How To Build and Grow a Hugely Profitable Construction Business: Part II

Speaker 1 00:10 Good morning. Good morning everyone. Happy Saturday you are tuning into business illegal talk with Leo and Claudina here on power talk 1360. How are you this morning? Good morning Claudia and Ken morning, how are you all pumped up? Fall is here. Oh, is here. Football, football zone. There’s a lot going on that kids are back to school a little colder in the morning. So which makes it a little cold. They’re going to the gym as early as I do, but that’s a good thing. It’s all good. That’s all, you know. No matter what happens around the world, it helps me be centered and to what we’re going to talk about today because we have a show for you. And um, so just because of the feedback and because of this, um, industry and because of the topics that we discuss, we decided, Claudine and I decided to do a part two how to build a very profitable construction business.
Speaker 1 01:08 Yes, yes it is. You know, so it’s really led by the audience and thank you so much. We can do get your feedback. And so, I mean, it’s been, it’s been a great thing. And just, we always read the emails, listen to the comments, you know, and you can call on, you call our office and you talk to us and we know, and so this resonates with you. So hope you’re having a great Saturday, uh, today. And, um, so let’s, let’s start with the legal update. What’s going on? Well, we’ve got a couple of big things on, on the horizon and I think most people out here, if you’ve been listening to the news at all here in California, um, the Senate here in California has passed our, what we refer to as the Dynamex decision, um, where we have essentially, um, with very little exception, uh, eliminated 10 99 subcontractors.
Speaker 1 01:55 So if people are out there, what does that mean? That means that you can no longer either be a 10 99 subcontractor or use one. Now, again, there’s very few exceptions. They did. I know, of course, there’s a few industries who have enough leverage within the state here that have been able to carve out some exceptions. And that’s the real estate industry. Um, really, realtors can still be, uh, independent contractors without having to be employees. W two employees. Say that again please. So now in California, okay, you can virtually not be a 10 99 employee or use somebody as a 10 99 employee. They are now required to be a W2 regular. Actually, I shouldn’t even say it that way. 10 99 employee doesn’t make any sense. It’s an oxymoron. It is. I caught myself. It’s still early. So what it is is 10 99 independent contractors are virtually, I’m no longer in California. And w this came by, um, a decision that came through this California Supreme court last may. And um, then it moved
Speaker 2 03:00 from there. And with the legislature in the state of California, the way it is, um, they went ahead and what we called codify did it and made it a law. Now it was hard wire. It’s hardwired in, um, and less, I don’t know. I think it’s gonna happen. Well, Uber and Lyft drivers are now required to be employees. So people used to really love, I know people who drive for Uber, Lyft and they really love the idea that at their convenience they can just, you know, log onto their app and you know, go do some driving. No. Well we have you fill in a time sheet. Yes. You and your and they’re required to provide all of the employment benefits. So if you have more than 50 employees, health insurance, if you have, um, you know, um, unemployment insurance if you have benefit requirements. So we were talking earlier about the upcoming law that is going to require business owners to, to provide a retirement retirement plan.
Speaker 2 03:59 So a whole nother topic for another day. But yeah, it’s hot right now. It’s hot in the news. So if you’re an employer out there, um, be very, very careful. Do not use people as independent contractors and remembered that it’s not the state that’s gonna come in and I’m going to, you know, create some liability for you. It is the employee that can now go back and Sue for all of those employment benefits that they did not receive. Wow. There is some, there is a mic drop. Yeah, there it’s really, it’s devastating. And there are a lot of people who loved being Lyft drivers or Uber drivers. Um, or couriers. I was listening to a show, uh, earlier in the week where they were discussing, people were discussing the different things that they did. So hairdressers now, um, from what I understand, they did not get an exemption. Insurance did get an insurance about realtors.
Speaker 2 04:53 Realtors did get an exemption. Um, I think it’s really the industries in the stage destruction, which is what we’re talking about today. What’s the deal with construction construction. As long as the person you’re hiring is not doing the same type of work as the hiring entity. So GC and if you’re Mexicali managing the project, you can still use slumbers, right? Because you as the GC general contractor, you are not performing the same task as the person you’re hiring up to snuff with the 10 99 the asset test. That’s correct. It’s going to be very difficult. Lawyers and doctors have been carved out as well. Um, we don’t know what about accountants. Yes. I think accountants, I’ll also got to carve out. Are you sure? I’m not positive. This is so super new. Give me advice right now. I know the CS, this is so super new that if you have a question you definitely want to look it up. Reach out to attorneys. Kate, before we go too far down the road, Hey, I know you, if you never tune into the 10:00 AM show power talk and you are right now, you’re like, what the heck’s going on? Well, we’re business illegal talk with Lee and Claudine. We are
Speaker 1 05:58 practitioners. I am an outsource CFO and run a practice that covers the entire state of California where we all about building businesses, scaling and profitably in looking for multimillion dollar paydays for those owners who are exiting the business. And I have team up with a great attorney in front of mine, Claudine from the Sharon law firm who is an excellent person. She’ll tell you more about herself, but Oh my goodness, right now because she’s incredible and she is all about making sure you’re going to be sustainable and all these things that we’re talking about right now pertains risk and mitigation, which is what you do. So where should they anyone call if any questions about this thing, we’re not going to be able to get into a job. It’s very, very complicated. So if you can give us a call@twoninefourtwoseventwentytwohundredsofsharonlawfirmandweareinmodestoonstanderfordavenueoryoucanfindusonthewebatwwwsharon-law.com and that’s spelled H. E. R. R. O. N. you’re such a pro, you wear a sh.
