How to Bid Construction Projects Profitably for Cash Flow
Do you know if you’re bidding your job properly to manage it for your cash flow? Struggling to keep your finances in order despite your best efforts? You’re not alone. Today we’re going to tackle some of these issues head on.
Topics we discuss in this episode include:
- 03:23 – Profit First implementation challenges
- 07:17 – Instant assessment difficulties
- 10:34 – JobEx and OpEx concepts
- 15:18 – Book development and goals
- 18:24 – Feedback request and conclusion
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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com
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TRANSCRIPT
[00:00:00] Wade Carpenter: Do you know if you’re bidding your job properly to manage it for your cash flow? Struggling to keep your finances in order despite your best efforts? You’re not alone. And today we’re going to tackle some of these issues head on. Come on in. Let’s talk about it.
This is the Contractor Success Forum. I’m Wade Carpenter with Carpenter Company CPAs. With me, my co host Stephen Brown with Daniel Whitley, Bonding and Insurance. Stephen, do you see contractors struggling to bid their job profitably?
[00:00:25] Stephen Brown: Absolutely, Wade. Finding the perfect project that meshes with your cash needs and your overhead and also your ability to make a profit is an art form, it seems like it. But, there’s some moving parts to this that you can manage, you can control. And you were telling me a little bit about your book that you had been working on this very subject matter.
So I’m interested in hearing more about it.
[00:00:50] Wade Carpenter: Yeah, that’s part of where we’re going with this. I have gotten approval to write a new version of Profit First for construction contractors. And I’ve been talking to Mike Michalowicz for five or six years and trying to get him to allow me to write my version of this for contractors.
So we’ll get into some of the revelations I’ve had. But some of the things that people have struggled to do whether they have great books or not is knowing if they’re managing their jobs and bidding it properly to manage their cash flow.
So we’re going to talk about a little bit of those concepts today but I’ll jump in to more of my motivation here.
[00:01:27] Stephen Brown: Please tell us more.
[00:01:29] Wade Carpenter: Okay. Me and you started this podcast a long time ago. We’ve Been working with these contractors for many years and just trying to give back a little bit. And this book is my culmination of 35 plus years that I’ve been in the business, and contractors dealing with cashflow.
And, I’ve been in Profit First for the last six years. I implemented it on my business and made a huge difference. I’ve been helping contractors all over the U. S. implement this. And when they implement it properly, they get some clarity around their cash flow and knowing if they are bidding properly.
I’ve seen some huge changes in some of my contractors that have actually implemented it properly. And I’ll talk in a minute about some of the struggles that the original book had and then there’s a derivative book that I had to get the author’s permission to do my version of it.
But I believe that there’s things that people struggle with to get going with this. And some real revelations as I have been testing for this book.
But you know I think I’ve said it before, I wish Mike Michalowicz had written Profit First before 2008 economic downturn and I gotta watch my word because we had one on the history of construction from an economic standpoint and YouTube blocked it because they thought something was political when it was not intended to be.
What I’ve come to realize is if people had been running their business around their cash flow back in 2008, would they have made different choices? Would they still be around today? Because there’s a lot of my contractors that did not survive that.
[00:03:01] Stephen Brown: Yeah, I can just tell you, not knowing every case study of your contractors that didn’t survive, they would have been around, people that had implemented this system back in 2008. I’m positive of that, Wade.
[00:03:13] Wade Carpenter: Whether they did or not, whether they made the right choices, the idea is what Profit First forces you to do is see quickly that if the cash is not working, you’re going to feel it a lot faster.
But we’ve got these huge buckets of cash that can sit there and we can feel like we’re on top of the world. And, then the cash can disappear overnight.
When Wade realized the need many contractors have for understanding their cash flow
[00:03:35] Wade Carpenter: Again, I just wanted to talk a little bit about the motivations. I still want to get to some of the details. But part of my motivation, and I may or may not have told you this story.
But my first three or four years of public accounting, I was working in an accounting firm and I got a project to help this concrete contractor do a cashflow projection. And, it was one of their constant problems that you know, a month over month, this is when we think the money’s going to come in and this is when it’s going out. And it was the old Lotus 1-2-3, you remember that?
It was not perfect, but the client loved it. The partners loved it. And, that was one learning lesson, but. The story came when, we were doing a construction symposium in downtown Atlanta with a big law firm. And we had keynote speakers in the morning and then we had breakout sessions in the afternoon. And the partners wanted me to show my cash flow projection and how I did it.
And we only had so much time to show it and there were so many slots we could have for it. And paper sign up forms, and they were signing up on them. And what was interesting was people kept going , and we actually had twice the number of people on mine to sit in for the breakout session. And people actually got mad because they could not sit in my session.
