This week we’re diving deep into the topic of finding and hitting your business’s sweet spot for more long-term profitability, success, and happiness. Join us to hear three different perspectives on the factors that make up a sweet spot, how to pinpoint yours and what to do to start landing construction jobs within it.
Topics we cover include:
- Which factors go into a contractor’s sweet spot from the perspectives of a bonding agent, a bookkeeper, and a profit strategist
- How to segment your jobs to find out which types of work to aim for in the future
- Why job costing is crucial to finding your sweet spot
- What the “cringe and crush” factor is and why you should consider it when segmenting your jobs
- How risk assessment factors into your sweet spot
- Why you should focus on your bottom line, not your top line
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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today, we are talking about finding and hitting your sweet spot in construction in the jobs that you do. At the Contractor Success Forum, we discuss financial strategies for running a more profitable, successful construction business.
And we have our three long-term construction industry professionals. In one corner, we have Stephen Brown with McDaniel-Whitley bonding and insurance company. And in the other corner, we have Wade Carpenter with Carpenter and Company, CPAs and in the other corner, and maybe it’s a circle, something. Then the other guy is Rob Williams, me, your profit strategist with IronGate Entrepreneurial Support Systems.
So guys, what is your sweet spot and how do we find it and hit that thing?
[00:00:59] Stephen Brown: What does it mean to hit your sweet spot? We were arguing that before we started recording this thing. What does it We’ve brought it up lots of times in past podcasts.
[00:01:09] Rob Williams: What is it on a golf club, Stephen?
[00:01:12] Stephen Brown: Well, if I’m on a golf club, it’s that spot on the head of your golf club where, they call it the sweet spot, because when you hit it in that spot, your ball’s going to go straightest and furthest. My grandfather used to say it’s hidden in between the screws back when the drivers were made out of wood, but that’s your sweet spot.
[00:01:30] Rob Williams: Yeah. So Wade, what is it in construction, man?
[00:01:34] Wade Carpenter: Well, I think it definitely means something different to all three of us, as we were discussing before this. But I think there’s a lot of ways we can approach it. Rob, you want to kick it off this time?
[00:01:43] Rob Williams: Yeah, we cannot tell you what, what I love it. We’ve got Profit First, which, Profit First actually came out of the Pumpkin Plan book and the Pumpkin Plan has a lot of contractors in it. Construction is one of the biggest focuses of that program. And then they say it’s when three things come together: you have your unique offering that you know how to do, you’re unique, you’re the best at it.
And then it’s something else that your, your top clients like. And so you have your unique offering. People want it. That’s another important thing. And then you systematize, you get the three circles together when you can have a systemization of that. So you’re the best at it. People, your favorite–not just anybody likes it, but your best clients that you’re focused on want what you have. And then you were able to systematize that offering so you can be efficient and keep doing it without running your overhead out of control. So that is my definition of what the sweet spot is.
[00:02:46] Stephen Brown: To me, sweet spot is getting bids. Whether you’re bidding publicly with bid bonds or whether you’re bidding privately, you want to get your jobs. You want to get that sale. But hitting your sweet spot to me is when you’re putting a number out there that is really hitting your sweet spot, as far as the number that you put out and the profit that you think you can make on it. And you’re not missing out on bids. So it’s, it’s a tough, tough–
[00:03:12] Rob Williams: I agree that. I think the way you find that is through these three concentric circles. That’s the Pumpkin Plan method. Now, I also love Jim Collins’ Hedgehog Concept, if I can remember what those are. He says in finding your Hedgehog Concept, that thing that you can do real well, you find something that you’re passionate about, you’re best at it, and it makes business sense.
So that builds your unique offering. And when you find those, the result is what you’re talking about, Stephen. You get those. That’s where you make more money and you can get margins because you’re best at it. And you can start building your systems around the good things to get even better at it.
That’s one thing that we teach. Hope I’m not going too off on a tangent, but, I used to do the opposite of what we teach. I would try to be good at everything. All these different things, and try to get good at things that we don’t do very often, and my resources were really strung out. So my overhead was really high because I wasn’t focusing on that one thing that I did best. I was trying to improve my faults where, seems like, three or four decades later here, the teaching is do what you do best, do more of it. Instead of trying to fix our weaknesses.
So that’s sort of the theme. What is that book? Outliers is where a lot of that came from the book Outliers, about strengthening your strengths to do more of what you do best. I was trying to strengthen my weaknesses. So I ended up doing a whole lot more of what I wasn’t good at, so I was not in my sweet spot. I hope that wasn’t just rambling.
[00:04:52] Stephen Brown: No, no. I’ve talked about it from my perspective. If you’re not low bidder, you don’t get the bond. And then I don’t get paid. And of course, that’s sweet for me. But from an accounting standpoint, Wade, what are you seeing that tells you a contractor is hitting their sweet spots?