Speaker 1 06:57 A few months ago you were, we were a little bashful. We didn’t want to talk about our companies, but now look at us. We’re pros at that. Right? So that’s great. So, Hey, if you have any questions about growth and about profit, you need to talk to us at Greenland HQ as the country of Greenland, a HQ H as in Harry, Q as in queen.com, or call it the office at (559) 207-3148. I sound like a pro now, right? (559) 207-3148 tied with to see that three times in a row. Anyway, so, so that’s a lot going on in the legal updates business wise, you know, this is absolutely fundamental. Um, it, we are just waiting for the fallout. We don’t know how bad it’s gonna get. Um, we, we may honestly see, um, services like Lyft and Uber disappear and it, it’s, you know, for me who, who is, um, you know, enjoys the free market, recognizes that, um, you know, we want to promote business, we want to grow business and there not everybody wants to be an employee.
Speaker 1 07:55 There’s, there are benefits to being an independent contractor and to now see that basically that whole industry, the gig industry is economy is really been put on notice. It’s, it’s because of payroll taxes. That’s right. Everybody wants their fair share, death and taxes right back to it. Well, it’s the state’s way of, of, you know, jumping in the game and taking a piece of a pie that they had been probably, you know, a little frustrated that they haven’t been getting. So, okay, sorry. It was eight minutes of something that we’re very passionate about but doesn’t help you if you’re a contractor or tradesperson. So a today show is a continuation of what we talked about a few weeks ago, which is, um, how do you know how to build and grow a hugely profitable construction business? And, um, and it’s not easy. It is not easy, right? Constructionist. So complication, complex things.
Speaker 1 08:53 You, we construction the, the, you know, the contractors live in the Delta of the margin, right? Um, whatever the cost of this job in the profit. And if we did our job right, we hit up a hundred percent of the costs and 100% of the, of the sales in that earned revenue and it turns into the profit. And if you did a very good job running and operating your business, you’re going to have 10 to 15 to 20 cents falls to the bottom line. But there’s not as easy as that. What I just said is there’s a lot to unpack. So what we’re going to do in today’s show, we’re just going to dive a little deeper in some of these things. Um, some of the concepts that we’ve been talking about, um, working capital and what does that mean in, why should you be, why should you be concerned about work in progress?
Speaker 1 09:35 If you have progress billing, um, the current ratios, which is what banks look at, uh, the, the regular accounts receivable versus your retention AR, which if you’re a federal contractor would be 5%. And if you’re a regular, uh, commercial contractor, maybe 10% your, your bonding capacity per job in the aggregate, um, and the number of months you have to have in the backlog because it’s not about what you can produce today, what you have in the backlog. But what happens when you run out of all the jobs that you’re been contracted for marketing and what is your funnel look like? We’ve been talking a lot about funnels even today, right. In our businesses.
Speaker 2 10:08 Do you work with clients, um, construction clients on, um, how to manage their estimates and, and knowing what they need to charge for things that are not necessarily, you know, I would say swinging the hammer. Um, you know, there’s a lot of other things that go into it as far as indirect costs. Yeah, there’s a lot that goes into, you know, getting a job done that has nothing to do with the actual, you know, onsite work. Yes, absolutely. We want to do the okay
Speaker 1 10:38 time. So, um, so with that said, okay, so I’m looking at, we need to go onto break, but we’ll come back home to our thought. If you’re listening to you listening to business illegal talk with Leah and Claudia, we’re having fun talking about contractors today. We’ll be right back.
Speaker 3 10:52
Speaker 4 11:05
Speaker 1 11:17 Hey everybody, welcome back. This is business and legal talk with Leo and Claudine having fun today. Talking about, um, just the, uh, making money in construction, right? And related traits. So it’s funny, we were joking with a producer that we, we keep going even when we go off the air, I know we keep going. So it’s like we almost not need to go on the air. We just kept talking for an hour later. He can maybe chop it or you can just stop it. But this, you know, this is our live show some. So we, we have to do that and we have to have our, you know, our sponsors and everybody else. But you are asking a very important question during the break. Go ahead.
Speaker 2 11:54 Well, just the how, how do you work with your clients and because I know when you’re working with them, you’re working in terms of the money and, and, and how much influence or assistance do you give clients and putting together estimates and recognizing, um, the distance between the time the job is done to the time the dollar arrives, depending on what type of construction you’re in. If you’re in civil, civil building, you know, it can be months and months and months down the road. They’re not even talking about the 10% hold back. Cause that’s very, very common. But by the time that that dollar arrives, the longer it takes to arrive, the loo the least value it has, it declines in value over the stretch of time.
Speaker 1 12:37 So, wow, that’s a cool, that’s a loaded question. So let me just start by saying that in just about every engagement that we take on, we usually become engaged because something is not working right. Okay. Or it’s not moving fast enough. Okay. Or the profit isn’t there as fast as you want it to. So there’s a mall there, there’s, there’s two different concepts. There’s a concept of being profitable and having cash in the back, right? If you’re running your business on an accrual basis and your recur, you recognize in all the stuff that you bill, right? That doesn’t mean that you’re going to collect it in due time, right? So if you made $100,000 today, but you’re not get paid for 90 days, the net present value of those hundred thousand dollars diminishes greatly for every month. You don’t get paid that you keep incurring expenses to run your business, right?
