Full Transcript for The Profit Problem Contractors Overlook

primarily the being able to rely on the people that I'm managing that are the technical experts, and so I spent basically the next six months learning from them while I was managing them, and ended up finding that that was actually a bigger passion for me in the audiovisual industry than it was in the network cabling. 00:05:35.569 --> 00:05:36.649 Love that, love that. 00:05:37.250 --> 00:05:59.620 Yeah, so it's it's been a really interesting journey. I find that, and this is probably the reason I love the trades the most is that we can continue down a road. We become technically proficient, and then a door opens. You know, and we if we choose to go through it, we go through it. We learn new things, and then that presents new opportunities. So 1,000% You know, keep going. I don't mean to cut you off. 00:05:59.978 --> 00:06:17.399 Yeah, sure. I ended up studying for other certifications. I got something called RCDD, which is a Registered Communications Distribution Designer, and basically that is to learn how to design network infrastructure within local buildings, usually. 00:06:18.088 --> 00:06:59.050 Okay, and so I did that, and then I ended up finding out that the company direction for me wasn't exactly where I wanted to go, so I ended up leaving that company, went to an engineering firm, and spent all of three months as a technology consultant. And I found out very quickly. I was like, man, I love getting my hands in it, and love being around the people in the field, and loved the guys I was working with. It was a great company, but decided at that point to go out. And I approached my old mentor at the time. He was no longer at the prior company either, and we decided to start our own company. So, in search trade alignments, actually that was Acom Technologies. 00:06:59.800 --> 00:07:51.250 Okay, in 2013, we started that, and we managed that all the way through 2024. Grew to 70-ish employees, and ended up finding a national provider that acquired our company. So into 2024, I exited that, and it's funny because you know, going through business, you learn incredible amount of things. But I did not have a college degree at the time. I had some credits from straight out of high school, but in 2022, I saw some guys that were managing projects, and they're just very high speed. So I was like, you know what? I'm going to go get my degree and see if I can compete with that, and so yeah, I ended up getting my bachelor's degree and graduated the same month that I left the company. So okay, my wife had a grad retirement party for me. 00:07:52.060 --> 00:08:07.529 That's right. That's right. I love it. I love it. I could like. I would. I would go down that. I would love to hear more about like what your take on was like all the experience that you had pre undergrad and then masters and then what it was like post, but that can be probably an episode in itself. 00:08:08.519 --> 00:08:26.120 But I think like just based on like all of your experience, like you you've definitely got like a compelling treasure chest of experiences and and examples that you can share. So I think that that leads me into like my question, which is like from your point of view, over two decades of experience, right? 00:08:26.209 --> 00:08:31.220 What is the one conversation in construction that isn't being had enough that needs to be had more? 00:08:32.750 --> 00:09:19.440 Yeah, this was a really hard lesson for me, but about five years or so into our business, I learned that we did not have an appropriate efficiency metric, and that may vary between companies to some degree. But ultimately, I think that it will go back to our net profit per our constrained resource. For most of us contractors, that's going to be the skilled labor hour. So, yes, an interesting thing to track through the arc of a company is if you take the cost of goods sold hours and divide that into the net profit for the year. 00:09:15.840 --> 00:09:25.190 It's very simple. You come up with your net profit per cost of goods sold labor hour, right? It's okay now. 00:09:25.519 --> 00:09:26.899 Yeah, keep going, keep going. 00:09:27.259 --> 00:09:47.950 Well, I was just going to say, it's if if you were to follow that arc out, you would, I almost guarantee it. The years that had higher net profit per your constrained resource are the years you would say you had great years, and then the ones that were bad were the ones that you had bad years, and that seems obvious, right? 00:09:48.759 --> 00:10:09.269 Right, totally. Well, and that-that's what I was going to ask. Was like, and maybe I missed it, but or we we talked about it too quickly. But like, what was the? You said five years in, right? Is really when you went into this like like the labor hour concept. What was that aha moment like? When did you was were you just like parsing data and evaluating, and you found the theme? Was it like an internal speculation you had? 00:10:09.659 --> 00:10:11.879 Was it just like I'm desperate, like we got to figure this out? 00:10:12.059 --> 00:10:15.629 What really created that moment, and then got you to that aha moment? 