Six Ways to Improve the ROI of Your Construction Company
How is your construction company’s ROI? Are you getting out more than you’re putting in? If you’re looking for ways to improve your return on investment, don’t miss this week’s episode. We’re sharing our six best tips for increasing your company’s ROI.
Strategies we cover in this episode include:
- Track your average gross margin on jobs
- Identify and fix profit leaks
- Get agreements upfront and include all work
- Manage your mix of jobs
- Put efficient marketing processes in place
- Shorten your cycle times
Join the conversation on our LinkedIn page: https://www.linkedin.com/company/contractor-success-forum
FIND US ONLINE
Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
Rob Williams: Welcome to the Contractor Success Forum. Today, we were talking about six ways to improve the Return On your Investment of your construction company.
At the Contractor Success Forum, we discuss financial strategies for running a more profitable, successful construction business. And we have in our two corners today, three corners, we have Wade Carpenter with Carpenter and Company, CPAs.
And in one of the other corners, we have Stephen Brown, McDaniel-Whitley bonding and insurance agency. And in the other corner, we have Rob Williams, me, with IronGate Entrepreneurial Support Systems.
So today the topic is about how do you improve your return on your investment? Does that–
Stephen Brown: I [00:01:00] just want to make a profit. What are you talking about, return on investment?
Rob Williams: What is return on investment from the–
Wade Carpenter: Well, there are several measures of that. The return on investment, return on assets, return on equity. Basically what we’re trying to figure out is what did we earn for what we spent? the simple definition. I don’t know, Rob, if you want to actually give a formula.
Rob Williams: In one of the articles I was reading about that, they gave a great explanation of this in a non-technical way. They said, how can you do and make a lot more with the same amount of people and stuff that you already have? So making more return on your investment instead of pumping up your sales growth; with more revenue, you got more problems.
How can you make more money with the same number of people in the same amount of equipment and the same amount of revenue or cost that you already are incurring? So, that sounds great. Everybody’s always pushing that top line. And then a lot of times their [00:02:00] return actually goes down. Their overall return, but definitely their return on their investments or their assets.
And people are also assets also. So I’m broadening that a little bit more from the technical return on investment, which would just be like, how much money people are getting there, but your return on your assets, improving all these returns. Does that make more sense, Stephen?
Stephen Brown: Yeah, that makes more sense. Both of it makes sense. I guess the main thing is how do you do it? How do you optimize that? You’ve got people and you push them to do more work. And they’re like, I can’t do any more than I’m doing right now.
Rob Williams: I came up with a list of six ways to improve the return on investment.
Stephen Brown: A listicle you, you–
Rob Williams: Listicle. Yes. Yes. You go online to our show notes and go online and see our listicle.
Track your average gross margin
Rob Williams: So, number one on our list, is, this seems so obvious, but track your average gross margins on your jobs. I wasn’t even [00:03:00] going to put that in there. Originally my list was five and then it came to six because in meeting with some other people out there, there are people that are big contractors that are not really even looking at that. You’d be surprised. So first thing, if you want it to improve, track it. So track your average gross margin.
Stephen Brown: We like to make between 20 and 30% average on our gross profit margin. So you’re saying actually track it instead of just say what you want.
Rob Williams: Oh
Wade Carpenter: Yeah.
Rob Williams: Yeah. As an example.
Wade Carpenter: I would say it definitely depends on the type of construction you’re doing, what the average gross margin is, but it is a simple measure. And a lot of people don’t look at it. Some people get tied up in saying, am I looking at direct costs versus putting all these indirect? Whatever way you look at it, just be consistent and look at it and see, is it going up? Is it going down? And you can learn a lot just from that simple measure.
Rob Williams: Yeah. And some people have said, well, gosh, I [00:04:00] look, I make millions of dollars. I had a partner one time. And it was building equipment for the construction industry and he was making a fortune, but he didn’t track any of his costs. It was like, how are you not doing that? So he was real busy and he just wasn’t into the book side of it.
So he didn’t, but what could you do to improve it even more if you are tracking and paying attention to these calls? So, so that was number one, track your average gross margins.