Speaker 1 13:31 So it’s, we look at the whole thing on a holistic level. So, um, in speaking some times I say that most business owners are entrepreneurs run their business in what I call bank balance accounting. So they look at their bank balances in the morning and they’re the wraps. Okay, I got a a hundred thousand dollars I’m good to go for the week. And then pretty soon they forget they have $60,000 goes to payroll and they’re, Oh my gosh, they that workers’ comp premium we got out, we had another bill for $20,000. All of a sudden you go from a hundred to eight 20 and he used to have bills to pay. It’s feast or famine, right? It really is and and a lot of business owners, particularly construction are having to borrow slowly but surely because it looks profitable on paper. But the reality of things is you’re not keeping your eye on the cash flow, right?
Speaker 1 14:19 So this is whole concept about do we look at everything. So when we come in, as I told you something is going on, either there was a letter from a bank saying, Hey, we’re pulling your line or we not going to approve you. We not going to approve the increase or you lost the key account or you realize that you have too many people you didn’t know you had that many people on payroll or you got to pay your lottery. The EDD. There is something that has to do with money and risk to happen to you and you just can’t figure out how to get out of it and you need perspective. So it’s like driving, I say this all the time, it’s like drive in a car with no dashboard. So you have no idea how much cash you have in the bank, which is your gas or how profitable you are. Are you going at the speed that you say you were going right in most in the Gates, ms. So stars with pricing things, right? Correct. Correct. Cost plus profit
Speaker 2 15:09 and that is probably one of the biggest challenges in construction. The biggest challenge that I see is that not proper job costing, right? Not pricing Jeff’s correctly. Well in job costing, we’ll bring you back around to proper estimating. If you do those job costing, you will see where you’re like, where you’re not coming through in the black. Right. And, and, and so often, I know in the smaller businesses that you know, construction people, trades people are listening, especially if you’re in the smaller scale doing, you know, perhaps residential work and so forth. Really got to account for time. You really have to account for time. If you have to make 15 trips to, you know, this part store as opposed to three trips, you know that time is a value because it’s the clock is ticking and that dollar is losing value every single day. You’re not getting paid. Correct.
Speaker 1 16:03 So you start by looking at the, that you’re accounting is so critical in construction. I can say it enough route you when you’re dealing with prevailing wages and, and, and certify payroll in old is regulatory compliance. You’ve got to do, when you feel working with the government and the whole David Davis bacon act that involves a whole lot of other things. So then they just payroll and in the end benefit compliance part of it, it’s you’re dealing with, it’s a very thin margin business, right? So you, you have this reposit if you’ve done your job ride in, you will have the costs associated with any given project plus the PR, the historical proper of any job you’ve taken under any circumstance sitting there and you’re finding in your accounting system that you can recall at a moment’s notice. And to figure it out. Reverse engineer, we started a 20% margin on this million dollar job, so we would have made $200,000 what happened?
Speaker 1 16:58 We only made 100,000 right? And it’s called B. Going back to the, you know, the scene of the murder and had reconstructing the crime in what, what went wrong. And a lot of the times we find ourselves doing this type of forensic stuff, right? What happened? Let’s deconstruct the past. But if you’re not keeping good records and if you’re not, you cannot estimate unless you have some historical precedents, right? Right. How much is concrete going to be, you know, how much is the roofing going to be in if you’re, if you’re co, you know, the developing commercial and you’re in the residential market, do you know within pennies, how much is it going to cost you? Every square foot of construction, the right? And if you don’t have those numbers down, how can you know how you’re going to make money? Right? If you, you know, if you don’t have a target, any target will do.
Speaker 1 17:41 You need to know when you, the money is made at the outset, right? When you’re pricing things correctly and you give yourself a buffer. So I had a C tuition, which we had a customer that it was just three, four, 5% net income. Right? And what’s going on? But then we realized that they were not doing a good job, you know, so whatever they were estimating and what, whatever it was in the, in the, you know, the S the schedule a, um, wasn’t really, it was becoming more and more expensive over time. Right. And they were not doing a good job pricing things. Right. So pricing is as a is a really big thing. But then the work in progress management, it’s, it can be complex,
Speaker 2 18:23 it can be complex in, and honestly it, it, there are so many different areas of construction. I mean there’s folks who have companies and they’re building big, gigantic, you know, commercial buildings, hospitals, schools, so forth. And then, you know, there’s the road construction and then there’s, then there’s the smaller tradesmen or smaller, you know, smaller in size in terms of the company. And they’re doing the residential work and all of it has a work in progress, a calculation that should be managed. So many of them,
Speaker 1 18:55 somebody has to either you. Okay. Also is it’s what is your time worth, right? Are you surrounding yourself as a construction with the right people on your team? You can’t do everything right. And if you’re a very good estimator beat, do make sure that your estimate as if you’re not the one are really, really good because they’re at the outset of the, they’re at the beginning of the revenue cycle. So what a lot of companies do is that they start to slowly but surely start over billing. Yes. And there’s a point in time when you know, when you know the earned revenue, this whole thing about accounting, this whole work of progress is unique to the construction industry and also manufacturing and which you don’t allow to progress on a determine you have a set amount of dollars and you’re not allow to build progress, you know, a percentage of completion, right?