And It was a real eye opener how, It’s obvious in construction that cash flow is king, but that, for me, was a wake up call. These guys really need to know how they’re doing with their cash flow. And that was an early lesson for me.
[00:05:07] Stephen Brown: They desperately wanted to know how to manage their cash.
[00:05:10] Wade Carpenter: Yeah, and there’s a lot of things I’ve come to realize since then, and that was a big learning experience.
Don’t run your business based on what’s in your bank account
[00:05:16] Wade Carpenter: One of the other things that as I’ve gone through my career and done both the tax side and the audit side of contractors and working with them, and as I started doing more consulting on contractors, I have told them time and time again, do not run your business by what’s in your bank account.
Run your r business by GAAP financials and getting good job costing, and honestly that is great advice for job costing, but too often contractors don’t have good job records, and even if they do, it’s not always timely to run their business by. And so I preach to them, do not run your business by what’s in your bank account.
And I actually read the first version of Profit First, and it didn’t really click with me because I had seen people doing their own little version of, we’ll carve out a account to go buy our own building or something like that. And I had seen okay We’ll just throw five thousand dollars in there, and then it just disappears, or they’re not consistent and it never worked.
And for me It was just, this is stupid, you’re doing the same thing. So it really didn’t click at that point for me. That I mean, do you see people that just, let’s throw a bank account up there and we do some kind of version of it, but then it doesn’t work. You ever see contractors do that?
[00:06:28] Stephen Brown: Absolutely, sure.
[00:06:29] Wade Carpenter: A few years later I had another contractor come to me and say, hey, we read this book and want to implement it. And I had read the book, but I re-read it. And actually there was a revised version of it by then.
And I started thinking about the, psychology behind it. It’s not just about putting, your money in buckets. It’s let’s carve it out and make sure that we don’t just take 5, 000 here and throw it there. And then next time we run out of cash, we’re going to break that bucket. The psychology behind it makes so much sense, but the structure that they were trying to do made no sense.
There’s a system behind it. And if you actually get in there and follow it properly, then it can make a huge difference for contractors. It made a huge difference in my own business. So key point, when it’s done right, it works.
[00:07:21] Wade Carpenter: And, there’s a lot of revelations in the original book and the derivative book. But they don’t go into the nuances of contractor, of how to implement this. I had a big revelation this week that I wanted to talk about.
[00:07:34] Stephen Brown: I don’t want to keep our listeners from your big revelation for sure, but just the whole issue of knowing where you are in order to figure out what your cashflow needs are. That’s a whole other process in itself.
There’s so many moving parts to being a contractor. And I guess that’s why we’ve done so many podcasts. There’s so many different moving parts that a contractor has to oversee. And cashflow doesn’t have to be a mystery. It doesn’t have to be a source of stress. You’ve got enough problems on the job site.
And that’s the main thing that that always has popped into my head about Profit First, and how to cashflow a project and what decisions you need to make in order to take on a certain project, based on your cashflow needs.
But anyway, you asked what I thought, but I want to hear your revelation.
[00:08:32] Wade Carpenter: That’s definitely true. People just don’t understand how to manage around their cash flow. Again, the motivation of the book, you can think about all kinds of other industries, but construction has so many nuances to their cash flow. These, retainage clauses and pay when paid clauses and people just dragging you out.
There’s a lot of moving parts and I think of all the different industries out there, I think it may be one of the toughest. And there’s no magic bullets, but Profit First can go a long way to getting you to where you are comfortable and can sleep at night, knowing that you have money in the bank. You don’t have to worry about, chasing money down on Thursday to make sure you can cover paychecks on Friday.
[00:09:13] Wade Carpenter: With that said, I wanted to talk about, the big revelation I had. And one of the thoughts that was floated by me that a lot of contractors will read the book or they’ll listen to the audio version of the book and never implement it. There’s a ton of people that never do it.
But there’s a section in there that is the instant assessment. And that instant assessment is not instant, and it can be very confusing.
Here was my experiment that I did this week with my own team. I had 10 people in the room on Monday morning in our team meeting, and I pulled out the Profit First book. And I gave them a contractor’s financial statement. So they have been around, they’ve been working with contractors, implementing the bookkeeping with Profit First, and hearing me talk about it, and deriving the percentages.
But I asked them, read the section of the book for the instant assessment. I had 10 people, so, a CPA in the room, a CPA candidate in the room, one with 35 years of public accounting experience, working this problem together. They could not get it. They could not figure out the system assessment. And so , if they couldn’t get it, I’m thinking this really is tough for anybody, whether it’s a contractor or not.
And I took down so many notes for the book from just that experience, because I was like, what goes into taxes, What’s owners, you know, what is profit? Trying to back into those numbers. And it was just amazing to me.