00:10:16.559 --> 00:10:23.149 Well, this is a long story, but I'm going to keep it really short, and it ultimately led me to getting my MBA after we sold the company. 00:10:23.240 --> 00:10:23.600 Sure, okay. 00:10:23.990 --> 00:10:54.789 But what happened around year four, year five was that we were busier than ever, but we had less profit to show for it. And it's like this is classic. This is crazy. And so as we started digging into that, we you know went to our CPA, who we had very little conversations with, unfortunately, and we were like,"Hey, you know, we're we're technicians here. What what are we doing here? You know, we were approaching five to 7 million in revenue at the time, and it was like we're working harder than ever. Why is there less money? 00:10:55.299 --> 00:11:04.740 And she said, "You know, don't worry about it. This is

something everybody goes through. As you're growing, you're going to have less cash. 00:11:01.500 --> 00:11:12.929 And what I found out later is that was terrible advice. As we followed that down the road, if we continued down that road, we would have ended up at zero eventually. Yeah. 00:11:14.250 --> 00:12:03.210 And what the logic was just like your your top line is there, and you're just investing back into the business. So you're going to have what is that essentially like the the thesis of her comment? Yeah, yeah. And at the time, it was funny. She assumed that we understood that net profit on the income statement doesn't mean actual profit. If depending on whatever capital resources that we are investing in, we're not recognizing the depreciation right away. So we might look profitable, but we run out of cash. But she made an assumption that we knew anything about that at the time. So yeah, yeah, totally. Well, that's why we're here. That's why we're here is to like help the contractors understand that because that's like where that lag is. It's like we're working with contractors here, incredibly talented with their hands, with their trades, with their skills, right? But then on the business side, they can be lacking. So let's hear it. Like, what is how did it impact you when you learned that? Go ahead. 00:12:03.600 --> 00:12:28.879 Yeah, and by the way, that is what the next phase of my life is about. Is you know, I think the business failure rate is terrible, particularly in the construction industry, and we got to fix it. So that's that's my goal for next phase of my life. Hey, insert shameless plug for trades alignment. If you're if you feel that way, give Tom a call. We'll get you the information to find Tom here at the end of the episode. 00:12:29.210 --> 00:12:39.950 Yeah, you know, I think it's interesting. Most contractors, most entrepreneurs as a whole, you get to a point where you're like, all right, I've proved that I have a product to sell. 00:12:40.159 --> 00:13:03.509 People want it, but then you get to the end and you run out of cash. You know, and it's like, well, how did that happen? And there's a lot of different reasons for it. Some of it is pricing. Some of it's some of the cost structure. But one of the things that was interesting to me through my journey, which I was literally at that time learning what is an income statement. What is a balance sheet? How do they interact? 00:13:04.440 --> 00:14:04.320 Yes, I was learning it at such a basic level, and the interesting thing is, 18 months later, after hundreds of hours of LinkedIn learning content and YouTube and books, I started narrowing down on this constrained resource concept, and for us, as self-performing trades contractors, we, for sure, our constrained resource is our direct labor hour. And even even for general contractors, I would encourage you to maybe consider that. But okay, for for me, as I was reading through that, I was finally narrowing down on this

concept, and then by the grace of God, I got introduced to a gentleman named Fred out of Saint Salt Lake City, and I called him up one day and I said, "Hey, here's my situation. He was a CFO with extensive experience, and I said, "Hey, I'm I'm tracing this out, and it appears to me that all the roads lead back to my labor dollar. And he goes,"Well, yeah, of course it does. 00:14:05.159 --> 00:14:07.019 It's like obviously, yeah. 00:14:07.499 --> 00:14:13.499 And at the time, it was like these scales were lifted from my eyes, and I was like, "Oh my gosh, I need to look at this again. 