Identify and fix profit leaks
Rob Williams: Number two is identify and fix those profit leaks. So what does that mean? The profit leaks are, the number one for me, were estimating mistakes. The big jobs I got scared to death. So make sure you’re getting your job cost estimates right. Do a good job on those.
And then your change orders. That was probably my other place. You’ve got to charge for those things, track them. Don’t just get the jobs built. I think I was guilty [00:05:00] of wanting to just do more and more and get that revenue number up and we’d have change orders out on the jobs. And sometimes I’m like, just do it, just get it done. I don’t have time to mess with this thing. Just get that done. So you’ve got to charge for those things. And on some of these jobs, they just keep adding up. And if we had had a simple process, we probably would have made a lot more change orders, but we didn’t have that process. Tighten up that leakage of your profit.
Anything else on that guys?
Wade Carpenter: Just a couple other things. We could talk about that for a long time too, but you know, just simple things like having very clear instructions to your guys of what you’re doing so you don’t have to go back and redo work, or things like that. Making sure they have what they need on the job and not have to make 20 trips to Home Depot to go get something, those little things can add up. I know you’re going to talk about time later on in this list, but those things can add up and kill your profit.
Get agreeements up front and include all of your work
Rob Williams: Yeah. Yeah. They could. [00:06:00] Because the next thing on the listicle is your agreements, which is very closely related to this. Make sure your agreements, you’re upfront, not just change orders that you’re charging for the– depends on the type of the contractor. So some people won’t get into this as much, but there are a lot of things that we do, especially if you’re close to the customer end rather than a subcontractor, but charging for the design. Charging for the estimating. Charging for creating the job scope development. And these are, some of these are the ones that are involved in the beginning of the creation of the project, because I know I didn’t charge for this stuff most of the time when I was doing these things we just kinda looked at the bid process, but we really should have, because we were doing a lot more than the architect sometimes. And then physically on the job, the demo and the discovery of the site and stuff. A lot of that stuff, I know I didn’t charge for that kind of stuff. There’s a lot of free advice up [00:07:00] front that they’re trying to get from us rather than the architect or the engineers, those kind of things.
So those agreements could go under number two, but we’re not going to make that number two. That is number three. Get your agreements upfront, get them down. Any comments on that one before we go to number four?
Wade Carpenter: Well I actually just had a conversation with contractor last week. Same kind of thing. He was absolutely tired of doing all the design work. He was remodeling and stuff like that, but he was picking out appliances and stuff like that, and he was not getting compensated for his time. So he did exactly what you’re talking about. He’s like, we’re going to start putting that in our contract. I was really proud of them.
Rob Williams: Yeah. One other strategy to that though, is maybe if you’re not actually doing it in the contract, have a designer or somebody that you partner with. I definitely see that in the bigger houses in the residential. And the commercial, you definitely see it, cause the architects usually have somebody on staff, a design [00:08:00] person in house. But make sure that you’ve got that in there.
We had an engineer, and we’re talking about the site development and the discovery. I did do this a couple of times I did actually charge for Mike. He was a really good land– I don’t know what his title is. He’s an engineer, but he’s a landscaper, so he can lay out the neighborhoods for us.
So, and he can stair-step them. That was hundreds of thousands of dollars of work sometimes, so that was a real big deal. So having some of these guys that you can partner with and send them these guys instead of you doing it. So if you’re not going charge for it, at least find somebody else to put them off.
And then maybe you do want to do the work and maybe you’re cheaper than having them do it. Maybe it’s a good justification so they won’t feel like you’re ripping them off or it should have been included in the price. So hopefully that’s helpful. Some of this kind of applies to residential, but it applies in the commercial, too. Especially our engineering and design time when I was doing the framing. [00:09:00] So, alright. That was number three. Get your agreements.
Job Mix Management
Rob Williams: Number four, job mix management. That’s a lot like what we have already been talking about. What kind of jobs are you doing? Look at your jobs, write ’em down, and look at your margins and stuff on them. And start focusing on those jobs that you’re familiar with. But when you’re doing these, don’t just look at the direct cost. Look at the cost of your office. Look at the time that you’re spending. Like in our last example, that should cost money. Your time is valuable as well. That’s not just sales. I think we just chalk that up to sales time, but that’s not, that’s a value that you’re doing. So put all those indirect costs because that can really clobber you. How about that, Wade? I know that’s a big topic for you.