[00:05:09] Wade Carpenter: Well, I actually was putting together a course on this, so it was kind of timely, but you know, sometimes the sweet spot is knowing what not to chase. Yes, it’s about profitability, but it can’t all be about profitability because, I’ve got another course where we talk about in cashflow that you can have very profitable jobs, but it can wreck your cashflow.
So, if we get a chance, I’d love to explore that as well, segmenting your jobs and finding the ones that are great.
[00:05:36] Rob Williams: Yeah. We should go into a little bit, Wade, I know we use kind of the same method on that, about how you identify those jobs. I think that’s one of the things you’re talking about when you list your clients and the different factors.
[00:05:49] Wade Carpenter: Yeah. I kind of segment, I ask people to go break down your jobs and say, segment your jobs based on how much revenue there is and the different types, like it could be, commercial, industrial, it could be, working with churches or whoever you work with. Break them down into different categories and see how much, not just the top line, but also the bottom line.
And if you don’t have good job cost records, I know this is a common theme, but you can’t really get to the profitability. But you also may find that, say, you do jobs under $50,000 and the other one’s at $250,000, and you may do one or two a year at a million dollars or something like that.
Well, once you start breaking them down into those different categories, you’re going to find different characteristics. And that’s where I think we could spend some time talking about.
[00:06:39] Stephen Brown: We love talking job costs. It gets old, but job cost is everything. Because if you don’t know what the job costs are, you don’t know what your job profit is and you don’t know what bid to put out. That’s pretty simple.
[00:06:54] Rob Williams: I was talking to Mike Michalowicz the other day on a Zoom call. And he was talking about one of the factors that you put in those columns, in case y’all didn’t know what we’re talking about, is you list your clients. And then usually, we list the revenue that you get from them, and maybe sort them in that order.
And then you have other factors that you put in, and one of my favorite ones, Stephen, is the C and C column. It’s let’s see, Wade, if we can remember what that was, it’s cringe or crush. So do you cringe when they call, is it like, is this the guy that you treat it like a spam call? Oh my God, that guy’s calling again, you know, oh my God. What is he gonna do? Or you’re like, oh man, there’s that guy. Let’s see. Oh, maybe we can go to lunch and let’s go do that. So is it a cringe or a crush? And it’s funny how that, that probably aligns with some of your profit things. Not always, but, but that’s part of the factor of the energy it takes and it may be an indication for all those things that you can’t track, either. Emotional effort on some of these jobs, it just wears you out, or it, it energizes you. So you want to do more and you get better and better at it because that’s part of that’s part of life and the part of your job that, that make you love it. You don’t want to spend all your time hating what you’re doing.
[00:08:10] Stephen Brown: Sure. And, from my perspective, cringe or crush has a lot to do about analyzing the risk assessment of the job that you’re gonna overtake. So sometimes all the stars line up. You’ve heard that expression. All the stars line up and all is right with the world. Sometimes you have a project like that, and sometimes you don’t.
I’ll never forget a customer putting in a fiber optic line from Memphis to Little Rock. Just absolutely did not know what the other bidders were bidding. It was a closed bid situation and, uh, ended up losing a lot of their equipment in the swamps. It was a nightmare. Risk assessment, really understanding where you’re going to do the project. What elements of it make it successful? That’s hitting your sweet spot too.
[00:08:57] Wade Carpenter: Yeah. And I, I think about it from different perspectives. So many people chase that top line revenue and when we start segmenting our jobs, say by revenue size, an example I show in my class is the million dollar plus jobs that they were doing were actually driving their breakeven point up to where it they needed to do more volume, with driving their profit down.
And, there’s other factors that, again, we could talk about the cashflow, how fast do they pay? Do you have retainage on it? There’s a lot of things that can affect the cashflow. Sometimes it’s the owners or the general contractor you’re working with. If they’re just slow and they nitpick everything you do to push your pay app out another month, that’s going to cost you in cashflow.
[00:09:38] Rob Williams: I really like where that’s going, because right now this is during COVID, if you’re listening to this in the future, but contractors are able to get so many different jobs. People are begging them to do things, so they’re taking all these jobs and I keep seeing people with growing revenue and their profits are down. The result of it is when you’re doing these jobs outside, your overhead is growing faster than your revenue. So less cashflow, less profitable. Not even those cash drivers necessarily that we keep talking about.
I had this conversation yesterday with a contractor and he said, well, I’m getting ready, I’m preparing to do all these new jobs so I’m putting in. It’s well, when do you stop? You keep going outside of your sweet spot to find a new seet spot. And there’s some room for that, but how much do you do? And, you know, I’m seeing, they’re doing more and more. You got to continue to make profit today.