00:14:14.429 --> 00:14:55.000 We have to optimize for the labor hour, yeah. But where that ultimately led me was a really interesting concept. So at the time, oh man, it's so terrible. If you go to any trade show, you could go up to any contractor just about and say, "Hey, what's your gross margin? They go, "Oh, 40% 45% 55% whatever it might be. And if they were to expand their business in whatever capacity, they would shoot for that same gross margin, and for us, that's exactly what we did. We had a industry standard that we under thought we understood that 35% gross margin across the board. 00:14:51.669 --> 00:17:23.480 If we could hit that, we were golden. And ultimately, when when I was able to ask the right question. I was able to I was able to ask this. I said each one of my prof each one of my projects is achieving a 35% gross margin. Why don't I have any money? And that ultimately leads up their question. Yeah, and it just leads us down this road of asking. Well, what is gross margin, and you know whatever's left after gross margin, which is our all of our overhead expenses, how do we actually pay for those? So as we're looking at our income statement, we have our revenue, cost of goods sold, and then our expenses. The only way we pay for our for our overhead expenses is if we have money left over after our cost of goods sold. That means we are selling to our clients the cost of goods sold line items, and somehow we're increasing the the price on those to cover the overhead costs. So then, the question from there, as we go down this road, is how do we pay for those overhead costs from each one of our lines on our cost of goods sold? And if you were to track it out for every single one of your expenses, you would find that they're not applicable across the board, so I think a good example of that is office labor. Let's just say that. So the people processing your payroll, processing invoices, doing whatever is is is that time directly proportional to all of your cost of goods sold expense costs, or do they tie more directly to one of those costs? And I'll fast forward my year and a half experience, and what I would find is that the majority of my expenses are traceable to the labor hour. So whenever I apply that lens, instead of a revenue perspective of overhead allocation, that leads us to a road of applying our overhead strictly to our labor hour. So now, what happens? What happens in that case is that all of the jobs that are heavy on labor carry almost all of your overhead in that scenario. 00:17:23.839 --> 00:17:23.930 Yep. 00:17:24.529 --> 00:17:37.609 And if it's light on material, or excuse me, if it's light on material, if it's light on labor, it will carry substantially less of the overhead, which is generally appropriate. 00:17:37.640 --> 00:17:38.059 That makes sense. 00:17:38.720 --> 00:17:40.130 However, yeah, that makes sense. 00:17:40.519 --> 00:18:12.990 However, at some point, some of the overhead is paid for by material subcontractors and your equipment. So, what we what we do at Trades Alignment is we do a strategic overhead allocation analysis, and we take the expenses line item by line item and say 80% of this is driven or attributable to our labor hours, 15% is attributable to the material that we purchase, and then 5% maybe to subcontractors. 00:18:08.160 --> 00:18:34.910 The interesting thing with this, as we go all the way down the road, is that we have this strategic allocation method that assigns costs to the appropriate projects. So, as we, it's interesting because I think this. It's funny because this is this is where I get the look in the eye from the business owner, where it's like, gosh, that's a lot. 00:18:36.230 --> 00:18:36.980 Yeah, sure. Okay. 00:18:37.759 --> 00:18:49.180 My mantra is, you know, if we're talking about millions of dollars here, which hopefully we are, it should be complex to develop because we want to dial this thing in tight. 00:18:50.319 --> 00:19:01.410 Yeah, but it must be simple to implement. So condensed, I say complex to develop, simple to implement. So beautiful. 00:19:02.160 --> 00:19:29.450 What we end up having at the end of that study is the ability to apply these pre-configured overhead recovery rates to each of your cost of goods sold items, so that you can very quickly, on an extremely simple calculator, understand your net profit per project, which is a yeah, which is a super super elusive number for most contractors. 00:19:29.480 --> 00:20:04.680 Totally, totally. Well, and I'm even thinking too is like if you can get this boiled down to like how your overhead is associated to your labor hour, then like as you are scaling, and you start to see your overhead increase, you can start to see like how that's tracking against your labor. So you can see much more quickly. Like I'm already selling something at a lesser margin because my overhead is increasing, which is going to happen with scale. As I've been maybe stagnating my labor hour, am I tracking on that? 00:20:05.369 --> 00:20:17.789 100% I mean, the interesting part with what you just said is, in my opinion, what you were just talking about is the true meaning of knowing your numbers. 00:20:12.960 --> 00:20:23.390 So, yes, someone told me very kindly early on was they said,"Man, if you just know your numbers, you're going to be good. I was like, "Okay, sweet. 00:20:23.390 -->

