brown: Isn’t it funny how every theme of everything we discuss kind of goes back to that?

[00:10:50] Wade Carpenter: Well, I know it may sound self-serving here because that’s, that’s what I do, but, I really believe that’s the core of making money and knowing how much it costs you and where you’re making the profit.

[00:11:01] Rob Williams: And it is. The core on the job cost, but also controlling that operating expense account to where it goes up and down. Like we were an example of great job costing and we would project it out. But I know some other guys that were very small offices that, they, they were maybe half our size, but when things went down, they were almost as profitable as they were when it went up because he had nothing in house. Very, very little.

And so he was able to go up and go down. So even in the bad years, he wasn’t losing money. Our up years were bigger than anybody else’s because that’s what we had projected on the spreadsheet and the projections with all our job costs. But we didn’t ever seem to estimate the downside as down as it would go. And so our bad years more than canceled out our up years, I think. We weren’t nimble enough with that many employees. Where, we’ll call him Johnny because his name was Johnny. Uh, but he was able to go up and down and swing, and so he’d kind of just go on a lot of vacations and stuff when things got bad. He had a bunch of rental houses and things like that. So he really, he may have had two guys he had to let go in the recession, not 200.

[00:12:15] Wade Carpenter: Right, exactly what you say. I think back 10 years ago with a great recession and how many people could not afford to keep their people on. And we all really kind of think about, how much are those people in house costing you? The payroll taxes, benefits, them taking vacations and holidays and all that stuff.

And as well as, if you providing, extra equipment or, things for them to do their job, it can add up really quickly.

[00:12:40] Rob Williams: Yep. So I was kind of going back to looking at our notes on discussing outsourcing of services versus the core functions you have. How is that different?

[00:12:52] Wade Carpenter: Well, as far as the core functions, I think about more of the back office stuff, and sometimes you can get it done better, faster, cheaper outsourcing it. And it may surprise some people to say, when I think about the core functions, like estimating and project management, accounting, legal, HR, those kinds of things.

Estimating and project management, we think go hand in hand, but I’ve known some contractors that have outsourced it and they’ve done it well. Especially if you’ve got an inexperienced project manager versus, I’ve seen some retired construction professionals that, they just want to do it on a part-time basis, but they can be so much more efficient. Or if you do all your own estimating, are you spending hours and hours bidding jobs and you work all day doing the jobs and then work till midnight doing estimates and paperwork?

[00:13:45] Rob Williams: Yeah. It really does. I remember us trying to bring that in-house because you had to, in those days, I thought you had to, because we didn’t have the internet in the old days and– we may have, it wasn’t that fast. But now, somebody’s virtually working.

We hired a guy to run this complicated estimating software system for us, that you had to set it all up and two years, he was there. Actually, I really feel sorry. I’m going to call him Danny, because his name was Danny. But he never got a house out. Where, if we had hired the guy that sold us the software, he charged a lot to actually run it and operate for us.

But I was like, we got hundreds of houses. So let’s just bring this thing in-house. Two years of salary versus what that guy cost and we would’ve had something in the first year. He probably costs about two years of salary, but that would have been cheaper. Because we would have had something in a month rather than two years later. We never had that complicated system that was not as user-friendly. You had to program everything back then.

[00:14:50] Wade Carpenter: Right. Well, when I think about like advising somebody whether they should outsource the core functions, do you have to do it on your premises? I–

[00:14:58] Rob Williams: Yeah, not anymore.

[00:14:59] Wade Carpenter: A lot of people don’t think they can possibly outsource estimating or project management or accounting, especially when you’re trying to do job costing. They don’t realize how much technology has enabled us to be able to do some of those things.

And you think about the cost of having a desk and having a computer for that person, as well as the payroll taxes overhead and all the things that go along with having an employee. The drama sometimes too. Should you really be doing that? And some of the best ones that I saw survive the great recession were the ones that had the low overhead. They ran it out of their kitchen table. They didn’t have an office. And it was a lot harder to do 10, 12, 15 years ago than it is today.

[00:15:44] Rob Williams: Oh, Yeah. Yeah. So on these core functions. So did we talk about when we should and shouldn’t do it? I think we talked about some stories, and examples of how if I went wrong.

[00:15:57] Wade Carpenter: Well, like the core functions, I guess we can name some of those things that I’ve seen. Obviously the stuff I do, the accounting bookkeeping, CFO services, maybe you don’t need a CFO all the time, but you know, a few hours a week or something like that.

[00:16:11] Rob Williams: The companies that I’ve seen the bookkeepers in there and the books that I’ve seen, as a rule, they’re just, I look at them the first time and I am confused because whoever has done these books do not know standard GAP procedures. They’re clearly, they’ve got things in there in places that’s like, why, what is this going on? And probably for cheaper and faster, they could hire somebody like you to do this.

