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This week we’re talking about how to deal with seasonality in the construction industry. As a contractor, you’ve likely faced ups and downs in your business from changes that were both anticipated and unpredictable. In the episode, we’re sharing strategies for preparing for both.
Topics we cover include:
- The factors that can affect your job volume and cash flow, including those beyond weather
- How seasonality affects bonding
- Tools you can use to save money during the good times and avoid spending it in the slow seasons
- Whether you should consider a pivot when work is slow and what else you can do to be productive during downtimes
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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
TRANSCRIPT
Rob Williams: [00:00:05] Welcome to the Contractor Success Forum. Today, we are discussing the seasonality of construction. On the Contractor Success Forum, we discuss financial strategies for running a more profitable, successful construction business.
And check out our show notes. That’s where you can get good information and share our shows and go to ContractorSuccessForum.Com to see whatever the latest, great things about this show. We can be changing that even when you listen to this show a year down the road or two years down the road. So go check out the show notes.
And today we have our three long-term construction industry professionals. We have Stephen Brown, a construction bond agent with McDaniel-Whitley bonding and insurance agency with over 30 years of experience underwriting and placing bonds for you as contractors. And Wade Carpenter with Carpenter and Company, CPAs, helping contractors nationwide to become permanently profitable for over 30 years.
And I am Rob Williams, your profit strategist with IronGate Entrepreneurial Support Systems, driving profit in your businesses with decades of vertical integration as a contractor, a manufacturer, an aviator, financial strategist in the construction industry.
Well, Wade, take it away on the seasonality of construction and I bet you have got a quote for us today.
Wade Carpenter: [00:01:36] Well, I do. There’s a guy named Albert Caymus that said in the depths of winter, I finally learned that within me, there’s an invincible summer. And honestly, I don’t know what he meant by that, but I know a lot of contractors struggle when they have seasonality. And when things are the worst, they wonder why they’re in this business.
So that’s part of what we want to talk about today.
Rob Williams: [00:02:00] Oh, yeah. So you would say that again, I got depths of…
Wade Carpenter: [00:02:04] In the depths of winter I finally learned that within me, there’s an invincible summer.
Rob Williams: [00:02:09] Interesting. So the seasonality of construction today. Profit First and bonding and CPAs. Man, that’s right down our alley isn’t it? And I am wondering on you too, Stephen in the bonding, does that make a difference for your bonds on the seasonality?
Does that have anything to do with that? Or is it just all about us making sure we’re planning ahead?
Stephen Brown: [00:02:33] Well in the bond world, when we think about seasons, we think about whenever our contractors’ fiscal year and financial statement. If it’s a December 31st, as a lot of them are, we’re worried in March, April, May, we don’t have those statements yet.
But yes, seasonality, it affects everything. We see so much frustration. Whenever it’s raining around our office, we’re all out of the office. So we know there’s a chance we can catch that contractor in their office. And that’s usually when we get the most calls as well.
Rob Williams: [00:03:03] How does that affect these contractors? There’s a, a few different things, you know, Wade, what would you say of, of how it’s affecting these guys?
Wade Carpenter: [00:03:11] Well, I mean, I, there are times that, we have rain and snow. I mean, we don’t have snow as much here in Atlanta. But you know,
Stephen Brown: [00:03:18] But if you have it it’s bad.
It
Rob Williams: [00:03:21] Yeah.
Stephen Brown: [00:03:21] everything down, even even an eighth of an inch.
Wade Carpenter: [00:03:26] Yeah. But, I mean, the guys that are working outside, like the guys that are grading and doing concrete, the winter months are horrible for them. And a lot, a lot of trades.
There are other things like, I’ve got a general contractor that does a lot with schools, and they get a huge part of their work done between May and August, when the kids go back to school.
And there’s other things like, you know, depending on the type of work. I mean, you have landscaping. Those guys are busy in the summer, but they may have nothing to do in the winter. And some of them pivot to something like snow removal, but here in Atlanta, we don’t have that. So what do those guys do?