Speaker 1 19:42 So if you’d have 50% of costs right in current month today and say is the end of the month, you should be having 50% of the revenue bill because you’ve earned our revenue and you can bill it. Right? But what happens is because all their jobs are not making money and then you have this profitable jobs, you think that the customer is going to look the other way. I’m going to build this. I want to bill them a little more and a little more. Pretty soon your 20, 25% over billing on a job that you haven’t really earned and when something is not earned and you bill for is a liability on your side. You need to produce the war to earn that revenue. Do you see how complex this can be? It’s
Speaker 2 20:24 very complex. And one of the things too is that you’re talking about billing, um, based on percentage of work of work completed, where, where as there is an entire different method, which is billing based on where you are in terms of the spending on your job. And I know that we see our S smaller tradesmen being able to do this, um, a bit more effectively than when you’re on big commercial jobs because the commercial jobs, the contracts are a little bit different. Um, the, the negotiation of the contract is different and you know, it’s the, the lowest bid wins. And so, but on, on the smaller end of things where you have folks who are, um, maybe doing the residential work, uh, if you know where you are going to be spending your money. So for example, I know within the first five days of this project, I am going to have to spend the largest portion of the money because I have to, you know, purchase the products and so forth. Right. And then you can, so you can structure your progress payments based on what you’re going to spend rather than based on percentage of completion. And it just, it’s just a different tactic of, of looking at it. Um, that I think would, would be really beneficial, uh, when you’re looking at putting your estimates together because it’s not always completion. Um,
Speaker 1 21:46 we’re through, there’s, there’s more than one accepted in, in my wall. A lot of what happens with the beer companies, you know, they, they, they are about sensitive completely. Right. And then the smaller ones, I don’t work a lot with the smaller ones that they, they, they, you know, there’s but you do, so you do it. So we have this complimentary, um, set of skills and this is a different way of looking at it. But so back to the original questions. How do you know what’s working unless you have some standard of what you look at? Right. I would expect construction to be, um, I’m looking for 20%. Right? I’m looking for it, you know, 18%. It depends on the volume, but 20% as gross profit. 10% or less as near us as operating expense and 10% or more for net income. And I would expect to have some accounts receivable and I would expect that AR to be a conscious level, but to be less than 60.
Speaker 1 22:43 Um, because I look at businesses through the way that a bank or a venture capitalist would look at him if they going to return and get a return investment. And there are certain things. So 2010, 10, right? At the very least. So 20% gross profit. Remember, it’s not the revenue that I look at an a in a revenue, it’s as a person, it’s the percentages are more important than the dollars. I always say that the percentage numbers have to fall in a certain criteria, right? So if you have a $10 million construction company and your margin is 20% so you have a $2 million business because we live off the profit, right? So if you have a $2 million business that you’re billing 10 but then you have to pay eight, you know, of those 10 million, this is basically due to your indirect cost to all your soft and everybody’s related.
Speaker 1 23:33 And then all those costs associated with producing the work, right? And there’s doing the construction, there is a lot of costs in dos wide. This is a very notorious cash written intensive. So if you have 80 you know you have a hundred and you have 20 and you have 10 you should ivory respect at least 10% so the problem is when it doesn’t happen that way. Now I look for anomalies, bad and good. So if somebody has a 25% gross profit, so instead of 2 million on a on 10 million on revenue, you have two and a half million, that’s good. Why? Now? Nine out of 10 is because we haven’t recognized certain costs that we already billed for. So there’s risk associated with overbilling remember this whole, but then if you’re doing your, your, your whip where we call the work in progress correctly, right? You should have a correction at every period since it usually happens on a quarterly basis.
Speaker 1 24:26 We actually true up the revenue and you discount from the revenue. The stuff that you overbuild is showing it as a liability. Well, you pulled it out of the liability by actually making a deduction on your revenue. Because if you bill 40 11 by, you only should have only bill for 10 you’re going to have that million dollar comes out on ability is registered as an under, which is are you with me? Yes I am. Yes, I am. So anyway, tracking. So those are things that are important. Uh, and then we, if we look, if the numbers are there, then we go to the next level. How is our cash and the balance sheet in construction is critically important. There’s two related unrelated parties that want to look at your balance sheet, which is your permanent document or your financials and one is the surety company in the bonding, right?
Speaker 1 25:20 Um, and the other one is your bank. It’s very hard to make it into the construction business without a good banking partner. Absolutely. Because you’re financing everything. You have to a, that’s the nature of the business. You know, I’ve known guys in the construction world. This is why they don’t get into this business by once you’re in it, you got to make a successful business. It’s, there’s a lot of liability, there’s a lot of personal ownership of this liability should something go wrong. So you wouldn’t get into unless, you know, eyes wide open. I say there’s a lot of other business that you could do with the construction business is chatted, but it’s also very rewarding. It is do it right and there’s, there’s people that I know that would do nothing else. I mean that, that, that because you’re wired a certain way, you know, let’s not go like create, ed loves what he does.
Speaker 1 26:03 So if you love, you know, always money is made at the intersection of what you’re good at, passionate about, right to and make and there is a potential of making money, right. That to me, that intersection of those three concentric rings is success. Right? And I don’t work with career people, I work with business owners. But if I was to talk to a college person, I’ll say, Oh, up in up, Hey, what do I want to do with the rest of my life? I would say, well, what are you good at? What are you passionate about? Do you love? Makes money. Yep. Yep. And, and, and really start off with, by identifying what is, what are you good at? What are you passionate about? Really? I mean, there are things that I’m passionate about that I wouldn’t even attempt to make. Claudine, we got to go to break. Hold that thought. I’ll business illegal talk with your Claudia and stay tuned. Very good.