[00:16:38] Wade Carpenter: Well, yeah. And right now it’s hard to find somebody who’s actually trained to do job costing and even just hiring it in-house. And if you do, you’re probably gonna pay a lot more money as well as what you get for the money, I think, probably, that a lot of people can say they worked in construction or whatever. And most owners really don’t know whether they know accounting. But there’s other functions. I mentioned, estimating and project management, HR, their IT, I’ve seen people that actually hired like in-house legal counsel. People trying to figure out how to do things like out of state licensing, where paying somebody to do that can be well-worth all the headaches that go into knowing how to do that. I’ve actually seen somebody that specialized in placing out of town crews in hotels and accommodating those kinds of things, little things like that.

For some of the benefits you can gain, they can definitely add up.

[00:17:34] Rob Williams: I was just thinking about the efficiency. Even if you had the same person that had the same skills, which when you hire it out, they’re more likely to have something that they focused on. That’s probably their sweet spot, so they’re probably smarter.

But even if they had the same skills, if it was the same person, I’ve seen all these studies, especially when we were in lean manufacturing, that if you get somebody to be 30% efficient on their work hours that they’re doing, you’re doing a hell of a job. I mean everything from bathroom to meetings, to just coffee talk, or setting up the office, all of these things that probably would not be on billable time when you’re outsourcing it, 30% is supposed to be a good number, which is kind of crazy, but.

You’d be paying three times as much. That’s one reason I like to outsource if I’m doing it hourly or specifically by the project, then I don’t have the risk, but when somebody sits down, they’re billing you for the time that they’re working only, they’re not billing you for breaks or any of that kind of stuff.

Plus all the benefits and everything. We used to underestimate that, not just the health, but you’ve got the office. You might have mileage your cars. You might have all kinds of other costs. Definitely taxes and things, but that might be built into the subcontractor.

[00:18:56] Wade Carpenter: I think about, I guess I can definitely relate to, from my perspective. I know a lot of people will hire a bookkeeper and they do it their own way but they never document any of these things. That person leaves or gets hit by a bus. Well, they’re starting over. And somebody like me, or an experienced project manager or estimator, I could walk in and diagnose somebody’s accounting system in a heartbeat, and document all those systems for you. Whereas somebody would probably spend a few years trying to do it in your own business.

[00:19:26] Rob Williams: Oh, yeah. I’m benefiting from that right now. One of my assistants, his island got hit by a typhoon. And so he’s been out, I haven’t talked to him. They, the whole island is out for a month. But right on clockwork, everything was so well-documented that every day, we’ve got somebody else just stepping in for him and doing that from the outsourcing company.

We had a handful of things that were not, I’m not going to do it as much anymore, but they were not documented. There were some side things I guess, that we were doing, but the main job function was really well documented that every day somebody’s coming in there four hours a day to do his job.

[00:20:05] Stephen Brown: Okay guys. Great discussion. I’m sold. I want us to outsource. Now we talked about outsourcing our work as a contract for, for subcontractors. We talked about core outsourcing for services. But how do you find all these? How do you find good people for outsourcing? I know for accounting, I could recommend you, Wade, for accounting issues. Rob, for you as a business coach. But how do you find good people for outsourcing?

[00:20:35] Rob Williams: I actually found mine from referrals, from other people that had been using those companies. I know you can’t always get it that way. That’s my favorite one, when you hear a success story from somebody else.

[00:20:45] Wade Carpenter: For me, I know a lot of people meet people at trade association meetings, things like that. And a lot of those people, they know people or somebody that’s retired and, maybe we can talk to somebody like that. But I think that’s, that’s the way to go.

And I guess what I’m thinking about it since it’s right around the first of the year, what I’d encourage people to do is take a hard look at what you’re subcontracting, what you are doing in house versus should be outsourcing. Your core functions. A lot of that stuff is, should the owner be spending extra time doing those things, worrying about accounting or, estimating and project management and trying to bid every job they can and spending all day working and then till midnight on their computer doing paperwork? What are you going to do different this year?

That’s my question.

[00:21:32] Rob Williams: Yeah. Do those things. Plan for it. When you’re going to start outsourcing, start writing down what you think those people are going to do. And once you start thinking about this for a while, especially if you can do in advance and have a couple of months, they mysteriously start popping up because you start seeing the people that are available. And one of the other things that we like to do in Profit First, I was just talking to two different people, two different clients about this, is as they know they want to hire this person so we’re making a new bank account just for that. So they’re putting that money away to see how that really impacts them. So they’re getting a new one, it’ll give them a little buffer because they’re going to have a little bit of a rough start getting that person. Well, whether that’s in-house or out-house, you won’t be as rough of a start if you’re hiring it out.

[00:22:22] Wade Carpenter: Outhouse?

[00:22:22] Rob Williams: Out -outhouse. Out of house, in-house out. I don’t know. I saw y’all smile there.

[00:22:31] Wade Carpenter: We could spend an hour plus talking about this, but maybe we can spend another episode sometime talking about finding those people because it is a problem right now.

[00:22:40] Stephen Brown: –thought on outsourcing. Something to think about.

[00:22:44] Rob Williams: The new year, new time to do it. New year, new way.

[00:22:48] Stephen Brown: Great. Another great idea. Another great topic from Contractor Success Forum.

[00:22:54] Rob Williams: That’s right. There you go. And this on that note was the Contractor Success forum. So go to those show notes, listen to the next episode. Thank you for listening to this episode and we will see you next time.