00:20:26.809 Yeah, so you know, super ambiguous. Yeah, man. 00:20:25.160 --> 00:20:42.069 Every night, literally every night, I would look at revenue to date per month, quarter, or year. I would know what my aging receivables were, what my payables were, and man, I was like, I know my numbers backwards and forwards. 00:20:39.140 --> 00:20:53.619 If somebody ever asks me, I'll know. And so, but later, later, I found I was like, "Wait a minute, that's not what they were talking about. Whenever I started, I was memorizing the wrong information. Yeah. 00:20:54.069 --> 00:21:27.200 Oh, totally. So the way I explain knowing your numbers now is knowing how many levers you have in your business, and I imagine this person sitting at this cockpit, like with 100 different levers, and knowing which one of them is the appropriate to pull at the appropriate time, and then also maybe even more importantly, which one provide better leverage. So there are some things in our business that a tiny little tug on that lever, and you have an extraordinary result that just explodes. 00:21:27.440 --> 00:22:27.349 Yeah, and ideally, what we do is as we scale that we we optimize those, and once we've fixed all those, we get into the ones that are very challenging to to dial in, and they offer a moderate reward, but man, why why focus on those? Let's focus on the high leverage ones, 100% And I think like so that's like understanding the different levers that you can pull in your business. That's really what knowing your numbers mean. Yeah, but like I imagine that's what you guys help the business identify what are our levers, right? So like for the audience as they're listening to this, do you have like any like example or something that they could hang on to that is a that is a lever that could potentially be pulled that they're like this is making sense now. We've got Tom talking about knowing your numbers and it's not just memorizing the digits and and the number of zeros, but it's really understanding how those numbers are getting there and then which levers to pull to make whatever you want to have happen happen. What is an example of a lever or a couple of levers and or examples that you could run through? 00:22:27.799 --> 00:24:14.009 Sure. Yeah. So I think a extraordinarily high output lever, high leverage, is our pricing. So as we go through an overhead allocation study, we can develop some very strategic pricing. So if we're not strategically allocating our overhead, we're using whatever metric they're using, typically gross margin target. What ends up happening is we are more expensive for projects that would be awesome to do. I mean, low effort, super high return, but we're too expensive, so we don't win the work. On the other side of the coin, we are very cost effective for projects that are very demanding, and so we end up winning projects we don't want and losing projects we do want. So that's a super super high leverage item. Another one that's interesting to me that we most of us contract tractors miss is the education of our team, and I think being able to have an alignment between our different departments, whether it's sales, service delivery, and finance, if everybody is tracking that we have a common goal, and in my opinion, it should be improved net profit per labor hour, then we can start making appropriate decisions, and I think a perfect example of that is in the field for what I call service delivery. You might have a project manager who's out there, and he says, "You know, I have I have an abundant amount of crews available to do this work, so I'm going to I'm going to send all these guys over there. They start doing the work, but then they need a an extra personnel lift, and he's like, "Well, I have plenty of guys. You guys just deal with it. I'm not going to spend money on a on a lift. 00:24:09.089 --> 00:24:47.170 And so, so what they're doing is they're they're they're thinking like 165 a day for a lift, but I have the guys, you know, and so yeah. Once we start tracking net profit per labor hour, and they truly have an appreciation for it, they know exactly what reducing one labor hour for that project does to project profitability. And on top of that, they know $100 in material or subcontractor cost does not equal $100 in labor cost. Those are two different things because of the overhead associated. 