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If you don't sit down with us and help us break down the cost of this and get us the numbers, then I'm going somewhere else in my business, and that's really what it took.
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Welcome to Builders Budgets and Beers. I'm Reece Barnes, and I started this podcast to have real conversations about money and the building industry, the wins, the mistakes, and everything in between. I believe builders deserve to feel confident about their finances, and that starts by hearing from others who've been through it too. This industry can be slow to change, but the right stories and the right tools can make profitability feel possible.
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Let's get into it. Alrighty, Kevin. Mics are hot, dude.
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Thanks for jumping on Builders Budgets of Beers with me.
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No, thanks for having me.
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Appreciate it.
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Of course, of course. Well, cool. And in true BBB fashion, go ahead and introduce yourself for the audience. Give them a little background on yourself, how you got to the home building game? Just some of the basics.
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Let the audience know who you are.
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I'm Kevin Acock. My company, Southern Luxury Homes, been building about 25 years.
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Graduated from University of Georgia in 2000 and started working for a custom home builder in Atlanta. Spent the first decade with him, market tanked in '08, like everybody remembers. He said, "Good luck, wish you the best. I got nothing for you, and so I was forced to go my own.
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There you go.
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Did did a bunch of bank work, finishing half built houses, you know, all over the southeast for a number of years, and then you know, just right back into into new home construction in about 2013, and okay, and then just kind of been five years there. There was about five years there from when the market crashed to go ahead.
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There was, and so I did a lot of. I was a court appointed receiver, so the banks would have the court appointment receiver for assets they didn't want to foreclose on. They didn't want to get the chain of title and get sued. So mostly half built houses, mostly some golf courses, neighborhoods that needed development finished. A lot of pipe farms. We we bush hogged lots and lots of pipe farms.
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Okay. Okay. Cool. Well, we could we could dig into that, and I'm sure we will touch into a little bit more. But okay, so 25 years in the game, and you've seen it all. You you experienced the the 2008 crash, COVID. I'm sure. But dude, let's get in. Let's let's let's dive in here a little bit because I do. I want to anchor this episode a little bit, and then we can start digging into some of the details you just shared, but dude, from your perspective, what do you think is the one conversation that needs to be had more in construction that isn't being had enough?
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Finance the numbers, knowing your numbers, knowing your numbers, your your cost of construction, your soft cost, hard costs, your overhead, what you're spending monthly, it's just not. When you're young, a builder, and you're starting out, people don't tell you that.
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You just think, "Oh, I learned how to go build a house. I can go build a house, right? And there's so much more to it than that. That's just one one small piece. Is actually the construction. The finance is so much bigger. You okay? So you went to the University of Georgia, Go Dogs. But were you a you were were you ever a finance guy or like maybe call like a business guy before? You you just jumped right into building houses.
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I was an economic major. Okay, and just economics was kind of easy. So I studied. We all know we all know that when you get a degree in economics or accounting or whatever, you automatically know everything, right? Oh yeah, it's the degree means everything.
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That's right. So no, then I I started building, and you know I worked for a bigger builder and underneath one of his superintendents for a couple years, and he taught me the ins and outs, taught me how to speak the language of residential construction, how to build houses, and and that education was priceless. It was great, totally. And as long as I was working for him and they were paying the bills and managing overhead, building houses was easy.
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Totally, that's when you got to do both of it, do all of it yourself.
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That's right. That's right.
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Okay, so 25 years. You started in 2001, 2008 rolls around and levels the playing field, right?
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Yes. What was the moment that really, like, I guess, motivated you to start focusing on the numbers, to start understanding the numbers? What was that moment? If there was, it could have been a combination of things that really motivated you to start really learning that side of the business, the numbers side of the business.
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But was there anything specifically that stood out to you?
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So what really changed was really COVID.
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COVID because because because it changed everything.
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The numbers changed, right? You used to. Could predict what things cost. Companies stocked everything, right? You'd order it; it was delivered. You request a bank draw. They come out. They fund you after doing inspection. You had 30 day terms with everybody. That all went out the window. Now nothing stocked anymore. The prices fluctuated daily. Frame and package went from $10 a square foot to 40, $50 a square foot, and it was just constant. Yes, which has changed the way our industry is now. I mean, people don't stock anything.
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Everything's made to order now.
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Everybody wants a deposit.
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Nobody wants terms. You know, you want to. It's like Amazon, and we should have paid for it when you order it.
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Yep, yep.
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Which has changed the game. So you have to know your numbers so much more, and really understand that going in up front, and take that time to price everything out, know what it's going to cost up front. Especially if you're signing, you know, you sign a contract with a customer, you're building a spec house, whatever you're doing, you still got to know what's going to be.
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The market's got to allow for it, or that customer you can't surprise with enormous changes that you just didn't tell them about.
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Totally, totally. Okay, so it was really like COVID. I was expecting you to say like the housing crisis, but it was COVID. COVID came in, and that makes a lot of sense. Go ahead.
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I mean, the housing crisis-it just crashed, shut everything down. It was like, okay, what do I do now? Right, interesting. Okay, and and then as the market starts slowly coming back, it was it was as it really truly ramped up in COVID. Right, we started we started building, we started exploding.
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Yeah, and and we were priced into we were fixed cost builder, and all of a sudden, I signed a contract with someone with a, you know, 25% margin, and now it's a 5% because my cost went up.
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Yeah.
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Oops, I didn't make money.
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Yeah, my my overheads 8% So I really I lost money.
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Yeah, yeah. You paid to build the house. I paid. Yeah, I'm like, sign me up for that. I volunteer for that, and so you truly know we ultimate switch to cost plus builder from fixed cost, but but it's still that valuable lesson of because if I tell someone your friend packages 100 grand to build your house and then all of a sudden it's 200 grand, well they're like I didn't pick that totally totally doing that and building that house off, which you told me, yes. Another, another mad at me.
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Yes, is there any way to get around? Go ahead, sorry. And it doesn't end pretty.
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No, no. Any, but anyone, any consumer would be like, dude, I didn't buy the $50 steak, and then you bring me the $150 steak. Exactly.
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Right. It's like I'm not. I didn't buy that. I don't want that. No, I don't. Did any? Is there any empathy for the contractor there? Did everyone?
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Everyone just got in line and took their lashings.
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Yeah, yeah. I mean, nobody says okay. It that sounds good. I'll take the $150 stake, even though I ordered a $50.
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Yeah. Well, you brought me a $50 steak and you charged me 150 for it.
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Yeah, exactly. Because the office staff got more, or the the yeah restaurant staff got more expensive. Yeah, right.
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Okay, so okay, and so that where that's where when you started to identify it, was it like you mentioned fixed price cost plus?
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Were you guys fixed during COVID? Yeah, going into it, and we and now you guys are cost plus. Yeah. Okay, so we've talked about that a fair amount on the podcast, like the fixed price cost plus argument that's all over residential construction. But like, was that just purely like a risk insulation or mitigation play on your end, or what was the eye opening moment there?
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Exactly, it was. So, but if you're fixed costs and the prices change, or you don't know your numbers as well, you know you can keep a customer happy.
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You can wiggle some stuff. If you're if you're open book, right? If you're cost plus, you so much. It's more important that you know your numbers because you're telling them, so they're trusting you to deliver on what you said, and so the moment you come back and you say, "Well, it's double what I said it was, then you they lose trust in you. Of course, just take the whole project goes south from there, right? Totally. Okay. Well, and so I think that's a great point because I was because with fixed price and cost plus, like you look at it's like, oh, we'll fix price. There's all this pre-con that happens, and every like all selections are chosen before we get going, and stuff's getting ordered, and all this stuff. But then cost plus, it's I get the transparency, right? Like the the client's just paying me my fee. My cost is whatever they want to build this house out of that I'm helping them make decisions on. But when it's when it comes back to like really knowing your numbers and you making the claim that you need to almost know your numbers more when you're cost plus, why is that the case in your opinion?
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Why like why would you argue that you have to know your cost plus numbers more than your fixed price numbers? Because what I'm really thinking is is like you're almost making it easier on the cost plus side in terms of knowing your numbers because. The cost is the cost. I just have to have my fees.
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Really, if you want to lose your reputation really quick, then don't know your numbers and don't do.
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I'm I'm certainly not arguing that. Yeah, right.