And I think about you as a bond, this guy doesn’t get a lot of bonds, but I think about you as a bonding agent, you must not like those guys at all that were like I was, even though you bonded me. Constantly reaching for something new and doing other things and it just, it clobbers our overhead. And that sort of some of the result of not working in your sweet spot.
[00:10:54] Stephen Brown: Well, that is kind of how you find your sweet spot. Hit and miss, trial and error. And I guess one thing our show’s all about is helping people not have to go through the trial. Maybe some experience one of our clients or that we’ve gone through with our construction clients might help you not have a problem. When we talk about sweet spots, that’s pretty much what we do. That’s what our podcast is all about. It’s your financial sweet spot is the focus, because we’re all finance people. I’m finance and risk assessment. When I talk about risk assessment, we’re talking about things that you can insure to minimize your risk, but we’re also talking about every single bond underwriter has a story of a job, in any category or any trade of construction, that went south. And there’s some common denominators of those things of why they went south.
[00:11:48] Rob Williams: One question is growth of that, and so I kind of wanted to hit that real quickly. How much do you do of reaching out? Wade and I, we have a method that we teach. You stay within your Profit First guidelines when you’re looking for those. There’s room for that. You get profitable in your sweet spots, in your niches, and then you have room in your profit account to maybe go back and invest in some of that, but you still need to keep those margins. So that’s how we judge how much of that to do.
And what has happened is contrary to what we were taught. It takes money to make money, but what we’ve actually found– and we being the industry and the coaching and Jim Collins, and a lot of these people– is when you stay within these profitable confines of your numbers, you actually grow faster.
It’s a paradox. It’s contrary to what we’ve all been talking. You’ve got to put all your money back in here if you want to grow. And there are reasons that that’s not work. One, you’re forced to find your sweet spots to stay profitable and you don’t grow business that’s bad. Anyway, Wade, do you have any comments on that one too? I liked that you were nodding.
[00:12:58] Wade Carpenter: Yeah, I agree and most people, that’s what they do. But I’m actually thinking about a contractor I was working with yesterday that actually had three distinct lines of business. They had basically new custom homes, they had renovations and they were also doing restoration work. And the profitability on each one of those is very different. So I had them break their allocations down differently based on the type of work they were doing. But they got a lot of work on the restoration side, but it was taking 70, 80 days to get paid from those insurance companies, and it was wrecking their cashflow. And it took a year of segmenting it and them building the job costs, but they saw finally that, we need to turn loose of this. We’re not making as much margin and it’s just wrecking. So by them actually reducing their top line, they were a lot more profitable and the mix of jobs helped them reduce their break even point because they were doing more profitable stuff that payed faster.
[00:14:04] Rob Williams: That is the biggest thing that I’m seeing right now. I love that point. Chase your bottom line, not your top line. I’m constantly seeing, I don’t know what your ratio is Wade, but I’d say 90, 95% of the people that I’m talking to are chasing their top line, the revenue, and they don’t have any idea what it’s doing to their bottom line.
[00:14:26] Wade Carpenter: They don’t and it goes back to that job costing and profitability by job.
[00:14:31] Rob Williams: Yeah. And I empathize with them because I had a formula. I thought it was increasing my bottom line. It wasn’t that I didn’t want my bottom line. I just had a formula in my head that everything was going to gain 30% margin or 50%, whatever it was. I think usually 30 percent was sort of a standard that we had in our margins that we were using.
So I thought everything was 30. I didn’t distinguish between the different ones. And so I thought I was growing my bottom line when I wasn’t analyzing it. Because it’s simple. It’s simple math and you don’t have to get into the weeds, but you might need to get in the weeds to find that sweet spot, to find whether it’s 30 and you may have an opportunity at 50 percent.
Or, what we found in our house, as you were talking about, our sweet spots were, we got in these little bitty 1000 square foot houses that we were making like 40 something percent margins on. And they were just like clockwork, we could do them in our sleep. And then we started building these big cut-up houses. And we were making 15% margins before overhead, which was negative. And we kept going for those bottom lines. And it was wrecking things. The people that bought us really went into that and they suffered there. They went out of business.
[00:15:50] Stephen Brown: I had a customer of mine on their website, they had a portfolio of their projects and front and center was one of the biggest projects. It was aesthetically beautiful, but it absolutely cost them their shirt. And said why did you put that on your website? First of all, every time you pull up your website, which they never looked at by the way, you see a job that reminds you of a job from hell. Sweet spot to me are those projects that are sweet. You enjoy doing them. You make a good profit. All of the risks are analyzed and everything comes together. Our point is that all this can be measured. I think it’s really fascinating what you were saying a while ago about how your profits grow when you’re operating in that sweet spot.