And if they can’t get started with a book, but , or they talk about it, they think about it. Or they do some kind of modified, whatever they think is, they should do and start throwing some bank accounts, it’s not going to work. Long story short, I’m basically walking through that a lot differently.
[00:10:56] Stephen Brown: So Wade, this assessment of cashflow needs, is that right? Is that what you were doing?
[00:11:03] Wade Carpenter: So it’s a Profit First Assessment. Taking your own numbers and saying, okay this is my materials and subs percentage, this is my operating expenses, this is what I’ve been taking for profit and tax. They were very confused.
And the exercise is let’s see where we are, and then there’s a table where we say, this is where you should be for various revenue buckets.
And I won’t go into the nuances of it, but you think about like different types of contractors have a different growth margin. That’s exactly what this real revenue concept is.
[00:11:36] Stephen Brown: So your team of 10 people that tried to do this assessment, are you going to tell us what made it so impossible for them? And what revelation you had as far as, getting that assessment done? I assume the assessment is vital to developing a cash flow projection.
[00:11:55] Wade Carpenter: So it’s more of what we’re developing percentages that we’re going to allocate our money, or our profit first buckets to.
I
[00:12:02] Stephen Brown: see. Okay.
[00:12:03] Wade Carpenter: And the part about materials and subs, and they talk about real revenue, but it’s very confusing and it’s not explained in the original book or the derivative book.
I’m just going to be able to hit the high notes on this, but in my book, , they carve out materials and subs, and the main point of that is it’s a clear definition. So if a contractor has no books whatsoever, I could make them go add up all the amounts they paid to their subs, I could make them go add up the supplier bills for the year, and we can come to some kind of percentage even if they have absolutely no records.
And they struggle with job costs, but this is one of the first building blocks of this. And I am going to take the concept of materials and subs to a different level to where we’re going to define it a lot better for subs. Because in construction, we both know it doesn’t matter what the IRS rules say or whatever, people are going to treat employees as subs and sometimes subs as employees.
And part of the concept is, what is the cash out on a job? And we’ve talked about the job costs can include workers comp and payroll taxes and all these other things. It’s confusing. So my concept, which I’m calling JobEx, or job expenses, is not job cost. It’s not just materials and subs, but it’s the attempt at creating a simple definition of what cash goes in and out of your job.
And that’s one bucket we’re going to put money aside for in. And that is the number one thing you can do to stop this, borrow from the next job to pay for the last job that contractors get in so much.
The other part, when people are bidding their jobs, number one, we’ve got the cash that’s going out. That’s what I’m calling this JobEx. It’s hopefully a simplified version of knowing what goes into your jobs from a cash flow standpoint.
The other part of it is when we’re bidding our jobs, we throw some overhead factor on there. Talked about all the time what goes in job costs and what is the true definition of overhead.
Are we using an overhead number that we used from our last company, or we made something up, or we said, this is the industry standard? But whatever that number is, if it has no relation to what’s really happening into your business, then that is.
[00:14:21] Stephen Brown: Worthless.
[00:14:22] Wade Carpenter: Yeah. So you’re probably bidding with a different figure.
But what we’re going to do with the OPEX, or operating expenses, is basically telling you how to figure all the other cash out. Most people look at your profit and loss statement, but that’s not cash in and out. And we got materials and subs out here and we’re going to extract that. But that’s not all that goes into cashflow out.
So I hate the term, but this is whatever your monthly nut is. What do you got to cover to make sure that you keep the lights on, even if you had no work?
So that’s where I’m going into OPEX and figuring that number properly, for a surrogate measure of overhead to bid your jobs properly.
[00:15:04] Stephen Brown: Okay.
[00:15:05] Wade Carpenter: And then there is the profit component. But those are two of the biggest problems that I see contractors make. And we all want to know how our job cost is, but the definition is all over the place.
So ultimately, the book, it goes into a lot of different things. Some of these things that we talked about . The upturns and downturns in the economy.
The idea is let’s take this instant assessment and throw it out the window. We do want to put some targets on those things. But the idea, number one, is you’ve got to get the system in place. You’ve got to get started knowing what your numbers are, and then working backwards.
I’ve run a couple of contractors through this as a test. Because I do it naturally. This is how I baked it into my practice, but I’m just throwing this out to our listeners. If anybody wants to possibly be a guinea pig or talk about some of these things, I would love to talk to you about it, because the more research I do with the book and getting this implemented, the better book I think I can have.
[00:16:07] Wade Carpenter: And this book is a very different book. Mike Michalowicz even said it. This is a story, building a project and implementing the system as we’re going through it. And so I can talk more about that later, but part of doing this, is I want to make this as simple as possible for contractors to implement it.