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That I mean, that's it. You're you're showing them right, and so you're giving them. They're making decision based off the original cost estimate. So we do the full, you know, cost estimate for the whole house upfront, right? We we we're really pushing for all design selections for every single thing, so we can hard pit get our numbers, right? At least we get them all done and quoted out before we place an order, right?
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Even if it's during construction, so they still have the opportunity to say, "Yeah, I'm going to spend twice as much as I thought I was going to spend. World space selection. I can show you how to not do that if you want to cut back. But right.
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But when you're, especially where where we are, we're we're such word of mouth, right? We don't. You know, my whole industry, especially here, anywhere I've been, has been word of mouth. Right. You're getting your referrals from architects, from homeowners, from real estate agents, and so if the customers, or you know, if they feel betrayed, or they don't feel like they trust you because they think you just told them a random number to get them sign a contract, and it was really you know 20% 40% more, then it just it ruins their reputation and it just changes so fast.
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Totally.
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Where so I I personally feel that it is more important to be prepared with the cost plus than it is with the fixed cost. The fixed cost, all you got to do is protect yourself. Yeah, right, right. I can move some numbers around. I can take a little beating here and there to to save face. But with cost plus, you can't. You got to have. You got to tell them. Yeah, I love it. Okay, so now this has been like essentially like five years from like your journey of like really understanding your numbers. Fair six years.
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Fair, right? What was the first thing that you drilled into when it came to knowing your numbers tactically? Was it looking at the overhead of the business?
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Was it better estimating, better precon was it budget? Like, where did you like tactically start to really start to understand your number journey versus precon? Right, precon. Get the precon done. Get the the cost construction down. All right, know what we're be able to predict what our true, you know, gross margin is going to be.
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Right, understanding the difference between markup and margin-big things, which people don't understand-and then, then what's my overhead? Right?
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Yeah.
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So can can I at the end of the day actually pay myself?
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Correct. Because the business owner, you got to pay everybody else. Yep. Right. So understanding that you know my my gross margin is X because we're going to hit our numbers because we've put the time and effort up front, right? Knowing that you know a 15% markup is really on a 13% margin, so I'm already 2% less. So let's change that. Let's get that right, and then my overhead. And can we, with the volume we're doing and the staff, does this balance out and we make money at the end of the day? Yeah, and in that order.
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Okay, pre-con markup versus margin overhead. Yeah, give me a snapshot of what it was like in the office at Southern Luxury homes. When you started to drill in and really understand your pre-con first step, what did that was in hours over hours, hours and months? And I mean, when we started, everybody was so busy. Right, there was so much construction going on, and to try to get these guys to stop what they're doing and give you pricing, and then just to finally just say you're not getting another job from us.
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You're not you're not getting those project managers. Yeah, to our first managers, to our subs, to our vendors. Okay, okay. If you don't sit down with us and help us break down the cost of this, right, and get us the numbers, then then I'm going somewhere else in my business.
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I love that, and that's really what it took because everybody was just running by the scene of the past. Everybody was like my market. Everybody was cost plus, and so they just kind of figured it out as they went.
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Yeah, and I'm like, no, no, we we have to know it up front, and so it was a whole culture of just figuring out as you go to changing the culture of no, no, we got to figure it out up front. It also takes more manpower. You can't just have pretended in a field. Now you got to have somebody in the office as project management, right? So we had to. We started just staffing up, hiring people, hiring people, and then I had to move around, get them all in the right seats on the bus, and figure out where they belong, and so there was that whole process. So I could saw a couple of years to where we finally, you know, we're in a we're in a rhythm, and we've got it down.
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Okay, so it took it was it was a year long journey, and that and that's just like us starting at the pre con side, or does that start to blend in and trickle into the markup versus margin understanding? And then the overhead is not like that's just a pre-con start. Oh yeah, it took that long.
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No, I love it. That's that's meaningful change, right? And you're-is it safe to say? Like we get like like a you know a little sneak peek here. Is your company better for it because you spent that time so much? So okay, the obvious yes, right?
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So much better.
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Yeah. Okay. So, but you did. You spent the time. You put the work in. What were some of the like immediate responses when you started to push this initiative from your team? And I'm even almost more interested in from your subs and your vendors. Like when you hold your team accountable, including your subs and vendors, to say I need to know the numbers, like we need to have this meeting. I imagine you lose some people. I imagine the other side of that coin of like subs being like, "Dude, Kevin, I can appreciate what you're trying to do here, but I'm running a business. Like you don't want to give me the job, don't give me the job. I'm on to the next. Or like, what were some of the what were some stuff that maybe the audience can anticipate if they're getting ready to go down this path.
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Well, I mean, it was it's tons and tons of pushback, right? No one wanted to do it. No one put the time, the effort into it, right? They just wanted to take the job and go, and then bill you after the fact, right?
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We we took it so far as, and you know, like purchase orders or any of the national builders, the big truck builders-they all, you know, with POs, right? Yep.
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But a lot of most small custom builders are not because everything changes.
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Everything's, you know, custom.
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You don't know what's going in these houses. But we pushed it so far as to pricing everything out, getting it all down, issuing purchase orders, paying off purchase orders, and that's work. It's just a lot of work getting that process set up.
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Once it's set up, it's easy. And once they understand that they're getting they're they're getting paid based off of that, right?
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Yeah.
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Otherwise, they got to submit a change or they got to get it through. But going through and adding all those layers, it's just what's necessary. And we just couldn't control it without it. And it just again, it was a, and it was a two-year process.
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Totally, totally. Okay, so there was the obvious pushback here, but you're even talking about like building and architecting the internal systems. Would you, looking back, would you start with architecting the internal system, i.e. implementing a purchase order system. Right?
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Would you build that first and then introduce that to the subs and vendors, or would you bring them along as you're building in that process? And this is me assuming that you didn't, or that you did one of these, because we were already go and established, so we brought them along as we implemented that process, and and we bounced around, right? We we bounced around from different softwares and how do we do this? What makes sense and what works for us? So most of the, especially your larger, they're used to it, right? If they have larger home builders buying from them, they're used to the PO. So starting with the vendors first is makes it so much easier because they're used to it. Then bringing in your your tradesmen, right? Your your subcontractors, and introducing them and just letting them know this is it.
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We're going to agree on a price, and that's what we're paying, and yeah, not making it sound so scary.
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Just here it is. It's like a subcontractor agreement. I'm just now going to pay you off of that.
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Yeah, it's a document. Like that's literally what you're doing. You're just you're bringing documentation into the equation, which frankly, what everyone wants. Go ahead.
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That's what they want. And then we made them come sit down at the office. All right, each trade, sit down. Here is the plans. Let let's go through it.
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How are we pricing this out? We need to make sure that we know how you are pricing out, so that we can price it out. I don't have to kill you on every job.
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Let's just get a system down, right? If you look at it and you say, "I am going to charge you X dollars per square foot, and that's how you come up your prices, then just tell me that so we can come up with it together, and then I can leave you alone, but making every one of them come sit down in the office with us as we worked through it was painful.
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Why? Why? I'm laughing. I don't know. I'm laughing because it's like you have enough of these conversations, and you're just like, "This is so simple. It's not complicated. It's just, but man, does it feel like a lot of work at the time, and it was a lot of work. Okay, so what do we just need to change curriculum at University of Georgia Construction Management Program and like get the like this is the shit people need to learn because like you said at the very beginning, right? It's like you start a construction company, you know, you're just massively ambitious, you're ready to go, you've got some experience, you're ready to build a company, and here you are building a product that you have no idea that is actually costing you money to build instead of what you just expect making money. So okay, so spend the time is the current solution. Go ahead. That's right. The current solution is spend the time and buckle up because it could be give you a long time, but it's going to be worth it. Okay, because we're going to get through this. So now the second piece is the markup versus margin conversation. Again, it's one of those things that you can listen to on a podcast, that you can Google, that you can look up, you can memorize the math equation, you can do all these things. But what was that motion like in your business? The markup versus margin train of thought was it just you understanding it, and it was an aha moment, or was it getting it embedded into how the team thinks? How far down did you go?
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Did you get subs vendors? I doubt it, but talk to me about what that no, not sub vendors, but with the team. Yes. So when when I'm going through numbers now, I'm looking at the overall numbers. Right, we're company wide, month to month. Every month we're closing out, we're you know cost plus 15% We got 8% overhead. Okay, great. I'm making 7% No, I'm not. I'm making 5% Right, where's that 2% going? Right.