[00:16:36] Rob Williams: So Wade, what do we want to leave our guys with about telling them, hopefully they’ve got the point of the sweet spot. So what do they do about it, and what are sort of the takeaways?
[00:16:48] Wade Carpenter: For me when you were just sitting there talking about that, I still come back and I know we’ve said it on this program before, but having your job costs, number one, but having a overhead factor. And people don’t know what they are, they use what the industry standard is. Then it comes back to bite them.
But you know, simply just go in, make a list of your jobs and hopefully you’ve got the job cost records. Break it down, go back through last year or maybe the last two years and say, what kind of revenue did we get? What are the cashflow characteristics, and how profitable are we at this different level? If that makes sense.
[00:17:22] Rob Williams: Yeah, it does. And not just an average overhead either. Most people can’t track that, the overhead per job. So you’ve got to put either the cringe and crush factor, or just sort of, a lot of times, we just have to kind of guess at how much extra time. Is it something that you’ve done before? Do you already have the specialty? And I’m seeing that a couple of times where people’s, a third of their overhead is just going to these new jobs, just figuring it out. Or the owner’s time, so he can’t work on something else, learning a new skill, something like that.
Maybe you guys have a better factor, but usually that gets to be a little bit subjective, trying to figure out how much of your overhead’s going towards those jobs. I don’t know exactly. Sometimes we have to rank them ABCD or 1, 2, 3, 4, 5, something like that and put that in there.
[00:18:10] Wade Carpenter: I mean, Unless it’s direct overhead or indirectly can be charged to that job. When we’re doing segmenting, I typically will leave that out, unless it’s something directly affecting that.
[00:18:21] Rob Williams: Well, I like to try to put score in there. It’s very subjective, but sometimes you have an ABC factor to that. It’s just one more factor to look at your sweet spot.
[00:18:32] Wade Carpenter: And another thing that you brought up before, the real revenue thing that Profit First preaches. Looking at how much materials and subs goes out to other people can also, you know, you may need to break that out and say, this type of job, we did a lot of the work versus we subbed most of it. You look at your profitability a little differently.
[00:18:53] Rob Williams: And that’s a good thing, right? You sub most of it. That’s good. Because it doesn’t take as much overhead.
[00:18:57] Wade Carpenter: It can be. A lot of people say, well, I keep more money if I don’t sub it out. But then again, you end up doing stuff that you’re not really good at, and that can wreck the profitability.
[00:19:07] Rob Williams: And it depends your, on your markup. A lot of the in-house cost, especially in the home building business, we just put our direct costs there. We didn’t have it marked up. You got to mark it up for the insurance and those things. And a lot of people do that, but then you also have to mark it up for the overhead and the time and effort to manage those people.
It’s a margin on a margin. One of the business groups I was in would have us, if you had your crews, like the typical scenario was a lot of these, we had some remodelers in there. They had three or four employees. So not only did we mark up those factors of the insurance and stuff, we treated it like a different business. And I had framers. So you had to make your margin, your 30, 40% margin on your labor to put that in your job cost, because there’s overhead to manage those. And I rarely see anybody doing that.
[00:19:57] Wade Carpenter: Yeah. Stephen, I know you’ve got some different thoughts from us, so wrap up thoughts from you.
[00:20:03] Stephen Brown: Well, this happens a lot on Contractor Success Forum. We talk about it and we’re talking about it from our different perspectives. But I know one thing that all three of us want our listeners to do is to work on that sweet spot. Whatever it is, however you define it. Whether it’s, it’s getting jobs, managing employees, keeping your numbers in line, and most importantly, making profit at the end of the day. That’s the measuring stick that says you’ve done everything right and you may have found your sweet spot. Then after that’s done, then you got the sweet spot of saying, am I doing the type of work I want? And am I happy?
[00:20:41] Rob Williams: Well, this is great cause and I think the sweet spot could be the number one thing to get the bottom line to your business going. To me, that’s one of the things that has the biggest impact on pushing your numbers forward. It’s not fast. It can be slow, coming in there, but it’s a great impactful thing.
All right guys, well, this has been a great episode. We kind of went a little long today, but because there’s so much value in here. This is a great sweet spot episode.
[00:21:08] Stephen Brown: There’s a lot of value in it, and all three of us bring a different expertise into how to help you find the sweet spot. And we’re here to help you if we can.
[00:21:19] Rob Williams: That’s right. So go to the show notes and look us up and go to ContractorSuccessForum.Com because we are the Contractor Success Forum. Wade Carpenter, Carpenter and Company, CPAs, Stephen Brown, McDaniel-Whitley bonding and insurance agency. And I’m Rob Williams with IronGate Entrepreneurial Support Systems.
Thanks for listening and tell all your friends to come watch us. Thanks. See y’all.