00:24:48.220 --> 00:24:58.750 I mean, this this seems this seems like just a massive like massive opportunity. I mean, go ahead. What are you saying from the clients that you're working with and the contractors you're working with? 00:24:59.559 --> 00:25:15.480 Well. I'm I am seeing the reason that we have such a high business failure. It's just catastrophic and it's heartbreaking. I worked with I've worked with a few that have been there. They are they couldn't have been more ideal clients. 00:25:16.500 --> 00:25:30.650 Yeah, but then at the end of the day, they're saying no, no. This is where I've always been. I've priced it right here. I know this is good, and it's like, but you're not. I can show you where you're not. This and ultimately, these should not be gut decisions. These should be math decisions. 00:25:32.089 --> 00:25:34.039 Yeah. Well, and okay. So this like brings up another one. 00:25:34.069 --> 00:25:40.579 Like, what is just what are some of the comments that you hear from contractors when they're essentially pushing back, right? 00:25:40.640 --> 00:26:15.000 And they're they're erring on the side of where their comfortability, oftenly disguised as something they've always done, right? What are just some of those comments that get made to you? This is a safe space, and I always say like the the your perspective here is important for the audience, so that then they can cross check themselves and identify like are they that person and is there room for growth, but what are those comments that just make you want to bang your head into the keyboard? And you're like, this

is so preventable. You're so close. Like you're you're right there. This doesn't have to be this way, but they just can't get over it. What are some of those comments that you hear from contractors? 00:26:15.480 --> 00:26:22.160 Yeah, there's a couple of things that they they can't afford a a bookkeeper that understands job costing. 00:26:23.119 --> 00:26:31.970 Sure, in my opinion, you can't afford not to have one. It just sure blows my mind. If without job costing, we we don't know where we're going. We don't know where we've been. 00:26:33.140 --> 00:26:33.380 Totally. 00:26:33.710 --> 00:26:38.150 So that's one. Two is I don't. 00:26:33.710 --> 00:26:38.150 This is one of my favorites. 00:26:38.329 --> 00:26:42.910 Like I don't I don't read because I'm not going to let somebody else tell me how to run my company. 00:26:44.109 --> 00:26:49.359 Really, that general perspective is more common than you might guess. 00:26:50.410 --> 00:27:11.160 Yeah. Well, and that's where like you kind of get into like are are those people trying to build a business or are they trying to monetize a hobby, right? And I think a lot of business owners conflate the two. Right, they look at that and they're like, "Well, yeah, I'm a business owner, but you're like, dude, if you're not growing, you're dying. Right? 00:27:11.160 --> 00:27:32.839 That doesn't mean you have to go out and be the next billion dollar contractor. Right, but you should be targeting like over you know whatever trajectory hitting your 1015, 20% year over year growth, right? And you're just constantly growing, and you're chipping away, and you're getting better. And so many people are like, "Yeah, I would love to do that, but you know, I'm happy right here, and this is good to go. And so, yeah, yeah, for sure. 00:27:33.470 --> 00:27:41.119 You know, I also see a lot of times where people don't want to release some of the reins, which is a challenge. I mean, if if there's if they're baby, it's normal. 00:27:41.329 --> 00:28:00.779 Oh yeah. If if there's a listener right now that has not read E Myth or Traction, those two books like revolutionized revolutionizes the way I think about things. Sure. And then there's there was one other one escaped me at the moment, but if you think of it, just pop it in. 00:27:57.579 --> 00:28:12.839 So yeah. So it's whenever I talk to people, I always mention that we need to be building our companies for an exit. And some of them, that's offensive at first, and they're like, "No, this is what I'm. I'm building my legacy here. This is what I'm going to do until the day I die. 00:28:12.960 --> 00:28:36.200 And I'm like, "That is great, but the same exit comes after you die. Yeah, yeah, sure, yeah, it's for your family possibly. But it is interesting if if your company is attractive to be acquired, that means it can run by itself. It's profitable. It's relatively low risk, and that's the exact company that you would want to manage the next 20 or 30 years. 00:28:37.400