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Yeah.
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Well, that's a difference between markup margin. Right. So I've got to go at 17.6% markup to be a 15% margin, okay.
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And so, getting people to understand that there's a difference to them, getting the team to, and when they're looking at the job, and we're looking at job each job to see what did we really make here.
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Here's our overhead. Our overhead doesn't change, right?
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We're paying the same thing every month on all these salaries. So now this, and then when we're bonusing, that's when they really right your bonus is going to be based off the gross profit margin.
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Yeah.
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So where do we want it to be? So as long as we sell it, we explain it up front. We don't know. This is what we're 15% margin. So we wrote it in our contract, and it must say in my contract in bold like 18 times.
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Yeah, cost plus 15% margin, margin, margin, margin, margin, and so that some people still get the the spreadsheet when we go to sign a contract. We're going over the estimate, and they simply do the math and they go,"What 17.6? That's not 15. I go,"That's 15% margin. And here in their contracts, they said margin. Yes. Okay, but so okay.
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So there is like obviously a component of educating the internal team. I like what you did there in terms of like aligning their incentive with the outcome that you are looking to accomplish. That's beautiful.
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I think that's a snippet that everyone in here should be doing. And it's like if you're just like project managers make bonuses. Like that's a common thing, right? You bring it on on time, under budget bonus makes all the sense in the world, but when you map it to margin instead of markup, now we create alignment as an organization that we are gunning for margin, not just hitting this end.
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That's right, has to be now. But the second piece was educating. It sounds like you're educating the homeowner on margin as opposed to markup.
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We we have to do that as well.
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Okay, so now I want a little, I want a little piece on this because you guys are out of Atlanta, right? Atlanta Metro.
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Yeah. I so I would imagine like it's pretty competitive in terms of like luxury, custom. You guys might have your niche, your own a market, whatever. But my point with all this is like when it comes to explaining this and educating the consumer, the home buyer, the client, what is that like? And do you see deals walk away from the table because it's this guy said he's going to do it for 15% markup and not margin, or like how does how did that experience land with you guys?
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We do, but rarely, rarely. So by the point by that point, we are so invested in each other that it's it needs explaining sometimes, not all the time, but it's usually not a make or break. There's occasionally where we've we've rushed to kind of give an overall cost estimate on job where they have their own plans and yep, and and that's all they're comparing. But normally, you know, people come in, they work with us to the design, estimate the whole process. So they've seen these numbers for months before we get to the final, and so it's usually not that big of a deal. But but it comes up, and it comes up. You have to explain it. You have to explain. There's a difference between them, totally. And I think this even just goes back to like being confident in that conversation and knowing the difference between your markup and margin, start that narrative and conversation early and often with your client, and then from there, just through the process itself of making decisions, looking at budget increase, seeing how all the numbers are actually starting to sit on the table, that's when you can be like, okay, now this is why this really makes sense. And frankly, when I hear clients or our clients, contractors, the builders, when they make that pivot from markup to margin line of thinking, they hear their customers maybe like immediately like, "Oh wow, like you guys make a lot of money on like building these things, but then it kind of gets back into a conversation of like, well, no shit. There's a ton of risk building your $2 million home.
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Of course, I'm gonna make some cheese on this. Like, there's a lot that can go wrong, and I'm the guy, you know. So it's like usually, like when you do explain that to the consumer, they start to get it, and it's like I had Jake Bruton on the podcast. He kind of explained.
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It is like you know, like a 15% margin is like a really like shitty tip in any other industry. It's like you go to a restaurant, you tip someone 15% they're like offended, right?
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But that's like a really hell.
00:25:11.638 --> 00:25:20.190
That's a hell of a business in construction. You know, they don't even have 15% as an option on the receipt. They give you 1820, or 22 now. Pick one.
00:25:20.579 --> 00:25:22.700
Exactly. Just that's an insult.
00:25:23.239 --> 00:26:06.628
Exactly, so it comes into this confidence of like as the contractor, like being able to explain it to people and like being able to set that expectation early on and be like, look, I'm not a markup guy. The guys that you're probably that are probably bidding against me that are markup people, odds of them sustaining any kind of business volatility is low because they're not making what they should to run a healthy business, and frankly, anyone that's spending you know 700 grand, 800 grand, 1,000,002, five, whatever the number is, they want it built by someone who's a legitimate business owner, right? They want these people employed. They want their community fed. They want their project managers insured with 401k's, right? They want all of that stuff. So, I do you have anything else in the markup versus margin?
00:26:07.529 --> 00:26:09.240
No, that's I think we had it.
00:26:09.599 --> 00:26:12.029
We've we've beaten this. We've beaten this one to the ground.
00:26:12.450 --> 00:26:15.599
All right, now the last one, which I do want to hear about.
00:26:15.630 --> 00:26:32.089
the overhead, you know, remains the same. But I do hear quite a bit of challenge in construction of contractors tracking and factoring in their overhead was that a big learning curve for you, or like what was how do you think about overhead and tracking it and how it plays into this formula?
00:26:32.960 --> 00:26:40.700
So we track it, right? I mean, we're tracking everything, but is a question about them actually charging for it on an?
00:26:41.930 --> 00:26:44.470
It's yeah, sure, it could be it could be charging it for sure.
00:26:45.819 --> 00:26:46.390
I'll let you go there.
00:26:46.779 --> 00:27:00.990
So that's that's the challenge, right? So and I have all these peer group meetings, different High Spire and Builder 20 and all the things, right? So we talk. We have all these conversations. Highspire is a good group. Love the Highspire guys. They've been great.
00:27:01.470 --> 00:27:06.660
Yeah, they're the ones introduced introduced me to Adaptus. So there we go. There we go.
00:27:07.829 --> 00:27:41.210
So we always have these conversations, right? And and one of the big things is so we we don't we don't really self perform. Everything's subcontracted out. But I've got a staff of like 14 people here, right? I've got project managers, got construction managers, you know, got estimating guys, accounts payable, accounts receivable, all the things, right? So the challenge is, is you want to put on line item that hey, I need to charge for site superintendent, estimating, accounting, all those things, and there's we have we put that on for a while.
00:27:37.730 --> 00:28:05.130
We kind of did like a 5% fix, just to fix 5% of it. Okay, and we if we got some pushback, if they're out there shopping other builders, then we get tremendous pushback because the other builders are cost plus whatever they are, right? But they're not that, and this is kind of a small knit community.
00:28:06.029 --> 00:28:23.119
But if if if they're if you're in a market where that's common, then they brought to other builders, and that's common, right? Then it's it everyone's doing it. Correct. If you're in a market where it's not, then it's it's it's hard to do because you got to kind of stay consistent with what your market's doing, sure.
00:28:23.420 --> 00:28:29.660
And so our market is just the cost plus, right? Not the superintendent, all of that.
00:28:26.900 --> 00:28:45.250
That's just part of within our margin. So we we tried it a little bit, just didn't work. So we kind of let it out, and so now that's when we really saw the the change from from markup to margin, which you know, and that's how we bumped ours up.
00:28:47.079 --> 00:29:29.599
Got it. Okay, so you're you're just like you've you've tried just equally spreading out the overhead, right? Like the safe assumption is, is I've got 20 projects, I've got 14 people, I've got you know 5% of these 14 people's costs, rent, all the other stuff, you get it. But the overhead gets divided evenly by 5% You were saying when you were throwing that on contracts, or you were like trying to win work with that. People were dodging, but you were able to get around it by pivoting from the markup visual to the margin visual, which allowed you to hit your margin as opposed to just. It's almost like you're just like circumnavigating the entire overhead conversation by starting the relationship with your prospects on the margin conversation, right? Instead of the markup.
00:29:30.440 --> 00:29:48.670
Okay, okay, cool. Um, in terms of like the overhead side, like, do you have any like pro tips for like the contractor that's out there struggling to track overhead? Like, I'm just even like even like document it, register it, get an eye on it, see how it goes. Not even how do we allocate it, but is there any any pro tip there that you saw?