Wade Carpenter: Oh, yeah. Well, segmenting your jobs and [00:10:00] slicing and dicing any way you can, if you don’t have the job costing, number one, I would say, definitely get that in there, but slicing and dicing. And even if you’re in doing the same, say you were doing commercial office buildouts. And you had some that were 25,000 versus a hundred thousand versus, I don’t know, 500,000. Different revenue levels.
You’ll probably find that, one of those levels, you’re making more money than the other. You know, different industries, it could be the same type of industry, but different owners.
So slicing and dicing them can tell you worlds of things about where you should be putting your time and where maybe you shouldn’t be, you know, estimating jobs that you shouldn’t take.
Rob Williams: Yeah. Yeah. Yeah. Don’t forget that familiarity with the job really saves you a lot of money. I think contractors don’t value themselves enough and realizing that if they’ve done a job, that’s a big asset that you have to get that return on that. [00:11:00] It’s going to take you a lot less time.
You may not see it in the direct job costs, but on your overhead and your time and the time that you could’ve been spending to get another job or focusing on the other items in the listicle to save money, instead of learning these new jobs, you already know it, your systems and processes, your direct job cost is probably going to go down as well, because you’re familiar with it.
So that familiarity, I know we keep talking about it. So I won’t say the word sweet spot because we say that so much. So I didn’t say get that sweet spot because Wade, we talk about the sweet spot a lot. Don’t we? Oh, did I say that? So anyway.
All right. That was number four, the job mix.
Put efficient marketing processes in place
Rob Williams: All right. Number five is something that we don’t think about as contractors, but number five more efficient marketing processes. You can really save a lot of money. I don’t know what the average is. I knew the numbers better for home building, ours was usually like [00:12:00] 4%, our marketing budget. Some people it’s more.
In the commercial thing, we may not call it marketing, but it’s that bidding process. If you get process up front, you may not see it as a line item. It may be, you know, your payroll, you might call it admin, or you might call it sales because you might have an efficient process that you’re doing, or inefficient process. It’s probably what not to do is advertising everywhere and just throwing money at all those things. How many people paid for Yellow Page ads for an extra 10 years? I ran into somebody the other day that said this year, they got rid of their yellow page ad charge.
Your’e just like, that’s still a charge? What are all these things that we do. So, find something that you’re efficient at and then do as much as you can in that area before you start spreading it out into all these other things. I always felt like I should have a little bit here a little bit there. And so I was getting no good return off of [00:13:00] any of them, rather than putting all my eggs, well, you don’t wanna put all your eggs in one basket sometimes either, but it is, it can be more efficient.
Stephen Brown: Well, as you’re branding yourself and your marketing yourself, a really slick website that showcases, you know, sometimes you have to spend some money on professional photography, especially when you have a project that you’re really proud of. It’s architecturally beautiful that took a great deal of skill. You want to showcase that. And some contractors’ websites I see are so aesthetically enjoyable go through their projects. And that’s what you have to sell as a contractor. The work that you’ve done.
Rob Williams: Right. And if you can market it as you’re– mixing that with the one, your job management mix, the ones you’re familiar with. And you see a lot of efficiencies in the prospecting, on the advertising of just getting the fact that you’re an expert at that, where I see so many people [00:14:00] that they’re trying to avoid that because they want to be thought of that they can do everything.
It’s well, then you’re not a perceived expert at anything. And I’ve made that same mistake is I didn’t want to seem like I was just in this one niche. But that can be really effective for marketing if you are seen as doing that one niche.
Stephen Brown: Right, and your website, you can let it brag on the technical aspects of the project that you had to overcome and other items. Whenever someone’s considering doing business with you, the first thing they look over is your website. And especially for contractors. What a great way to see quickly what projects you’ve done and what parts of the country you’ve done them. What type of work you’ve done.
Rob Williams: Right, right. Yeah. Even you’re talking about websites and social media and stuff, it seems like the commercial guys like stick on LinkedIn. So put your efforts in there. Where the people doing residential services direct to the scene, you know, [00:15:00] Facebook or Instagram, something has tended to be more popular with that.