--> 00:28:37.670 Totally. 00:28:38.299 --> 00:28:49.210 If if you can go through those steps and do that. I'm not. I'm not an operations coach, but in order to afford to do those things and improve in those areas, we have to fix our finance. 00:28:50.559 --> 00:29:13.769 Totally. Yeah, I think that's like an awesome point. Like, if build the company for an exit, even if there's no inclination or interest of exiting, it is just such a safe move, because to your point, it's like, why wouldn't you want a company that operates on its own? And like, you're obviously performing roles called as like a CEO, right, or president of the company, and you're sitting there doing high level vision, and you're controlling the vision. What do we want to grow? 00:29:13.920 --> 00:29:36.349 What do we want to maintain? How do we want to go about the next, you know, five years of the organization? And you might surprise yourself at 3540, years old. You don't want to sell it, and at that point in time, you're like, "This is going to be my legacy. But life happens; something crazy goes through, happens to your world, and that might be the saving graces that you put in the work to build the business to exit. 00:29:36.559 --> 00:29:38.299 You don't know what's coming tomorrow. Be prepared. 00:29:39.410 --> 00:30:09.900 Totally, totally. I think this was an awesome episode, Tom. I think there's a ton of ton of information, and you know, I think I like to bring um people with your perspective on the podcast, the service providers, right? The people with the with the context, because you're talking to contractors every day, um, and that's obviously married up with your 20 years of experience. So I want the audience to know, like, how do they get in touch with you? How do they follow your content? How do they reach out if they want to start a conversation? Where can they find you? 00:30:10.319 --> 00:30:15.990 Sure, yeah, you can find me at TradesAllignment.com if you want to check out the website there. 00:30:13.230 --> 00:30:32.809 You can also find the TomAtkinson.com if you wanted to check out the book. Okay, you can also find me on Instagram, TikTok at Trades Alignment, and then on YouTube at the Tom Atkinson. Oh, are you TikToking these days? Are you TikTokking? 00:30:28.039 --> 00:30:35.720 It's it's just literally one extra step to put it there. So that's that's why there we go. 00:30:35.990 --> 00:31:07.829 But you know, real quick, I was hoping to want to share on on Thursdays. I'm releasing a series I call Nail the Numbers, and so what I do do in that time is in literally four to five minutes, I take a financial concept, we go over the numbers and try and make it where it's simple to understand. I would love it if companies are bringing their project managers in for their weekly, you know, project meetings. They're like,"Hey, let's take a look at why markup is not margin or what is overhead. And so, totally. 00:31:08.099 --> 00:31:11.789 Anyway, I've just found a ton of fun doing that, and I think a lot of values there. 00:31:12.660 --> 00:31:19.680 Or do you do it like in a webinar format, or like like a Zoom link, or like how do they get? How do they register for it? How do they? How do they do that? 00:31:19.799 --> 00:31:30.049 Yeah, this one I just released straight on YouTube, so you can just go. There's a playlist on my channel called "Nail the Numbers, and so 1030 mountain every Thursday. 00:31:31.069 --> 00:32:18.720 Love it. Okay, we'll definitely link that in the show notes. And frankly, Tom, we'll get all those your different handles, your websites, all that stuff, because this is such a critical conversation, especially with you know, there's 10s of 1000s of small to medium sized construction companies out there, and a lot of them do have the aspirations to grow, but so much of it is that like analysis paralysis-the years of trying to piece together what's actually happening when really they just didn't know the right question to ask. So I want them to get in front of you, or at least your content, at the very least. To again, to your earlier point, your entire mission is like it's heartbreaking. These small businesses are failing. Oh yeah, there's and they're so simple, or the reasons that they're failing are so simple to correct. Yeah. So that's beautiful. Anything else? 00:32:20.009 --> 00:32:41.650 You know, I think if if the overhead allocation topic is interesting to you, I did write a book called "The Liar, the Thief, which is the right. Yes, it's a business fable, so it's a it's an interesting read. It's a story about a project manager, but in my opinion, well, you know what? You you can just listen to it on Audible or the book. You'll see who I think is the liar and the thief. 00:32:42.549 --> 00:33:02.160 Okay. Okay. Beautiful. I love that. The little teaser. And honestly, I mean, there's there's a lot here. I think if anything, this is just a testament to how passionate and honest you are about wanting to solve these problems. I mean, you're tackling it from all angles. A ton of the great resources. But no, Tom, I appreciate you jumping on. I think I will definitely be in touch. Let me know if I can ever do anything for you. 00:33:02.250 --> 00:33:03.269 Okay, sounds great. Thank you. 00:33:04.019 --> 00:33:04.259 You bet.