And then there’s other things like, people like that do multi-family, like apartments or things like that. If kids are going back to school, people are moving. So there are all kinds of seasons that affect what our contractors do. And it can be difficult when they have those low times.
Rob Williams: [00:04:21] Right. So, you know, I’m thinking of things that made my seasons different. Clearly we’re all here in similar climates, sort of in the South. We don’t have a lot of the tools like Stephen just referred to, to make these jobs happen when we do have snow, because we don’t have those tools. So for me, I think the volume came in, the amount of volume, but it was also our margins. We did spend a lot of money prepping, doing extra prep or extra storage, so we could try to keep the volume going during that. So I guess you can stay home, or you can spend part of your margins to keep those going.
One of the other things is we used to pour slabs well in advance. So we might have six months of slabs in the, maybe not six months, but three months, I guess, in the winter climates they may do that a little bit more, but there’s an expense to that and the erosion of your margins. We even had we, we had tried to do this dome project where some people in some climates will actually put one of those dome tents. That’s an extreme example of eroding your margin by having a big expense like that.
But I’m kind of curious what you see in that, Wade. Is it even something that people pay attention to? Because I didn’t think about it as margin. I thought of it, of it as overhead to keep those jobs going, but I’m sure I wrote in my margin.
Wade Carpenter: [00:05:49] We just had Michelle Scribner come in on the podcast and talk about a roofing contractor that she had. And they do a lot of stuff during certain times of the year, but other times out there, where she’s at in California, it’s too hot to get on a roof. And, you know, there’s, rainy times.
But her contractor had a serious problem. They would do stuff all the way through the year, but then in this low time, they had zero revenue.
Rob Williams: [00:06:15] Hmm.
Wade Carpenter: [00:06:16] And how do we address that? And that’s where one thing I want to talk about.
Rob Williams: [00:06:19] Okay, great. So, so we got the margins, it’s just, I think being aware and being careful that we do it and really thinking about doing that, or could we shift to a different segment? Like, like Christmas lights? I think the guy who lived next door to me, they actually own a Christmas light company, too. He’s got a seasonal business. So they store them in these warehouses, then all of a sudden outcome, all these giant Christmas decorations. So they get those crews working on that. So, so you can do that.
Stephen Brown: [00:06:47] There are overhead costs and then there’s overtime costs. You’re going to have a week of rain and you’ve got a week before and you’ve got a large dirt job, you’re going to be working overtime. You need to plan for that. I’ll never forget once, I guess this was about 20 years ago, I came up with this product called rain insurance.
I thought it was going to be great for contractors because we insured special events like Memphis in May and different festivals that if it would rain, you’d lose all your income. So, I kind of developed a product for rain insurance for contractors and I thought it was a great idea.
It was kind of a little bit pricey, but one of my buddies said, Stephen, did you know that you get rain days on federal contracts? And my head just dropped. What an idiot. But anyway, rain days are something that you have to allocate. Time is money and anything that keeps you from getting the job done costs you money unless you’re allocating for it.
I thought Michelle had a very good comment about having that fund. You call it a rainy day fund, but if you’re a roofer that does a lot of roofing, you can’t roof in the Northwest when it’s snowing, even remotely. That’s one thing that you could say definitely shuts you out of work and even interior contractors, doing mostly interior work where it’s not as big of a deal, they have to deal with the seasons of all the other trades for the project to come up out of the ground. So that affects them to some degree.
Rob Williams: [00:08:14] Yeah. We used to go to extremes to try to get a house “dried in”. How many could we get dried in? The one day, two days of winter. So if you’re not putting every crew and every resource you’ve got to get in some kind of, at least get it, felted in, something covering that roof, you could lose months because you’re not going to have many of those days to get it dried in because you may have a frozen roof for weeks and weeks. And if you can get it dried in, then you can start doing all the interiors. So that’s a lot of extra crews and it used to be, we were just joking about how we used to use plywood and just put it all up to the thing, but the price of lumber today. Oh my God. The cost of doing these things to get through the mud. I’m actually not sure what they’re using out there to get through the mud, but I doubt they probably pave it in gold before they put it in plywood out there this time of the season.