Don’t start spending your money on the other one because you’re not getting as much from that. Just spend that money on where it’s efficient. So, so that was our marketing efficiency. We ready for number six?
Shorten your cycle times
Rob Williams: Shorten your cycle times in everything on the job. If you shorten your cycle times– and I guess the cycle, that could be a technical thing, I guess, in our industry, people should know what that means, I think. But just the time that you’re out there on the job, if you can do a job– I built houses in a year and a half, and I’ve also built houses in 15 days.
If you shorten the cycle time, then there are fewer resources. You don’t have to go check on as many jobs or there’s so many efficiencies that you can save and the assets that you’ve got, if you speed that, especially just wasted cycle time.
There’s one aspect of spending a fortune to make it shorter, but so much of that time is just waste. If you [00:16:00] shorten that down, then the assets that it takes, you’re only overseeing, say 10 jobs at a time, where if it takes you twice as long, you might be overseeing 20 jobs at a time which might mean a whole other superintendent or all these other resources, and definitely the drive around job time, the theft, the slippages are just more and more and more, the longer the jobs take.
Plus you get your money in faster. There is now we’re talking with Wade. And don’t just think about the job on site. It’s all those things you spend before the job starts, too. So try to get those cycle times down and maybe you can or can’t control that yourself, but you can always control it when you start, think about this when you’re looking for your job types, which ones you’re going to do. That cycle time. A lot of times I couldn’t control a particular time on a job, but there were types of jobs that took a lot less time. What about [00:17:00] Wade? I got him nodding, at least.
Wade Carpenter: Well, yeah, you were going there exactly where I was about to go with this. When you talked about the segmenting your jobs, that’s one thing when you look at the cashflow and the profitability, a lot of times when you get in and get out, you make a lot more money. Even if the top line is lower, your profit is higher as a percentage. And I’ve seen many people stop doing these big jobs simply because they finally realized that, hey, I could do four of these jobs in the time it takes this one and make a whole lot more profit.
Rob Williams: Oh, yeah.
Wade Carpenter: Just cause I could get in and out. Right.
Rob Williams: Yeah. I had this philosophical moment one time about when you’re talking about how much money you made, let’s say, whatever this number is, that’s a hundred thousand a year. Well, it’s a year. It’s not a hundred thousand. Cause I used to just put down all my jobs and I would add those up and I would see them, but there was no time factor out in the beginning and we measure our lives and our success, not in [00:18:00] total dollars of profit.
Everything’s measured in how much you make per year. So you push those jobs into half the timeframe, you make twice as much money, you’re twice as successful. It’s funny how people don’t put a time factor and I was guilty of that. I just didn’t think about the timing of the money is how we measure our success. So I don’t know if that makes any sense. Was that a little too philosophical?
Wade Carpenter: No.
Rob Williams: All right. So any bonuses here?
Wade Carpenter: Well, I was going to throw something out and I’m not sure it’s more of a rant. I don’t know…
Rob Williams: Rant? rant this.
Wade Carpenter: Okay. Well, So just kind of got to set the stage. Cause I had a meeting with a contractor last week, last Friday. And this guy I had met at a trade organization show, probably more than five years ago. And we talked over the years, I’ve given him all kinds of free advice.
And back in 20, he came to me and said, okay, I want to try to do something. I’ve been trying to [00:19:00] do all this on my own, and I’m still frustrated. And he got started and he got scared. He kinda took the lowest package and he bailed in his first month because he’s like, I’m scared, and the money’s going to run out, all that stuff.
Well, he came back to me the first of this year and I didn’t even want to take the meeting with a guy. I was like, look, I just can’t help you keep doing this. He convinced me. And he’s taken the full CFO back office package. The point I want to make of this is we’re closing in on two months of this. And so I’ve been preaching to him, and this is what I would say to improve your ROI.
Get your books in order, understand your job costs, understand what that overhead is, understand those things that drive your cashflow. That is what builds ROI. He had horrible books. In just a month, we couldn’t tell him everything, but we sat down last Friday and I showed him what we had pulled together. He told me after the meeting, [00:20:00] he’s like, I had learned more in this one hour than I have in 20 years of running this on my own. And he said this was well worth the investment.