00:29:46.150 --> 00:30:05.849
The biggest thing is get somebody get get a local account or someone who's going to review close their books every month, review it, and explain it to you. I mean, the problem so many people can't read a balance sheet, they can't read a profit loss, they don't understand what they're looking at. So get someone. That local thing can sit down with you every month and go through it, right? Start start with the basics. Just just go through it each month. Yeah, close them out.
00:30:06.420 --> 00:30:07.559
Yep, and that's that's step one.
00:30:08.309 --> 00:30:09.900
Yep. When did that step happen for you?
00:30:13.740 --> 00:30:57.460
That was early, eight or nine. Yeah, eight or nine years ago. Okay, coming out of coming out of the recession, really going back to the to home building, getting volume going, and going, oh, hang on a minute, what do what do we do? So that part, and then I went back and got my MBA from third from Georgia, 13 through 15. So that was a big education, right? So it was in that time when I was getting my MBA that was like, okay, this is super important, and that was reason I did it was because I just I didn't have enough, I wasn't intelligent enough about finance, right? I I just didn't know it well enough, and that's I felt okay. I'll go get an MBA.
00:30:54.849 --> 00:30:59.680
That'll help me learn it. So that's when I really started focusing on it.
00:30:59.799 --> 00:31:30.980
Okay, so this would have been like 2017, 2018. I graduated MBA at 15. So coming out of that was I really started 1617, 18. Okay, cool. So just start with like getting someone who can actually sit down and explain it to you. And I think I think the last the explaining the explaining part that's the biggest challenge. I could be wrong, but like, have you had a had a hard time finding people that are actually closing out your books, providing that service, being able to sit down and meaningfully, essentially educate you on why and what this information is and why it's important.
00:31:32.420 --> 00:31:37.339
No, once that is so, that's what we're doing. It was easy to find people to. I mean, there's there's accountants all over the place.
00:31:38.000 --> 00:31:48.549
Yeah, finding a real true construction accountant that's a little more challenging, but any of them can explain you your P and Ls, the basics. Okay, the basics so that you know what you're doing on a monthly basis.
00:31:49.119 --> 00:31:51.369
Just get started understanding every month.
00:31:52.059 --> 00:31:56.619
Totally. Okay, so the step one is just like getting the understanding of a general. Have someone track it and do it, and
00:31:56.740 --> 00:32:03.150
Is there anything else when it comes to then it was word off on a true construction accountant, right?
00:32:03.509 --> 00:32:13.589
Who really understands, you know, your percentage of completion accounting and things like that. Then you're getting deeper and deeper in, but just the basics. Just understand what you're doing on a monthly basis.
00:32:14.250 --> 00:32:20.309
Totally. And then, do you outsource your construction accountant, or is that something that you hired internally for?
00:32:20.549 --> 00:32:43.240
So I have internally an accountant that her she's controller slash accounts receivable, and then we have a fractional CFO who is a construction accountant. Okay, perfect. Contract with cool, cool. Are you down to share who you use? You don't have to. You're gonna keep the family secret close to your chest. I love it. I love it.
00:32:40.730 --> 00:32:43.240
Okay, no, that's totally fine.
00:32:43.359 --> 00:32:45.609
That's why I like to ask. Go ahead.
00:32:46.750 --> 00:32:55.450
So no, but once he started, we've really gotten things where we need to be. Right, moving along, getting that guy who really understood construction.
00:32:56.200 --> 00:33:03.990
Yeah, they're just hard. They're hard to find, but you don't have to go that far with it in the beginning. You just just get an understanding.
00:33:03.990 --> 00:33:08.700
Get the blocking and tackling down. Understand what's the consistencies in your business.
00:33:06.390 --> 00:33:14.519
Make sure that you're looking at your costs that are trending in the right direction. Your income trending. Yeah, makes sense.
00:33:11.009 --> 00:33:20.160
Okay. Well, so I mean, I think in terms of like understanding your numbers, like I mean, I think this was great. Like, where do you start this journey?
00:33:20.190 --> 00:33:30.710
Is really with pre-con starting to get into a line of thinking that's more on the margin side as opposed to markup, and then really understand your overhead.
00:33:27.200 --> 00:34:36.230
And that overhead conversation is a really easy progression once you get margin tackled and you start to present your business through the lens of margin as opposed to markup. I think in terms of like anything that's like outstanding, Kevin, like on understanding your numbers. Any other words of wisdom that you would that you would suggest to people, or maybe even like a success story of like what was life before, and then what is life after, Kevin knowing his numbers. You know, a builder years and years and years ago, told me he said that right now is the easiest time to do a hard thing, and and that's really stuck with me. So anything you put off gets harder and harder to do. So if it's tough thing to do, go do it right now. And any change like that, it's all tough, so just dive in and get started. And it's fine to be messy, but just get started. Go find someone that can advise you. Can find someone that can help you, coach you. You just got to start right now. Don't put it off.
00:34:36.949 --> 00:34:39.199
Yeah. So just prioritize it.
00:34:39.679 --> 00:35:00.599
That's it. Like after the audience listens to this episode, that is the best time to start understanding the numbers right now. Right now, I love it, Kevin. I appreciate the the the candor here. So much information. Where is the best place for the audience to find you if they want to follow you along and get more get more.
00:34:58.509 --> 00:35:00.599
Insights from Kevin.
00:35:01.559 --> 00:35:06.690
Our Instagram is at Southern Luxury Homes. Website is southernluxury.com.
00:35:07.860 --> 00:35:08.940
Love it. Those are the best spots.
00:35:09.000 --> 00:35:19.230
Those are the best places. All right. Well, Kevin, I appreciate you, sir. Thank you for jumping jumping on the podcast. And yeah, if there's anything I can do, just let me know. Just shoot me a note. I enjoyed it. This is fun.
00:35:19.739 --> 00:35:22.340
Yeah, I I agree. I agree. We'll have to do it again.
00:35:22.969 --> 00:35:23.389
Absolutely.
00:35:23.869 --> 00:35:24.679
All right. We'll see, Kevin.
00:35:25.159 --> 00:35:25.760
All right. Take care.
00:00:00.239 --> 00:00:09.390
If you don't sit down with us and help us break down the cost of this and get us the numbers, then I'm going somewhere else in my business, and that's really what it took.
00:00:09.390 --> 00:00:44.295
Welcome to Builders Budgets and Beers. I'm Reece Barnes, and I started this podcast to have real conversations about money and the building industry, the wins, the mistakes, and everything in between. I believe builders deserve to feel confident about their finances, and that starts by hearing from others who've been through it too. This industry can be slow to change, but the right stories and the right tools can make profitability feel possible.
00:00:32.024 --> 00:00:47.625
Let's get into it. Alrighty, Kevin. Mics are hot, dude.
00:00:44.354 --> 00:00:48.674
Thanks for jumping on Builders Budgets of Beers with me.
00:00:49.270 --> 00:00:50.619
No, thanks for having me.
00:00:49.270 --> 00:00:50.619
Appreciate it.
00:00:51.249 --> 00:01:04.739
Of course, of course. Well, cool. And in true BBB fashion, go ahead and introduce yourself for the audience. Give them a little background on yourself, how you got to the home building game? Just some of the basics.
00:01:01.768 --> 00:01:04.858
Let the audience know who you are.
00:01:05.700 --> 00:01:14.040
I'm Kevin Acock. My company, Southern Luxury Homes, been building about 25 years.
00:01:08.939 --> 00:01:33.170
Graduated from University of Georgia in 2000 and started working for a custom home builder in Atlanta. Spent the first decade with him, market tanked in '08, like everybody remembers. He said, "Good luck, wish you the best. I got nothing for you, and so I was forced to go my own.
00:01:34.280 --> 00:01:34.609
There you go.
00:01:35.359 --> 00:01:55.599
Did did a bunch of bank work, finishing half built houses, you know, all over the southeast for a number of years, and then you know, just right back into into new home construction in about 2013, and okay, and then just kind of been five years there. There was about five years there from when the market crashed to go ahead.
00:01:56.230 --> 00:02:19.020
There was, and so I did a lot of. I was a court appointed receiver, so the banks would have the court appointment receiver for assets they didn't want to foreclose on. They didn't want to get the chain of title and get sued. So mostly half built houses, mostly some golf courses, neighborhoods that needed development finished. A lot of pipe farms. We we bush hogged lots and lots of pipe farms.