Stephen Brown: [00:09:09] I’ve got a shed in my backyard. I wrapped in that Tyvek and it’s just been a big advertisement for Home Depot for the last year, because I got to get the siding up.
Rob Williams: [00:09:19] Yeah. There’s supposed to be a siding on top of that,
Stephen Brown: [00:09:21] No, no.
Wade Carpenter: [00:09:23] That stuff is not supposed to last forever.
Rob Williams: [00:09:24] Right. Hey, but you got dried in man, and that’s the key.
So we were talking about what are some of these tools? We were talking about a drip account and a vault account. Wade, do you want to talk about those? And my definition, I know I see them as two different things. I’m curious if we use the same terminology.
Wade Carpenter: [00:09:42] We probably don’t use the same terminology, but thinking about Michelle’s problem with a roofer that has severe shortage in revenue in certain times of the year, and you’re trying to keep people employed and, and make sure your rent is paid and those kinds of things. From a Profit First standpoint, here’s the simple definition of how you address it.
Basically at a minimum, if you’ve got three months of overhead you got to cover, look at reasonably what you got to cover, plus, paying the owner, plus paying taxes, look at what that number is. Take that number, and that should be your minimum target. And after that, you take what you expect to do for the revenue for the entire year and divide it by that minimum overhead you’ve got to cover.
So say you do a million dollars a year, but you got to cover $200,000 in three months when you’re really low. You need to take 20%. And when things are really great, set up a brand new bank account. And 20% comes in, it’s nice when the cash is flowing, but you got to put that back or it’s not going to be there when you need it.
Rob Williams: [00:10:48] So let me try to talk about that too. What I’m hearing you say is, look at your whole year or, or if you have a couple of years to really study that. So when you’re taking these percentages, if you take a percent of your real revenue after the materials and your subs and you put that percent over there, I know when we analyze these on a quarterly basis, we’re like, oh my gosh, I’m putting way too much into Op Ex in the summer. It may look like your analysis is wrong, but you’ve really got to look at that for the year and don’t go spend that OpEx, or maybe you put it in a vault. We can get specifically how to do that. But if you’re looking at the full year, you got to trust that and maybe reanalyze it to make sure you’re keeping that in there. It may be a large balance in the summer because you’re planning for the winter.
I know there’s a tendency to say, well, wait a minute, we got all this money sitting over here. Let’s lower our percent that we’re allocating to that, but they look at it in a really small segment. You’ve got to look at it and get your cycle long enough. Have you seen that? Is that true or?
Wade Carpenter: [00:12:00] Absolutely. I mean, when you put it all in that one big bank account in the summer, it’s easy to spend it. And if you don’t put aside, it’s not going to be there. And the formula I gave you it’s, it’s tough to maybe start that. Because you probably have some overhead you might need to cut.
Rob Williams: [00:12:17] Right. Yeah. You might have to go through a season or two of analysis to get on these numbers, to get them right. And then–
Wade Carpenter: [00:12:24] Maybe you can’t do all of it upfront. Maybe you can do 10%, but at least you got something put back for those really tough months.
Rob Williams: [00:12:32] Yeah. And then, you know, the two different accounts I think about is a drip account, and that would be one account that, that you’re funding things to that maybe is out of your regular five accounts that you put it over there. To me that’s adjusting for the revenue, something that’s predictable, because you can, it’s coming. You put it in a drip account and then you say, well, we’ve got six months. Let’s just drip it out over six months.
But then there’s the vault account for all those things that we don’t know are coming. So you’ve got to have the less predictable and that that’s always a tough decision of how you’re going to allocate those.
So.
Stephen Brown: [00:13:10] If you’re not setting money aside in those accounts for the bad days, then you’re borrowing on your bank line to get through until things pick up. Then you’re incurring a cost instead of not incurring a cost. So it’s a great idea.