Speaker 4 26:49
Speaker 1 27:14 Hey, welcome back. Listening to business and legal talk with Leo and Claudine here on power talk 1360. Uh wow. I, we had to, the producer had to come and wrestle us down to the ground to walk away from the mice. We were so into what we’re doing. Thank you. Look, you’re a great producer. We love you. So anyway, so back to this. So, but let’s remove ourselves from that in, in really what it is is to me,
Speaker 2 27:40 I cared deeply about business owners having a blueprint for success. Right. And so let me ask you, do you sit down with your clients or construction clients and teach them how to do work in progress? Yes. And, and, and what are the tools, if somebody is out here listening and they say, okay, what Leo’s saying is I need to do, you know, keep track of work in progress and, and, and where I am with all of this stuff. How do you, how do they know what to do? Well, aside from calling you, of course, right. But some of the stuff that has to be done on the job site, it has to be done on the day to day.
Speaker 1 28:13 Yeah. I mean, you know, big enough companies will have, um, teams of people that actually have created this, you know, the schedule of values. Right, right. Um, you know, you have professional estimators and then you have the project managers that they cover. And then project managers used to leave juggling a bunch of projects and they have superintendents on the job site. If the company’s big enough, we have a superintendent on site talking on a daily basis to the project manager to make sure that we are actually where we are in a percentage of completion and everybody’s different at different stages. Right. You know there’s the Gantt charts that the, all of this stuff you can actually find online and you may even pay some of it. Negligible amounts. A lot of it, the whip reporting is done on, you know, there’s great software that will allow you to do that, but I wouldn’t recommend software from day one because you know, you, you, you know, QuickBooks is a great counting software, but he doesn’t really do a good job with the percentage of completion that the whip reporting, the, the work in progress reporting.
Speaker 1 29:08 Some companies choose to do that outside of the accounting software and they just do the journal entries for an inspection sheets. Right. You started with the schedule of values. What was it? Agree today you start with that. What do we agree to? What is the dollar amounts on Trek price, right? But then the contract price, it’s useless unless you ha you got that as a byproduct of having your costs associated. How much is it going to cost us to deliver it in? How much profit do we want to make? Right? So you have the, you know, the associated costs that we, you’re going to have to hit right to be . If we hit a dollar for dollar, then you’re going to make every dollar of profit that you say you were gonna make, right? But that’s not how it works, right? There are variables that are, so you happened that now what if you got us a change order midway? Well, there’s going to be a, there’s going to be a change order added to the schedule of values, which are going to be a new contract, that amount, and then the next thing is where you order percentage of completed you zero five 10% and then you start getting all your invoices, adding up all the costs and doing the progress billing. If you’re doing that on a monthly basis, you should have an idea when you’re trending over 10 10% is acceptable of over-billing. Yeah. Now you’d never want to under bill,
Speaker 2 30:22 you never want to under bill, you want to be very careful of over-billing what, where, where as it’s, it’s, it’s negligible enough that by the time they actually receive the bill, the bill, we’re getting close to completing that, that portion that got over-billed. So let’s just say like we’re at 9% when we actually type out or you know, get ready to, to, to draft out the invoice. But by the time it gets there, we’re pretty close to 10%. It’s about being shrewd, it shrewd, and where somebody could look back and go, okay, that was close enough to 10.
Speaker 1 30:56 So at the beginning of the week, you got your, um, you got your, you know, at some point in the project you got your roofer and doing the work, right. And at the beginning of that week, he said, well, we’re about . We’re about 40%, but we think we’re going to be a 75% by the end of the week. Now, if you’re have a, if you have a good sense of where the project is, as you can say, well, I’m going to bill a 70 even though I haven’t gotten the invoice from the, from the, from the, from the, from the sub, right? I’m going to go ahead and bill for the 75% knowing that if this is true, you’re going to be caught up. So you’re going to bill before you get the invoice. And it’s just a matter of timing, right? But it’s good for cash when you don’t bill when you’re supposed to. It is an asset you already earned out revenue that you have in bill for, but doesn’t good.
Speaker 1 31:44 It doesn’t do any good to sit in and sit in and as an asset, unless you cash it right? You got to invoice. So the heartbeat of major construction or general road construction is the work in progress. That’s what confuses. And that’s what the most complex area, because there’s a lot of accounting that goes into that. Uh, you know, their software like Sage 300, that does a very, very good job. But this, you know, and you enter your schedules of values, you can build your estimates as Alec robots historical capabilities, and you can go back and see, you know, you can get very, very good at estimating. You can, but so is the price associated with us, the technology, right. So not everybody starts with a pile of money at the beginning. You know, I think a lot of the really, really good clients that I have, it really started with a passion.
Speaker 1 32:29 You look, I really like doing this and I, I, you know, I don’t have an MBA. I’m not a CPA. I don’t, I’m not, I’m not an adjuster. I’m not, I’m not. You started with something that you love to do and you evolve. You, maybe you started us an apprentice on a roofing company in the uterus, salad strike on your own. You know, you don’t have the financial know how you don’t have the legal background, right. There’s a lot of things that you have to worry about. But the point is at somewhere along the way, it behooves you as a construction owner to get the right people on the bus. Absolutely. Because the right team of advisors
Speaker 2 32:59 at this point we, what we’ve been talking about is the numbers and, and the, you know, tracking your numbers and the estimates and the job costing and all of that. There’s a whole nother side to this contracting, which is the root word here is the contract. And, and let me tell you the disputes that people can get into. Um, if the contract is ambiguous, it perhaps we don’t have a full contract. We have a contract for, you know, one portion of it, but then the scope of the work change throughout the PR, the project. And now what we are actually into, and this is what I see so often, probably twice a week is the contractor comes in, he’s done X amount of dollars worth of work. In his mind, he’s owedX amount of dollars while the contract started out to be, say a $10,000 contract or a $100,000 contract.