But that’s not– my rant here is, we talked about the tools. It is well worth the money to reach out to Rob, Stephen, me. When you know how to do this, you can get so much farther. Instead of trying to say, well, I still have my wife doing the books, if you really want to get to that next level, reach out to somebody, whether it’s one of us or, if you’ve got your own person, if you want to get to that next level, stop playing around. That’s it for my round. Forgive me.
Rob Williams: I really like that because I just had a a conversation with a new client yesterday, brand new client that had found us because of LinkedIn and maybe the show, but he was talking about how he likes to do his books so he really knows what’s going on. So he does his own books. He does have somebody that reviews them and stuff, I haven’t gotten into that yet to see [00:21:00] exactly what it is.
But that’s a great point. The perception that he had, that he’s going to know more because he’s doing the books himself could be false. Maybe you’re aware of the line items, but you might, what is, can’t see the forest because the trees?
Wade Carpenter: Well, absolutely. You get the tunnel vision, but you know, sometimes doing your own books, if you understand them and know what to look for, that’s great. But a lot of people, even if you’ve been doing this for years, just get an outside view from somebody, you know? And–
Rob Williams: Freshen up your ideas. Cause there’s always something there.
Stephen Brown: Take the first step.
Rob Williams: That’s–
Wade Carpenter: That was a little justification for me. Cause I was like, forgive me for the rant, but, just, if you want to get to that next level, stop playing around.
Rob Williams: Oh yeah. You know we should probably have another episode on cash drivers. So y’all listen, look! Look out there. See if we have another, because that’s a way to do it because Wade just mentioned that. So look after you’ve got these absolutely wonderful ideas of how to [00:22:00] get better return on your assets.
You can worry first about that before you start worrying about the growth of the revenue, which that’s what everybody looks at. Just tighten up your profit. Tighten up that return on your current assets. Not just the dollars, but the people assets and your time, those type things, because the more revenue you got the more headaches you’re going to have.
And it’s very likely that in boosting that overall revenue, you’re going to distort and diminish your profits. It’s actually even going to go down if you’re not really focusing on these ideas of the return on your assets.
Stephen Brown: It’s amazing how, a lot of times you just, we’ve heard that expression, you can’t see the forest through the trees and there are just obvious things that you can’t see. And then there’s more detailed things that you just don’t know about. And you know, our motto on the Contractor Success Forum, is you don’t know what you don’t know. And I would add another one, be intentional about [00:23:00] managing your company, so it doesn’t manage you. Be intentional.
Rob Williams: God, there’s so much valuable information on here. Whoa. Just, if you could see the, you guys listen to just the knowledge exploding from his head.
Stephen Brown: No, no, it’s not knowledge. I can just tell you . That. It’s just amazing how many times the smallest thing can make such a big change. That’s why I’m saying don’t be afraid to reach out. Don’t be afraid to say, you know, I’ve got a problem, and be disciplined enough to listen.
Rob Williams: Yeah. That’s a good point on our feedback. So reach out, they can go to the ContractorSuccessForum.Com. And that will tell you, I’m not going to say specifically where we’re going, but we are developing communication so we can talk to you guys better. But the way to get there is to go to ContractorSuccessForum.Com, because you may be listening to this later, and those have the links to whatever our rooms are, where you can have discussions, where you can ask questions where you can find. Information on us and we actually [00:24:00] get calls that we take, and it usually starts out free, so, I think it always starts out free.
So call us. Put questions in there and more topics that you want to hear that you can have the three Stooges, the three Contractor Success Forum guys, talk about here. We’re turning into like Car Talk guys. We’re like contractor talk guys. So we’ll, we’ll– alright.
Wade Carpenter: Who was Moe, Larry, but I guess you gotta be Curly today, Rob.
Rob Williams: Yep. I got some ideas, but we’ll talk about that. I’m the short one.
All right guys! Think they’ve heard enough about that. I will let them go on to our next episode as they’re listening to these. Wade, Carpenter, Carpenter and Company, CPAs. Stephen Brown, McDaniel-Whitley bonding and insurance agency. And I’m Rob Williams. IronGate Entrepreneurial Support Systems. Thanks for listening to the Contractor Success Forum.