00:02:19.680 --> 00:02:49.930
Okay. Okay. Cool. Well, we could we could dig into that, and I'm sure we will touch into a little bit more. But okay, so 25 years in the game, and you've seen it all. You you experienced the the 2008 crash, COVID. I'm sure. But dude, let's get in. Let's let's let's dive in here a little bit because I do. I want to anchor this episode a little bit, and then we can start digging into some of the details you just shared, but dude, from your perspective, what do you think is the one conversation that needs to be had more in construction that isn't being had enough?
00:02:51.489 --> 00:03:09.209
Finance the numbers, knowing your numbers, knowing your numbers, your your cost of construction, your soft cost, hard costs, your overhead, what you're spending monthly, it's just not. When you're young, a builder, and you're starting out, people don't tell you that.
00:03:06.628 --> 00:03:29.959
You just think, "Oh, I learned how to go build a house. I can go build a house, right? And there's so much more to it than that. That's just one one small piece. Is actually the construction. The finance is so much bigger. You okay? So you went to the University of Georgia, Go Dogs. But were you a you were were you ever a finance guy or like maybe call like a business guy before? You you just jumped right into building houses.
00:03:30.289 --> 00:03:47.650
I was an economic major. Okay, and just economics was kind of easy. So I studied. We all know we all know that when you get a degree in economics or accounting or whatever, you automatically know everything, right? Oh yeah, it's the degree means everything.
00:03:47.979 --> 00:04:14.158
That's right. So no, then I I started building, and you know I worked for a bigger builder and underneath one of his superintendents for a couple years, and he taught me the ins and outs, taught me how to speak the language of residential construction, how to build houses, and and that education was priceless. It was great, totally. And as long as I was working for him and they were paying the bills and managing overhead, building houses was easy.
00:04:15.090 --> 00:04:18.240
Totally, that's when you got to do both of it, do all of it yourself.
00:04:18.839 --> 00:04:22.670
That's right. That's right.
00:04:18.839 --> 00:04:28.009
Okay, so 25 years. You started in 2001, 2008 rolls around and levels the playing field, right?
00:04:28.399 --> 00:04:45.819
Yes. What was the moment that really, like, I guess, motivated you to start focusing on the numbers, to start understanding the numbers? What was that moment? If there was, it could have been a combination of things that really motivated you to start really learning that side of the business, the numbers side of the business.
00:04:43.660 --> 00:04:47.110
But was there anything specifically that stood out to you?
00:04:48.250 --> 00:04:53.170
So what really changed was really COVID.
00:04:53.800 --> 00:04:59.110
COVID because because because it changed everything.
00:04:55.120 --> 00:05:33.860
The numbers changed, right? You used to. Could predict what things cost. Companies stocked everything, right? You'd order it; it was delivered. You request a bank draw. They come out. They fund you after doing inspection. You had 30 day terms with everybody. That all went out the window. Now nothing stocked anymore. The prices fluctuated daily. Frame and package went from $10 a square foot to 40, $50 a square foot, and it was just constant. Yes, which has changed the way our industry is now. I mean, people don't stock anything.
00:05:31.790 --> 00:05:33.860
Everything's made to order now.
00:05:35.209 --> 00:05:38.449
Everybody wants a deposit.
00:05:35.209 --> 00:05:41.319
Nobody wants terms. You know, you want to. It's like Amazon, and we should have paid for it when you order it.
00:05:41.740 --> 00:05:42.339
Yep, yep.
00:05:42.668 --> 00:06:01.259
Which has changed the game. So you have to know your numbers so much more, and really understand that going in up front, and take that time to price everything out, know what it's going to cost up front. Especially if you're signing, you know, you sign a contract with a customer, you're building a spec house, whatever you're doing, you still got to know what's going to be.
00:06:01.288 --> 00:06:09.238
The market's got to allow for it, or that customer you can't surprise with enormous changes that you just didn't tell them about.
00:06:09.839 --> 00:06:19.050
Totally, totally. Okay, so it was really like COVID. I was expecting you to say like the housing crisis, but it was COVID. COVID came in, and that makes a lot of sense. Go ahead.
00:06:19.529 --> 00:06:35.839
I mean, the housing crisis-it just crashed, shut everything down. It was like, okay, what do I do now? Right, interesting. Okay, and and then as the market starts slowly coming back, it was it was as it really truly ramped up in COVID. Right, we started we started building, we started exploding.
00:06:36.499 --> 00:06:47.620
Yeah, and and we were priced into we were fixed cost builder, and all of a sudden, I signed a contract with someone with a, you know, 25% margin, and now it's a 5% because my cost went up.
00:06:48.250 --> 00:06:48.310
Yeah.
00:06:49.778 --> 00:06:50.769
Oops, I didn't make money.
00:06:51.670 --> 00:06:54.999
Yeah, my my overheads 8% So I really I lost money.
00:06:55.449 --> 00:07:24.050
Yeah, yeah. You paid to build the house. I paid. Yeah, I'm like, sign me up for that. I volunteer for that, and so you truly know we ultimate switch to cost plus builder from fixed cost, but but it's still that valuable lesson of because if I tell someone your friend packages 100 grand to build your house and then all of a sudden it's 200 grand, well they're like I didn't pick that totally totally doing that and building that house off, which you told me, yes. Another, another mad at me.
00:07:24.889 --> 00:07:28.850
Yes, is there any way to get around? Go ahead, sorry. And it doesn't end pretty.
00:07:29.449 --> 00:07:39.379
No, no. Any, but anyone, any consumer would be like, dude, I didn't buy the $50 steak, and then you bring me the $150 steak. Exactly.
00:07:39.920 --> 00:07:49.540
Right. It's like I'm not. I didn't buy that. I don't want that. No, I don't. Did any? Is there any empathy for the contractor there? Did everyone?
00:07:45.490 --> 00:07:50.439
Everyone just got in line and took their lashings.
00:07:51.009 --> 00:07:59.110
Yeah, yeah. I mean, nobody says okay. It that sounds good. I'll take the $150 stake, even though I ordered a $50.
00:07:59.800 --> 00:08:03.540
Yeah. Well, you brought me a $50 steak and you charged me 150 for it.
00:08:03.990 --> 00:08:08.910
Yeah, exactly. Because the office staff got more, or the the yeah restaurant staff got more expensive. Yeah, right.
00:08:09.029 --> 00:08:16.170
Okay, so okay, and so that where that's where when you started to identify it, was it like you mentioned fixed price cost plus?
00:08:16.620 --> 00:08:38.690
Were you guys fixed during COVID? Yeah, going into it, and we and now you guys are cost plus. Yeah. Okay, so we've talked about that a fair amount on the podcast, like the fixed price cost plus argument that's all over residential construction. But like, was that just purely like a risk insulation or mitigation play on your end, or what was the eye opening moment there?
00:08:39.110 --> 00:08:53.200
Exactly, it was. So, but if you're fixed costs and the prices change, or you don't know your numbers as well, you know you can keep a customer happy.
00:08:49.600 --> 00:09:51.070
You can wiggle some stuff. If you're if you're open book, right? If you're cost plus, you so much. It's more important that you know your numbers because you're telling them, so they're trusting you to deliver on what you said, and so the moment you come back and you say, "Well, it's double what I said it was, then you they lose trust in you. Of course, just take the whole project goes south from there, right? Totally. Okay. Well, and so I think that's a great point because I was because with fixed price and cost plus, like you look at it's like, oh, we'll fix price. There's all this pre-con that happens, and every like all selections are chosen before we get going, and stuff's getting ordered, and all this stuff. But then cost plus, it's I get the transparency, right? Like the the client's just paying me my fee. My cost is whatever they want to build this house out of that I'm helping them make decisions on. But when it's when it comes back to like really knowing your numbers and you making the claim that you need to almost know your numbers more when you're cost plus, why is that the case in your opinion?
00:09:48.159 --> 00:10:03.960
Why like why would you argue that you have to know your cost plus numbers more than your fixed price numbers? Because what I'm really thinking is is like you're almost making it easier on the cost plus side in terms of knowing your numbers because. The cost is the cost. I just have to have my fees.
00:10:01.799 --> 00:10:07.379
Really, if you want to lose your reputation really quick, then don't know your numbers and don't do.
00:10:07.889 --> 00:10:09.690
I'm I'm certainly not arguing that. Yeah, right.