Speaker 2 33:47 But there was so much other stuff that got done along the way that we’re actually, you know, $120,000 and there’s a gap with our documentation between what started off to be $100,000 project and what is now $120,000 project and how do we back, why do we, how do we backtrack to get, um, to, to get enough, uh, justification to be able to say no, that that extra $20,000 is owed and it needs to be paid. But we have no, we have no basis for the payment. We have no contract, we have nothing written. And that is really super complicated. And I know again, speaking from um, the, the smaller residential contractors, um, I can’t tell you how many of them are afraid to record and do pre lien notices. So what do pre lien notices your prelims? Um, so many residential contractors are afraid to do that now in the, in the commercial side of it. That is, that’s part of the signing of all the documents. I mean that is absolutely not even a consideration that leans them pre liens are going to be filed.
Speaker 1 34:50 So. So this is good. So far we’ve been talking about the numbers and how I get involved and what I look for in a lot of it is AMI coming at like basically as a doctor with my white coat on to do to make sure that you’re not on a, you’re not in a gurney dying right. As a business,
Speaker 2 35:04 but
Speaker 1 35:06 but I worry about certain things and you have worry about other things. So what, what typically happens in your engagements? What’s going on that that gets you involved as an attorney?
Speaker 2 35:16 So I have some, some clients who have either had a clothes scare or they’ve had a bad scare or you know, they, they’ve just been in a situation that they just had to walk away and just take the hit from a job and walk away from the money that was owed to them. We, so you’re catching them when they’re on the gurney, we’re catching them as they’re going into the coffin. They’re coming to us, they’re coming to us. They have come, you know, completed a project. And again, there’s a gap in the documentation from the contract that we started off with and what we actually ended up doing. And there’s a gap there and now we have to figure out how do we substantiate what we’re claiming is out because I don’t have a contract that says you agreed to pay me $100,000.
Speaker 1 36:01 So you’re saying you get involved in situations where there was not a uh, an executed fully executed agreement?
Speaker 2 36:06 There usually is some sort of an agreement, but things change, things change during the project. We start off to do one thing and then we open up the roof and we find out this is wrong. Or we open up the wall in the, in the residential, um, remodels zone or even on commercial projects. We’ll have contractors go out. And we were supposed to do, you know, we were supposed to put up the tilt up building and well that didn’t include insulating, but then the GC comes in and says, or the project owner comes in and says, Oh no, we need this all insulated. What? And somebody didn’t run back to the office and type up that contract that says we’re supposed to insulate. And so at the end of the job I’m saying, well, I did all this insulation and that is X amount of dollars worth of work and product.
Speaker 2 36:53 And the project owner says, well wait a minute, that that’s included. Everybody else would’ve included it. How did you like I’ve literally had commercial projects where the paint contractor, PR PR provided the estimate, signed the contract and at the end didn’t paint any of the doors or trim and you know, there’s 35 doors in this building. And he said, well that’s not part of the, that was not part of the the estimate. And then the project owner comes back and says, well, what painter is going to give me an estimate that doesn’t include doors, you know, because somebody either a didn’t write a co the contract correctly, it was ambiguous or B, we just didn’t read it. We were just in such a hurry. Everybody just signed away. So in construction at the end of the job, the contractors, the subs, the tradesmen, they, we start off with a set of building plans.
Speaker 2 37:43 And then because rarely does it actually get built exactly to the plans at the end of the project, we submit what’s called as-built plans. So these are the plans what actually ended up being built like right. So that when we have a problem with the, with the building or with the electrical at some point later on down the line, we have these set, the set of building plans that shows us what it actually ended up being built. Like. So we have a true replication, um, you know, a true drawings of what was actually built. Well, that happens in the contract as well. We start off with this plan, but nothing ever goes according to plan. By the time we get to the end of the project, we have extra work, extra materials that were purchased extra, this, that, and a third.
Speaker 1 38:31 Wow. You’re talking about something I want to cover in the next segment. It’s not just about, you know, the things that we’ve been talking about, revenue, uh, cost of goods, and then you know, the net profit this much. There’s a whole nother area about a liability that we’re going to get into it. But, but things are contracting and in, you know, you get what you pay for. A lot of people just go, Oh, let me just download this agreement from the internet. Oh, and and, and change the names. Right? And there’s some specific wording that isn’t there. I deal with that all the time and I know enough to say, this looks wrong. We need to get an attorney involved. Because most people you have, you have a choice. You, we’ll take the vitamin or you will take the pain pill. That’s right. One is more costly than the other.
Speaker 1 39:17 I’m in the vitamin business. Absolutely. And so are you, we are preventive preventative. How do you build a business that’s going to be profitable and sustainable today that will allow you to prevent or prepare for contingencies when they happen? And particularly in the construction world, things will happen. Are you prepared for them? Are you financially stable, which is what banks, which is what surety companies, which is that anybody, a potential buyer, whether it is a institutional or a strategic buyer, will want to see is this business sustainable? Do you have enough cash in the bank? Do they have enough standard operating procedures to build? And it transcends the owner. We actually have a bonnet, but we have spent a lot of time talking about right when this a business transcend the owner, right? Right. And we have a management team. So those are the kinds of things that we care about.
Speaker 1 40:07 Um, and you know, and you have a choice. Either you’re gonna do and you’re going to learn and you’re going to get the right people advising you on the things that you’re not, you don’t have to be good at everything. One thing I won the construction owners to be good at, it’s two things. Where’s the next bid come? Where’s the next book of business come and beyond the backlog? Right? Right. And I will do we have enough cash and if their business is not generating enough cash or we grease in the wheel with the banks and what it’s going to give you the cash that you need to finish those job.