So we actually have been building some online calculators because walking through this spreadsheet, there’s a form that is in the Profit First book for this Instant Assessment. It’s confusing.
We probably can put this in the show notes, but I’m going to give a link that you can go to to start figuring these JobEx figures and OpEx figures for yourself. So with that said, that’s the idea between where I was going with this today and my hope was to get more into the details of it.
What are your thoughts, Stephen?
[00:16:59] Stephen Brown: My thoughts are, I think it’s great you’re doing this. Everything you do in life, you can use an extra helping hand. And when it comes to accounting systems, sometimes I bet a lot of our listeners may listen to a certain podcast that we do that just goes really deep into a certain subject matter that we’re interested in at the time.
It may not mean anything to our listeners at all, but it’s just something that we’re interested in. We think it’ll help our contractor customers succeed.
And to have a book that spells out the rules and you understand what fundamental plays you have to make to score a touchdown, this is the building blocks, just like the cornerstone, the foundation of a new building project, that you can put into place. It’s explained in a way you can understand, and also has a glossary of terms that are unified throughout the system. And like you said, that is really difficult.
It just absolutely blows my mind, Wade, how many different business terms people come up with. And how much more effective it is to change it up in something that explains those business terms a lot better.
And then once you get the rules, once you get the fundamentals down, then you’re ready for the fancy plays that you need to make to go after a bigger and different jobs, to finance projects, to take cashflow to another level of effectiveness, not just simplicity.
I’m excited about this, and I think our listeners really ought to take advantage of your offer. I know I would if I was a contractor and that is, yeah, okay, use me as a guinea pig. I’m all in. Because I think this is going to be a very necessary and popular book that you come out with and program that you perfect.
It’s like you said, when you initially just did a simple spreadsheet of cash flow, all those years ago, it was revolutionary. And when you mentioned Lotus 1, 2, 3, it, it just, shorted my old brain out, it’s so old. Our younger listeners are gonna have to look that up online, but predecessor to a spreadsheet, maybe.
But nevertheless, you were able to show contractors what they were so desperately trying to understand. What is it that makes my life so stressful? What is it that causes me to lose money on projects? What is it that has caused me to have a bond claim?
All these things are basically the end zone. It’s the touchdown you want to score in your project and in your construction business.
So I think it’s great, Wade. I can’t wait to hear more about it. And I think we ought to do another podcast, maybe where you get into more of the nuts and bolts of it.
[00:19:48] Wade Carpenter: I think we definitely will, and I talked to Mike Michalowicz, he’s excited about it. He offered to come back on the podcast, which we haven’t had him on since the first year of doing this, but, it’s a very different approach that I’m taking to it. I’ve taken over this talking too much, but I am really excited about it, because I really see a lot of help that I can bring to contractors if they will implement this properly.
But, what I am finding out in this process of writing the book doing it right is a lot more than just putting words on paper.
[00:20:18] Stephen Brown: Sure.
[00:20:18] Wade Carpenter: So I wanted the target date to be later this year, but they’re telling me to probably send it out, it may be after tax season next year. I don’t know at this point.
[00:20:28] Stephen Brown: In the meantime, you’ve got to grind it out with real world examples and you’ll get there. I know you, you’re going to do a great job.
[00:20:36] Wade Carpenter: I’m already 50, 000 words into it, so I’ve got a little bit of–
[00:20:40] Stephen Brown: Little bit of momentum. Yeah. I want to hear more about what you’re thinking about. So I’d really like to do another podcast with Mike, or with you, just fleshing out basically the blueprint of this book you’re coming out with.
[00:20:54] Wade Carpenter: I’d love to talk about it more, but again, I know we’re running way long. But if any of the listeners out there, we may want feedback on the book. If anybody may want , to read some of the earlier versions of it and give me feedback, that would be invaluable to me.
[00:21:08] Stephen Brown: How would they reach out to you, Wade?
[00:21:10] Wade Carpenter: We can put my contact information on the show notes, or they can always go to CarpenterCPAs. com, is our website. Just any of the ContractorSucessForum.com or YouTube channel. I think your contact information and my contact information is already up there.
[00:21:26] Stephen Brown: Okay.
[00:21:27] Wade Carpenter: Again, for any of our listeners, if you’ve got any thoughts on what we discussed today, I’d love to hear your feedback and answering any questions or comments on the topics. drop them in the comments section of the YouTube or whatever.
Thank you for listening to Contractor Success Forum. Check out more information at ContractorSuccessForum.Com or the Carpenter CPA’s YouTube channel for more information. Appreciate it if you consider subscribing, liking, and sharing our podcast. And follow us every week as we post a new episode. We will look forward to seeing you on our next show.