00:10:09.870 --> 00:10:32.480
That I mean, that's it. You're you're showing them right, and so you're giving them. They're making decision based off the original cost estimate. So we do the full, you know, cost estimate for the whole house upfront, right? We we we're really pushing for all design selections for every single thing, so we can hard pit get our numbers, right? At least we get them all done and quoted out before we place an order, right?
00:10:32.570 --> 00:10:44.320
Even if it's during construction, so they still have the opportunity to say, "Yeah, I'm going to spend twice as much as I thought I was going to spend. World space selection. I can show you how to not do that if you want to cut back. But right.
00:10:44.440 --> 00:11:15.509
But when you're, especially where where we are, we're we're such word of mouth, right? We don't. You know, my whole industry, especially here, anywhere I've been, has been word of mouth. Right. You're getting your referrals from architects, from homeowners, from real estate agents, and so if the customers, or you know, if they feel betrayed, or they don't feel like they trust you because they think you just told them a random number to get them sign a contract, and it was really you know 20% 40% more, then it just it ruins their reputation and it just changes so fast.
00:11:16.409 --> 00:11:16.710
Totally.
00:11:16.830 --> 00:11:46.720
Where so I I personally feel that it is more important to be prepared with the cost plus than it is with the fixed cost. The fixed cost, all you got to do is protect yourself. Yeah, right, right. I can move some numbers around. I can take a little beating here and there to to save face. But with cost plus, you can't. You got to have. You got to tell them. Yeah, I love it. Okay, so now this has been like essentially like five years from like your journey of like really understanding your numbers. Fair six years.
00:11:46.809 --> 00:12:00.989
Fair, right? What was the first thing that you drilled into when it came to knowing your numbers tactically? Was it looking at the overhead of the business?
00:11:57.698 --> 00:12:21.230
Was it better estimating, better precon was it budget? Like, where did you like tactically start to really start to understand your number journey versus precon? Right, precon. Get the precon done. Get the the cost construction down. All right, know what we're be able to predict what our true, you know, gross margin is going to be.
00:12:18.299 --> 00:12:29.840
Right, understanding the difference between markup and margin-big things, which people don't understand-and then, then what's my overhead? Right?
00:12:30.200 --> 00:12:30.259
Yeah.
00:12:30.620 --> 00:12:33.080
So can can I at the end of the day actually pay myself?
00:12:34.190 --> 00:13:09.240
Correct. Because the business owner, you got to pay everybody else. Yep. Right. So understanding that you know my my gross margin is X because we're going to hit our numbers because we've put the time and effort up front, right? Knowing that you know a 15% markup is really on a 13% margin, so I'm already 2% less. So let's change that. Let's get that right, and then my overhead. And can we, with the volume we're doing and the staff, does this balance out and we make money at the end of the day? Yeah, and in that order.
00:13:10.019 --> 00:13:49.840
Okay, pre-con markup versus margin overhead. Yeah, give me a snapshot of what it was like in the office at Southern Luxury homes. When you started to drill in and really understand your pre-con first step, what did that was in hours over hours, hours and months? And I mean, when we started, everybody was so busy. Right, there was so much construction going on, and to try to get these guys to stop what they're doing and give you pricing, and then just to finally just say you're not getting another job from us.
00:13:46.899 --> 00:14:02.759
You're not you're not getting those project managers. Yeah, to our first managers, to our subs, to our vendors. Okay, okay. If you don't sit down with us and help us break down the cost of this, right, and get us the numbers, then then I'm going somewhere else in my business.
00:14:03.360 --> 00:14:12.149
I love that, and that's really what it took because everybody was just running by the scene of the past. Everybody was like my market. Everybody was cost plus, and so they just kind of figured it out as they went.
00:14:12.840 --> 00:14:50.830
Yeah, and I'm like, no, no, we we have to know it up front, and so it was a whole culture of just figuring out as you go to changing the culture of no, no, we got to figure it out up front. It also takes more manpower. You can't just have pretended in a field. Now you got to have somebody in the office as project management, right? So we had to. We started just staffing up, hiring people, hiring people, and then I had to move around, get them all in the right seats on the bus, and figure out where they belong, and so there was that whole process. So I could saw a couple of years to where we finally, you know, we're in a we're in a rhythm, and we've got it down.
00:14:51.519 --> 00:15:07.259
Okay, so it took it was it was a year long journey, and that and that's just like us starting at the pre con side, or does that start to blend in and trickle into the markup versus margin understanding? And then the overhead is not like that's just a pre-con start. Oh yeah, it took that long.
00:15:07.859 --> 00:15:19.500
No, I love it. That's that's meaningful change, right? And you're-is it safe to say? Like we get like like a you know a little sneak peek here. Is your company better for it because you spent that time so much? So okay, the obvious yes, right?
00:15:19.590 --> 00:15:20.070
So much better.
00:15:20.909 --> 00:16:02.970
Yeah. Okay. So, but you did. You spent the time. You put the work in. What were some of the like immediate responses when you started to push this initiative from your team? And I'm even almost more interested in from your subs and your vendors. Like when you hold your team accountable, including your subs and vendors, to say I need to know the numbers, like we need to have this meeting. I imagine you lose some people. I imagine the other side of that coin of like subs being like, "Dude, Kevin, I can appreciate what you're trying to do here, but I'm running a business. Like you don't want to give me the job, don't give me the job. I'm on to the next. Or like, what were some of the what were some stuff that maybe the audience can anticipate if they're getting ready to go down this path.
00:16:03.749 --> 00:16:15.509
Well, I mean, it was it's tons and tons of pushback, right? No one wanted to do it. No one put the time, the effort into it, right? They just wanted to take the job and go, and then bill you after the fact, right?
00:16:16.409 --> 00:16:26.000
We we took it so far as, and you know, like purchase orders or any of the national builders, the big truck builders-they all, you know, with POs, right? Yep.
00:16:23.149 --> 00:16:27.590
But a lot of most small custom builders are not because everything changes.
00:16:27.710 --> 00:16:30.740
Everything's, you know, custom.
00:16:27.710 --> 00:16:47.950
You don't know what's going in these houses. But we pushed it so far as to pricing everything out, getting it all down, issuing purchase orders, paying off purchase orders, and that's work. It's just a lot of work getting that process set up.
00:16:43.480 --> 00:16:53.019
Once it's set up, it's easy. And once they understand that they're getting they're they're getting paid based off of that, right?
00:16:53.350 --> 00:16:53.409
Yeah.
00:16:53.559 --> 00:17:06.720
Otherwise, they got to submit a change or they got to get it through. But going through and adding all those layers, it's just what's necessary. And we just couldn't control it without it. And it just again, it was a, and it was a two-year process.
00:17:07.559 --> 00:17:28.549
Totally, totally. Okay, so there was the obvious pushback here, but you're even talking about like building and architecting the internal systems. Would you, looking back, would you start with architecting the internal system, i.e. implementing a purchase order system. Right?
00:17:24.950 --> 00:18:18.779
Would you build that first and then introduce that to the subs and vendors, or would you bring them along as you're building in that process? And this is me assuming that you didn't, or that you did one of these, because we were already go and established, so we brought them along as we implemented that process, and and we bounced around, right? We we bounced around from different softwares and how do we do this? What makes sense and what works for us? So most of the, especially your larger, they're used to it, right? If they have larger home builders buying from them, they're used to the PO. So starting with the vendors first is makes it so much easier because they're used to it. Then bringing in your your tradesmen, right? Your your subcontractors, and introducing them and just letting them know this is it.
00:18:18.809 --> 00:18:25.460
We're going to agree on a price, and that's what we're paying, and yeah, not making it sound so scary.
00:18:22.700 --> 00:18:27.920
Just here it is. It's like a subcontractor agreement. I'm just now going to pay you off of that.
00:18:28.609 --> 00:18:37.430
Yeah, it's a document. Like that's literally what you're doing. You're just you're bringing documentation into the equation, which frankly, what everyone wants. Go ahead.
00:18:37.549 --> 00:18:44.319
That's what they want. And then we made them come sit down at the office. All right, each trade, sit down. Here is the plans. Let let's go through it.
00:18:41.440 --> 00:18:49.000
How are we pricing this out? We need to make sure that we know how you are pricing out, so that we can price it out. I don't have to kill you on every job.