Speaker 2 40:38 And I want to add a third one to that. We want to make sure that we have a contract such that you can get paid bingo and it because it’s all well and good that we’re supposed to get paid, but if we don’t have a contract, we often
Speaker 1 40:52 don’t get paid. All right, hope you’re having fun. This is so much fun talking about risking cash while you’re listening to business illegal talk with Leah. Claudia, stay tuned. We’ll be right back.
Speaker 4 41:00
Speaker 3 41:17
Speaker 1 41:28 welcome back. Are you awake? Are you still with us? I know you probably went to the Depot it and doing a run around as a Saturday morning, but you cannot neglect this. This is a very, if you are a business owner and you are, if for some magical reason you happen to run into, sure you need to pay attention to business and legal talk with Leo and Claudine. We are here at 10:00 AM every Saturday. Dill it, do it, you know, just deal dishing it out in business, dishing it, addition it out, the good, the bad, and the ugly of being an entrepreneur in today’s society. And we’re all about being profitable and sustainable. It today’s show, we’re talking about the construction business. Um, so we left it, we were talking about some key performance indicators. Um, and you know, my world as you know, it’s in the kind of looking at the crystal ball in how a business is going to do if certain conditions are met and it’s called financial modeling.
Speaker 1 42:27 CFOs begin when the controller leaves off the controller is okay, everything is reconciled and new. This are your financial statements and the CPA will go this or your financial statements and, um, you’re gonna pay this much income tax. I go, well, okay, this is our baseline and I begin from here to figure out what’s going to happen, where are you going and what’s going to happen in the future and how are you going to build infrastructure to accommodate all this new revenue? But there are more key performance indicators specific to the construction industry when I get into those right now. Sure. Okay. So we talked about profit off scores. You want to be able to look at your gross profit, you revenue trending quarter over quarter, year over year and right as a percentage of growth. You’ve got to look at your costs, which is, you know, spend an enormous amount of time talking about estimated and cost building and then cost accounting, right?
Speaker 1 43:13 Um, or job costing. But there are other things that I want you to think about. And um, bid development is one of them. What’s in the pipeline, right? Um, what, what’s coming down the pipe? Where does your next business, where does your next multimillion dollar, are you greasing the wheel? Are you marketing? You know the days of you build it, the field of dreams and they will come or gone. This is a hyper competitive market. If you don’t have an edge in the competition, if you’re not really good at marketing and creating that and really being involved with in in cases where they may be RF, RF, RFIDs, RFQ is RFPs and you’re really developing your pipeline well while you have his backlog and that’s it, right, which is what you’re contracted for, which I, here’s this something that you wanted to look at. If you are in a construction business, your target for backlog is 12 months or more of contractor work you haven’t started because that allows you to kind of kind of build your capacity, right? But then it’s what’s beyond that? I’m a scout, I’m looking beyond 12 months. What is your business gonna look like two years from now, 10 years from now? That’s the difficult thing about the construction business is really the farther out you’re planning, the less efficient in fact
Speaker 2 44:32 of your, and it’s really on one hand from a business perspective, yes you want to have jobs lined up or you want to be in a pipeline. But the, the, the estimates are what gets you the jobs. It’s a low assessments. The lowest bid bar by and large in particularly in, in commercial and civil work,
Speaker 1 44:52 your price has changed. Yeah.
Speaker 2 44:54 And, and you, I mean, yes to some extent you can go back. Um, but in a lot of cases you cannot go back and say, Hey, you know, the estimate was this and it only, you know,
Speaker 1 45:03 it was what does a legal binding agreements. You cannot unless there a change order. That’s a whole nother thing. But anyway, bid development, um, your funnel, right? So they buy our process. When you start actually, you know, it’s investing in the next job where you haven’t received a dollar of revenue. Right. And, and how much cash that’s going to take. And that’s easy. When you have two or three jobs, what happens when you have 10 jobs and three of them are going to store and then you have to have enough money to you. So you’re doing the work, but then you’re going to build later in that gap begins. It gets bigger and bigger. As more dollars get involved and more costs get associated with it. Quality control. Now, um, you cannot stress that enough. There is a whole lives, you know, if you in construction, you know, if you’re in the hair business, if you do, if your hairdresser did a poor job with your hair, you may be unhappy, but your hair will grow back, right? And most cases right. But if your quality control isn’t there in construction, life’s may be apparel. It’s a nightmare. It’s a nightmare.
Speaker 2 46:07 One of the, one of the reasons why we build into the contracts, um, you know, what we call dispute resolutions and dispute resolution in a contract identifies how are we going to resolve a dispute when it comes up. There is a one school of thought that we like arbitrations and arbitrations, um, are more cost effective. They’re quicker, it’s easier. Um, there is a large body of thought and, and which one I prescribed too is I don’t like arbitration agreements I don’t like and I definitely don’t like to be forced into them. Um, because we have a court system, um, that we pay a filing fee and when we go to, um, a case management conference, when we go to a mandatory settlement conference, when we go and you know, before the judge for a motion hearing, w that judge has paid for, we’re not paying every time and we’re not paying by the hour with arbitrators, you’re paying by the hour, you oftentimes don’t have somebody who, um, the rules of discovery and the rules of evidence are blurred.