Rob Williams: [00:13:26] Yeah.
Stephen Brown: [00:13:27] To even out your cashflow that way.
Rob Williams: [00:13:28] It is. And I think we’re all kind of accustomed to what I’m calling a vault account. That’s the rainy day fund, that’s sort of our name. The drip is an unusual new thing to me. I never used that in the past, where you can have, if you have something predictable to pull it out.
But let’s also talk about what things you can do. We were just talking about seminars and education, and I was talking to somebody yesterday that said their seminar attendance is way down right now in the summer, because of all the jobs everybody’s out there working. So you can try to plan for a lot of your training in the winter and stuff. Do some of these things that may not interrupt your jobs. Some things you might have continually going on all year long, but I know we did a lot of training on these rainy winter days when people weren’t at hunting camp. That’s the other thing you schedule. Schedule all these hunting camp vacations during those winter months.
Wade Carpenter: [00:14:29] Well, that definitely helps. And you can look for alternative means to get some revenue. The classic example I gave, the landscaper that pivots to snow removal. But you know, sometimes you can’t do that. And I think back do you remember if you read and Profit First, Mike Michalowizc talks about Ernie, his landscaping guy that started doing roofing and fixing chimneys and gutters. You can’t be everything to everybody. And when you try to, that one thing that will definitely kill your profit. And sometimes it is better to just, cut back
Rob Williams: [00:15:05] Yeah.
Wade Carpenter: [00:15:05] for the months, even though you may have some people you want to keep.
If you can’t find a way to efficiently do that, sometimes it’s a bad choice.
Rob Williams: [00:15:13] Right. We had a cabinet shop that used to just close down. They would say, we’re, I can’t remember how long, but it seemed like a really long time. I know it made me nervous as a home builder, it’s like, what if I need some cabinets? So I don’t know if I can plan ahead, basically, I don’t know how much of it was voluntary on their point or how much of it was, they knew their employees were gone for hunting season anyway.
So, but it just wasn’t even worth it to open the doors. Maybe they had some billing people in. I don’t think they even had that. I think they just shut it down.
Stephen Brown: [00:15:46] I think that’s a good point though, that you made Wade, about setting up the landscaping and the snow removal business for example, to even out the hard times. People forget that the headache is, you want to be known to be the best of one thing or another, and the more you diversify that, it kind of takes away from that. Not to mention, if you have different companies involved, well, what are you going to do when it’s not snowing? Borrow from the landscape company? Borrow from the snow removal company? Or are you just going to have your one company do it all? And then I don’t know what you call yourself.
Rob Williams: [00:16:23] Yeah.
Wade Carpenter: [00:16:25] Jack of all trades
Rob Williams: [00:16:26] Right.
Wade Carpenter: [00:16:27] Master of none. Exactly.
Rob Williams: [00:16:30] Well, that’s great. This is, this has been a good show. Some good topics. Wade, y’all have anything else to add before we wrap this one up?
Stephen Brown: [00:16:40] Just call me if you need some rain insurance.
Rob Williams: [00:16:46] Don’t call me if you need some rain insurance. Or call me and I’ll send you to Stephen. So, well, this has been a great show and we’re coming up on our 20 minutes. So it was good having you guys here today and seasonality, it’s really not that difficult to plan, if you do it. The other thing is do it. So just do it, just do it.
So thanks for watching the Contractor Success Forum today. I am Rob Williams with IronGate Entrepreneurial Support Systems.
Stephen Brown: [00:17:17] I’m Stephen Brown McDaniel-Whitley Insurance. We find solutions to your bonding problems. Give us a ring.
Wade Carpenter: [00:17:24] I’m Wade Carpenter with Carpenter and Company, CPAs, and we help contractors nationwide to become permanently profitable. You want to check us out at CarpenterCPAs.com.
Rob Williams: [00:17:34] All right. And this is the Contractor Success Forum dot com. Thanks for watching this. See ya.