00:18:49.509 --> 00:19:05.819
Let's just get a system down, right? If you look at it and you say, "I am going to charge you X dollars per square foot, and that's how you come up your prices, then just tell me that so we can come up with it together, and then I can leave you alone, but making every one of them come sit down in the office with us as we worked through it was painful.
00:19:07.500 --> 00:20:28.549
Why? Why? I'm laughing. I don't know. I'm laughing because it's like you have enough of these conversations, and you're just like, "This is so simple. It's not complicated. It's just, but man, does it feel like a lot of work at the time, and it was a lot of work. Okay, so what do we just need to change curriculum at University of Georgia Construction Management Program and like get the like this is the shit people need to learn because like you said at the very beginning, right? It's like you start a construction company, you know, you're just massively ambitious, you're ready to go, you've got some experience, you're ready to build a company, and here you are building a product that you have no idea that is actually costing you money to build instead of what you just expect making money. So okay, so spend the time is the current solution. Go ahead. That's right. The current solution is spend the time and buckle up because it could be give you a long time, but it's going to be worth it. Okay, because we're going to get through this. So now the second piece is the markup versus margin conversation. Again, it's one of those things that you can listen to on a podcast, that you can Google, that you can look up, you can memorize the math equation, you can do all these things. But what was that motion like in your business? The markup versus margin train of thought was it just you understanding it, and it was an aha moment, or was it getting it embedded into how the team thinks? How far down did you go?
00:20:28.670 --> 00:20:51.460
Did you get subs vendors? I doubt it, but talk to me about what that no, not sub vendors, but with the team. Yes. So when when I'm going through numbers now, I'm looking at the overall numbers. Right, we're company wide, month to month. Every month we're closing out, we're you know cost plus 15% We got 8% overhead. Okay, great. I'm making 7% No, I'm not. I'm making 5% Right, where's that 2% going? Right.
00:20:51.940 --> 00:20:52.000
Yeah.
00:20:52.750 --> 00:21:02.490
Well, that's a difference between markup margin. Right. So I've got to go at 17.6% markup to be a 15% margin, okay.
00:21:03.000 --> 00:21:13.740
And so, getting people to understand that there's a difference to them, getting the team to, and when they're looking at the job, and we're looking at job each job to see what did we really make here.
00:21:11.220 --> 00:21:16.680
Here's our overhead. Our overhead doesn't change, right?
00:21:13.799 --> 00:21:26.599
We're paying the same thing every month on all these salaries. So now this, and then when we're bonusing, that's when they really right your bonus is going to be based off the gross profit margin.
00:21:27.019 --> 00:21:27.079
Yeah.
00:21:28.009 --> 00:21:42.250
So where do we want it to be? So as long as we sell it, we explain it up front. We don't know. This is what we're 15% margin. So we wrote it in our contract, and it must say in my contract in bold like 18 times.
00:21:37.700 --> 00:22:01.079
Yeah, cost plus 15% margin, margin, margin, margin, margin, and so that some people still get the the spreadsheet when we go to sign a contract. We're going over the estimate, and they simply do the math and they go,"What 17.6? That's not 15. I go,"That's 15% margin. And here in their contracts, they said margin. Yes. Okay, but so okay.
00:21:57.339 --> 00:22:10.079
So there is like obviously a component of educating the internal team. I like what you did there in terms of like aligning their incentive with the outcome that you are looking to accomplish. That's beautiful.
00:22:10.680 --> 00:22:31.369
I think that's a snippet that everyone in here should be doing. And it's like if you're just like project managers make bonuses. Like that's a common thing, right? You bring it on on time, under budget bonus makes all the sense in the world, but when you map it to margin instead of markup, now we create alignment as an organization that we are gunning for margin, not just hitting this end.
00:22:29.809 --> 00:22:38.240
That's right, has to be now. But the second piece was educating. It sounds like you're educating the homeowner on margin as opposed to markup.
00:22:38.599 --> 00:22:39.980
We we have to do that as well.
00:22:40.519 --> 00:22:44.289
Okay, so now I want a little, I want a little piece on this because you guys are out of Atlanta, right? Atlanta Metro.
00:22:45.009 --> 00:23:10.740
Yeah. I so I would imagine like it's pretty competitive in terms of like luxury, custom. You guys might have your niche, your own a market, whatever. But my point with all this is like when it comes to explaining this and educating the consumer, the home buyer, the client, what is that like? And do you see deals walk away from the table because it's this guy said he's going to do it for 15% markup and not margin, or like how does how did that experience land with you guys?
00:23:11.849 --> 00:24:47.739
We do, but rarely, rarely. So by the point by that point, we are so invested in each other that it's it needs explaining sometimes, not all the time, but it's usually not a make or break. There's occasionally where we've we've rushed to kind of give an overall cost estimate on job where they have their own plans and yep, and and that's all they're comparing. But normally, you know, people come in, they work with us to the design, estimate the whole process. So they've seen these numbers for months before we get to the final, and so it's usually not that big of a deal. But but it comes up, and it comes up. You have to explain it. You have to explain. There's a difference between them, totally. And I think this even just goes back to like being confident in that conversation and knowing the difference between your markup and margin, start that narrative and conversation early and often with your client, and then from there, just through the process itself of making decisions, looking at budget increase, seeing how all the numbers are actually starting to sit on the table, that's when you can be like, okay, now this is why this really makes sense. And frankly, when I hear clients or our clients, contractors, the builders, when they make that pivot from markup to margin line of thinking, they hear their customers maybe like immediately like, "Oh wow, like you guys make a lot of money on like building these things, but then it kind of gets back into a conversation of like, well, no shit. There's a ton of risk building your $2 million home.
00:24:43.538 --> 00:24:59.949
Of course, I'm gonna make some cheese on this. Like, there's a lot that can go wrong, and I'm the guy, you know. So it's like usually, like when you do explain that to the consumer, they start to get it, and it's like I had Jake Bruton on the podcast. He kind of explained.
00:24:59.999 --> 00:25:11.368
It is like you know, like a 15% margin is like a really like shitty tip in any other industry. It's like you go to a restaurant, you tip someone 15% they're like offended, right?
00:25:11.638 --> 00:25:14.249
But that's like a really hell.
00:25:11.638 --> 00:25:20.190
That's a hell of a business in construction. You know, they don't even have 15% as an option on the receipt. They give you 1820, or 22 now. Pick one.
00:25:20.579 --> 00:25:22.700
Exactly. Just that's an insult.
00:25:23.239 --> 00:26:06.628
Exactly, so it comes into this confidence of like as the contractor, like being able to explain it to people and like being able to set that expectation early on and be like, look, I'm not a markup guy. The guys that you're probably that are probably bidding against me that are markup people, odds of them sustaining any kind of business volatility is low because they're not making what they should to run a healthy business, and frankly, anyone that's spending you know 700 grand, 800 grand, 1,000,002, five, whatever the number is, they want it built by someone who's a legitimate business owner, right? They want these people employed. They want their community fed. They want their project managers insured with 401k's, right? They want all of that stuff. So, I do you have anything else in the markup versus margin?
00:26:07.529 --> 00:26:09.240
No, that's I think we had it.
00:26:09.599 --> 00:26:12.029
We've we've beaten this. We've beaten this one to the ground.
00:26:12.450 --> 00:26:15.599
All right, now the last one, which I do want to hear about.
00:26:15.630 --> 00:26:32.089
the overhead, you know, remains the same. But I do hear quite a bit of challenge in construction of contractors tracking and factoring in their overhead was that a big learning curve for you, or like what was how do you think about overhead and tracking it and how it plays into this formula?
00:26:32.960 --> 00:26:40.700
So we track it, right? I mean, we're tracking everything, but is a question about them actually charging for it on an?
00:26:41.930 --> 00:26:44.470
It's yeah, sure, it could be it could be charging it for sure.
00:26:45.819 --> 00:26:46.390
I'll let you go there.
00:26:46.779 --> 00:27:00.990
So that's that's the challenge, right? So and I have all these peer group meetings, different High Spire and Builder 20 and all the things, right? So we talk. We have all these conversations. Highspire is a good group. Love the Highspire guys. They've been great.
00:27:01.470 --> 00:27:06.660
Yeah, they're the ones introduced introduced me to Adaptus. So there we go. There we go.