Speaker 2 47:06 We’re not having, um, a strict adherence where we can say, Hey, the civil code, you know, X, Y,Z says this, that, and the third and we have to stick to it. So everything becomes more and more nebulous as you get further and further away from the court. And then I have seen some really, really poor rulings, really poor rulings that I, that I frankly don’t think we would’ve seen with the judge, um, judges that they do and have to adhere to the statutes they do and have to adhere to case law. Um, they, they make sometimes poor rulings, but by and large, um, you know what you’re getting. Um, and, uh, arbitrations can be far more expensive, um, than, than using the court system. And I, I’m, and I’m not convinced that it goes any quicker. Sometimes it’s appropriate. And so when, when we dropped a contract, we do like to leave that open if the parties agreed to it and we can agree upon an arbitrator, but you’ll, you can speak to litigators here in, in Modesto that will tell you we don’t have any decent arbitrators around here.
Speaker 2 48:07 No, I’m not saying that. But there, whether somebody is good or not good as an arbitrator is very much, um, an opinion and it’s based on, you know, did I get favorable rulings? Um, as opposed to was the arbitrator actually correct. So, um, dispute resolution is a huge, huge part of your contract. And, and let me tell you when we’re talking about the numbers and stuff, there’s a presumption that you send the invoice and it actually is gonna get paid. The reality is vastly different than that. We don’t always get paid when we send the invoice.
Speaker 1 48:43 Yeah, I’m in, in, that’s a whole nother conversation of cash. I don’t want to get started on right now, but it’s like we like you who’s on the numbers? Very nervous. WIC. Well sick. Yeah. I actually physically gets viscerally sick. Um, so there’s two things. Um, quick, two quick stories, right? So we talked about quality controls, sub-contractor inventory or you know, um, just materials for the job, right? And safety. So, um, remember I told you that I get involved because something is not working well, you know what the profit and loss, what the statement of cashflows tells you that the profit and loss and the balance sheet doesn’t tell you is the use of cash. Now I’m all about cash, right? Most businesses need to be run on an accrual basis. You know, you know know it rather than cash because we recognize the revenue when it happens.
Speaker 1 49:39 We knew we earned it, we bill it, right? But when you see, we’re saying we don’t know when you’re gonna collect it, right? It’s an accounts receivable. So you can have $1 million worth of profit. But if the million dollar sits in accounts receivable and collected, then you got a big problem. I’ve seen many, many profitable businesses go out of business. In fact, that’s normal, right? You think, wait a minute doesn’t make sense. It’s the management of the accounts receivable. But there’s another thing. So I had a business and it was just, just something didn’t make sense. I had to do a little bit of forensic and reverse engineering, which I like to figure things out, right? Sort of sound that the business hat purchased $400,000 worth of inventory, kept buying inventories for jobs that didn’t get start soon enough. The jobs can be done, pushed out. They were going to happen.
Speaker 1 50:31 They were contractually obligated to perform, right? But the Geoff kept getting pushed out. And guess what happens with tire pressures? Cash dollars, inventory. Now inventory is an asset, but it’s not getting expensed. We’re not billing it back to the customer process profit because it’s sitting there in a warehouse. Because we have not started right now. The only bright spot of that is if the products prices of the products went up during that period. Yeah. But is that worth $400,000 worth of cash? Probably not. Probably not. Right? So those are the kinds of things that we diagnose. And the other thing is safety. You know, in workers comp and you know when you get to about one 2130 of modification rates and you know, safety is a big deal. You’ve got to be proactive. So we can go and we could actually have a third show, but we don’t know.
Speaker 1 51:14 So the point is that if you’re in construction, if you have a question, you need to give us a call. We love construction. You know, we have plenty of background in the construction world. I just love the construction world in Claudia. You on the legal side. So find [email protected]. Call our office (559) 207-3148 or you can call you were claudine@thesharonlopperpermitareacodetwoohninefourtwoseventwentytwohundredorwwwsharon-lawdotcomsherron-law.com. So hope this was helpful to you. I mean, I know we unpacked a lot of things and a lot of concepts and a lot of these concepts I’m constantly talking about it. So they’re kind of regurgitating things, but they may be new to you. Yeah. If you’re listening to the show and if you’re out there in the trades, what we want to do is we want to set you up. We, we set our clients up with contracts. Um, we really work with them to get familiar with the contract so they can move pieces and parts in.
Speaker 1 52:09 So maybe some contracts, you do want to have an arbitration clause, maybe you don’t. Um, but we want to get the customers really super familiar with the contracts so they know their own agreements. Um, and then we give you the base contract and then we work with you to set up your scope of work. So we have a whole plan to get you in that position where when the job’s done, you’re going to get a check. That’s fantastic. I mean, I care about that. You’re okay that your job is, um, it’s profitable, you know, while you may care. Yes. We have to make sure that your, your, you have a good chance contractually or legally to get paid because if you have to pay us or somebody like us in order to get that check, profits are gone. Yeah. It’s just the whole thing went upside down, so not profitable.
Speaker 1 52:54 So don’t try to go at it alone. Um, I think, you know, sometimes I, I, a lot of business owners, a lot of entrepreneurs miss the forest for the trees. You know, you know, this is, I don’t want to spend any money because, you know, I gotta watch the dollars, but sometimes not everything is an expense. You know, sometimes you gotta think about, am I investing in my business? Education, investment in education, in, in advice. And your business is critically important in a shoot. Produce a return on investment in ROI. So you know, you’re gonna pay one way or the other if you don’t make enough money. If you’re not profitable and you don’t know, and it’s too late to find out, you won’t have a business right to nourish and flourish and you won’t have something to pass onto your children as to sell. So just think about it. It’s been great having you, um, as, as I listen to an audience, I hope your day goes great. We, I don’t know about you, but we had fun and we’ll always have fun. So, uh, you have been listening to business and legal talk with Leah and Claudine and we’ll talk to you next week.