00:27:07.829 --> 00:27:41.210
So we always have these conversations, right? And and one of the big things is so we we don't we don't really self perform. Everything's subcontracted out. But I've got a staff of like 14 people here, right? I've got project managers, got construction managers, you know, got estimating guys, accounts payable, accounts receivable, all the things, right? So the challenge is, is you want to put on line item that hey, I need to charge for site superintendent, estimating, accounting, all those things, and there's we have we put that on for a while.
00:27:37.730 --> 00:28:05.130
We kind of did like a 5% fix, just to fix 5% of it. Okay, and we if we got some pushback, if they're out there shopping other builders, then we get tremendous pushback because the other builders are cost plus whatever they are, right? But they're not that, and this is kind of a small knit community.
00:28:06.029 --> 00:28:23.119
But if if if they're if you're in a market where that's common, then they brought to other builders, and that's common, right? Then it's it everyone's doing it. Correct. If you're in a market where it's not, then it's it's it's hard to do because you got to kind of stay consistent with what your market's doing, sure.
00:28:23.420 --> 00:28:29.660
And so our market is just the cost plus, right? Not the superintendent, all of that.
00:28:26.900 --> 00:28:45.250
That's just part of within our margin. So we we tried it a little bit, just didn't work. So we kind of let it out, and so now that's when we really saw the the change from from markup to margin, which you know, and that's how we bumped ours up.
00:28:47.079 --> 00:29:29.599
Got it. Okay, so you're you're just like you've you've tried just equally spreading out the overhead, right? Like the safe assumption is, is I've got 20 projects, I've got 14 people, I've got you know 5% of these 14 people's costs, rent, all the other stuff, you get it. But the overhead gets divided evenly by 5% You were saying when you were throwing that on contracts, or you were like trying to win work with that. People were dodging, but you were able to get around it by pivoting from the markup visual to the margin visual, which allowed you to hit your margin as opposed to just. It's almost like you're just like circumnavigating the entire overhead conversation by starting the relationship with your prospects on the margin conversation, right? Instead of the markup.
00:29:30.440 --> 00:29:48.670
Okay, okay, cool. Um, in terms of like the overhead side, like, do you have any like pro tips for like the contractor that's out there struggling to track overhead? Like, I'm just even like even like document it, register it, get an eye on it, see how it goes. Not even how do we allocate it, but is there any any pro tip there that you saw?
00:29:46.150 --> 00:30:05.849
The biggest thing is get somebody get get a local account or someone who's going to review close their books every month, review it, and explain it to you. I mean, the problem so many people can't read a balance sheet, they can't read a profit loss, they don't understand what they're looking at. So get someone. That local thing can sit down with you every month and go through it, right? Start start with the basics. Just just go through it each month. Yeah, close them out.
00:30:06.420 --> 00:30:07.559
Yep, and that's that's step one.
00:30:08.309 --> 00:30:09.900
Yep. When did that step happen for you?
00:30:13.740 --> 00:30:57.460
That was early, eight or nine. Yeah, eight or nine years ago. Okay, coming out of coming out of the recession, really going back to the to home building, getting volume going, and going, oh, hang on a minute, what do what do we do? So that part, and then I went back and got my MBA from third from Georgia, 13 through 15. So that was a big education, right? So it was in that time when I was getting my MBA that was like, okay, this is super important, and that was reason I did it was because I just I didn't have enough, I wasn't intelligent enough about finance, right? I I just didn't know it well enough, and that's I felt okay. I'll go get an MBA.
00:30:54.849 --> 00:30:59.680
That'll help me learn it. So that's when I really started focusing on it.
00:30:59.799 --> 00:31:30.980
Okay, so this would have been like 2017, 2018. I graduated MBA at 15. So coming out of that was I really started 1617, 18. Okay, cool. So just start with like getting someone who can actually sit down and explain it to you. And I think I think the last the explaining the explaining part that's the biggest challenge. I could be wrong, but like, have you had a had a hard time finding people that are actually closing out your books, providing that service, being able to sit down and meaningfully, essentially educate you on why and what this information is and why it's important.
00:31:32.420 --> 00:31:37.339
No, once that is so, that's what we're doing. It was easy to find people to. I mean, there's there's accountants all over the place.
00:31:38.000 --> 00:31:48.549
Yeah, finding a real true construction accountant that's a little more challenging, but any of them can explain you your P and Ls, the basics. Okay, the basics so that you know what you're doing on a monthly basis.
00:31:49.119 --> 00:31:51.369
Just get started understanding every month.
00:31:52.059 --> 00:31:56.619
Totally. Okay, so the step one is just like getting the understanding of a general. Have someone track it and do it, and
00:31:56.740 --> 00:32:03.150
Is there anything else when it comes to then it was word off on a true construction accountant, right?
00:32:03.509 --> 00:32:13.589
Who really understands, you know, your percentage of completion accounting and things like that. Then you're getting deeper and deeper in, but just the basics. Just understand what you're doing on a monthly basis.
00:32:14.250 --> 00:32:20.309
Totally. And then, do you outsource your construction accountant, or is that something that you hired internally for?
00:32:20.549 --> 00:32:43.240
So I have internally an accountant that her she's controller slash accounts receivable, and then we have a fractional CFO who is a construction accountant. Okay, perfect. Contract with cool, cool. Are you down to share who you use? You don't have to. You're gonna keep the family secret close to your chest. I love it. I love it.
00:32:40.730 --> 00:32:43.240
Okay, no, that's totally fine.
00:32:43.359 --> 00:32:45.609
That's why I like to ask. Go ahead.
00:32:46.750 --> 00:32:55.450
So no, but once he started, we've really gotten things where we need to be. Right, moving along, getting that guy who really understood construction.
00:32:56.200 --> 00:33:03.990
Yeah, they're just hard. They're hard to find, but you don't have to go that far with it in the beginning. You just just get an understanding.
00:33:03.990 --> 00:33:08.700
Get the blocking and tackling down. Understand what's the consistencies in your business.
00:33:06.390 --> 00:33:14.519
Make sure that you're looking at your costs that are trending in the right direction. Your income trending. Yeah, makes sense.
00:33:11.009 --> 00:33:20.160
Okay. Well, so I mean, I think in terms of like understanding your numbers, like I mean, I think this was great. Like, where do you start this journey?
00:33:20.190 --> 00:33:30.710
Is really with pre-con starting to get into a line of thinking that's more on the margin side as opposed to markup, and then really understand your overhead.
00:33:27.200 --> 00:34:36.230
And that overhead conversation is a really easy progression once you get margin tackled and you start to present your business through the lens of margin as opposed to markup. I think in terms of like anything that's like outstanding, Kevin, like on understanding your numbers. Any other words of wisdom that you would that you would suggest to people, or maybe even like a success story of like what was life before, and then what is life after, Kevin knowing his numbers. You know, a builder years and years and years ago, told me he said that right now is the easiest time to do a hard thing, and and that's really stuck with me. So anything you put off gets harder and harder to do. So if it's tough thing to do, go do it right now. And any change like that, it's all tough, so just dive in and get started. And it's fine to be messy, but just get started. Go find someone that can advise you. Can find someone that can help you, coach you. You just got to start right now. Don't put it off.
00:34:36.949 --> 00:34:39.199
Yeah. So just prioritize it.
00:34:39.679 --> 00:35:00.599
That's it. Like after the audience listens to this episode, that is the best time to start understanding the numbers right now. Right now, I love it, Kevin. I appreciate the the the candor here. So much information. Where is the best place for the audience to find you if they want to follow you along and get more get more.
00:34:58.509 --> 00:35:00.599
Insights from Kevin.
00:35:01.559 --> 00:35:06.690
Our Instagram is at Southern Luxury Homes. Website is southernluxury.com.
00:35:07.860 --> 00:35:08.940
Love it. Those are the best spots.
00:35:09.000 --> 00:35:19.230
Those are the best places. All right. Well, Kevin, I appreciate you, sir. Thank you for jumping jumping on the podcast. And yeah, if there's anything I can do, just let me know. Just shoot me a note. I enjoyed it. This is fun.
00:35:19.739 --> 00:35:22.340
Yeah, I I agree. I agree. We'll have to do it again.
00:35:22.969 --> 00:35:23.389
Absolutely.
00:35:23.869 --> 00:35:24.679
All right. We'll see, Kevin.
00:35:25.159 --> 00:35:25.760
All right. Take care.
