June 25, 2025 • 52 mins
Custom builder Will King of High Cotton Homes shares hard-earned lessons on how to actually make money in construction. From markup vs. margin to pre-con agreements and spotting bad clients early, this episode is packed with real talk and tactical advice for builders who want to run a profitable business.
https://www.highcotton-homes.com
Show Notes:
Introduction and Overview of High Cotton Homes (0:00)
Will King's Journey from Fireman to Builder (3:18)
Joining the Southern Living Custom Builder Program (5:30)
Implementing Financial Management Practices (13:02)
Challenges and Strategies for Increasing Profitability (17:36)
The Importance of Pre-Construction Agreements (29:24)
Advanced Payments and Cash Flow Management (40:09)
Building a Strong Network and Learning from Peers (47:55)
Conclusion and Final Thoughts (51:30)
Find Our Hosts:
Reece Barnes
Matt Calvano
Podcast Produced By:
Motif Media
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcome to another episode ofbuilders budgets and beers, and
today was a doozy, with our goodfriend will king over at high
cotton homes. I say this is adoozy, and I feel like I might
have said this already onintros, but the entire crux of
this episode is how to makemoney in construction. We talk
(00:20):
about pre constructionagreements. We talk about
picking the right customer. Wetalk about the difference in
markup and margin, which youshould absolutely know. We talk
about huge losses and burns thatwill had come across just from
simple practices that he didn'tfollow. And Will's an absolute
open book. So go ahead jump in.
Let's get to it and learn alittle bit about how to make
(00:41):
money in construction.
Thanks so much for jumpingon, dude, absolutely man. Thanks
for having me.
Of course, we had some some nicewarm chatter here. We just said,
Damn, we got to just hit recordand get the record and get this
(01:03):
thing running for the for thelisteners, we'll go ahead jump
in. Give the give the listenersa little bit of an idea of who
you are. And high cottonAll right, yeah, so will King,
like you said, high cotton homesis our company. We are a design
build custom home buildingcompany here in Florence,
Alabama, which nobody knows whatthat is, hardly. So it's
Northwest Alabama. We're almostin Tennessee. We're almost in
(01:26):
Mississippi. Everybody alwaysthinks we're on the coast. For
some reason. It's kind of funny,the complete opposite end of the
state, Gulf Shores. Yeah. Sothere's a city across the river
called Muscle Shoals, which islike famous for the Swampers,
and it's actually when I went tohigh school. But when people
hear that, they justautomatically assume you're at
the beach. Yeah, so, but yeah,so we are, I guess we started
(01:49):
the company in 2016 so we'recoming up on 10 years to
celebrate. Of 10 years of what,survival, growth, celebration,
business ownership, yeah, yeah.
Butwe are just mainly focused on
custom building. Man. We don'tdo any, we don't really do any
spec building at all. You know,I have a little bit of a rental
(02:13):
business going on the side, butthat's, that's the pride of our
company. Our bread and butter isjust custom all building. So
we're just doing just doing moreand more parts of it, so
customer experience andbeautiful product. Yeah, yeah,
we're doing over at high cotton,everybody, that was the episode
next year. Yeah, exactly No,dude. I love it. I mean, will a
(02:37):
you've been a great customer ofours. Would be like you are who
we built this product for? Ithink, you know, even just kind
of piggybacking on ourconversation before we hit
record. You know, we weretalking about the builders that
do they build a product verysimilar to yours, sometimes
bigger, better, more passive,more whatever, right? Like, it's
(02:57):
always a contest inconstruction. But we were just
kind of discussing, like, thechallenges if you could build
this killer product but stillreally not have a strong pulse
or really even a clue on whatyou're making from a financial
standpoint. Um, I think justlike, generally, like, what's
your take? Like, how do you getinto a position to build that
type of product and not knowyour numbers?
(03:18):
Yeah, I mean, so I guess I canjust tell a little bit of the
story there. I mean, that'sreally when I so I was a fireman
for 10 years, and kind of laterin my fire career, I started
building houses. We had beendoing some, like, flip houses,
and we'd like some more rentalproperty. Then decided that, you
know, we wanted to take it, youknow, I guess all in, right? And
(03:41):
be be doing this. Well, Iremember, man, like, my first,
first child was born, and we hadthis house we were framing, and
this dude was wearing me outabout, like, what kind of house
wrap I wanted, right? And Isaid, Man, I don't know. It's
just whatever they bring out tothe yard or the job sites, just
house wrap. And he sent me thisarticle from a dude named Matt
(04:03):
Reisinger. And I was like, well,that's, that's awesome. Who's
this guy, you know? And so, butthen I realized I didn't know a
lot of things, right. And so Istarted going down a rabbit
hole, man of just hours andhours and days and days of
reading about perm ratings andweather barriers and how to air
seal. And then I really realizedthat we had this big need for,
(04:23):
like, good building sites, goodconstruction in my area. So that
was, like, my passion, right? Sothen for the next, let's say,
five years, like that was myfocus. Like, I just wanted to
build it better, right? I justwanted to make it more airtight,
more watertight, crazy designstuff. I loved it, and I still
love it, like, there's still apassion of mine. But to your
(04:44):
point, I was really just focusedon that. I mean, I was kind of
just trusting my office andtrusting our process, and even
though they were doing what Ithink was a really good job with
how I'd set them up, like, youknow, I've started to realize
years into. It like, Okay, I'mbuilding a cool product, but
like, I don't think we're evenmaking money, you know, and
(05:06):
like, when that feeling hitsyou, what is that?
It sucks. I mean, because you'relike, man, I've been not
sleeping. I've been grinding andgrinding and grinding to try to
get all these projects done and,you know, make everybody happy
and get employees set up. Andthen it's like, at the end of
the day, you're like, looking ata P and L statement. You're
(05:26):
like, what? Like, how did welose money? Like, we're, we're
crushing it out there. And then,you know, it just, I wasn't
paying attention, man, I didn'tunderstand a lot of the things.
And so, you know what reallyflipped for me. I got in, of
course, you can see it on myshirt today, but I'm in the
Southern Living custom builderprogram, and love it, man. It's,
(05:47):
it's been life changing for me.
It's, it's so similar to, like,the nhB, where you've got, like,
builder 20 groups, you know?
Sure. So well, okay, let me backup. So living is, like,
obviously the brand, right? Themagazine, everybody knows,
selling living it's obviously avery famous brand, and one of
the most popular, if not thebiggest, magazine in the
country. Love it. But they puttogether a custom builder
(06:10):
program. They have, like, thishuge website for House plans.
And there's about 80 builders,85 builders. And so you claim
your territory, you apply, theyinterview you, and then you, you
know, hopefully you qualify tojoin. And then, sure, you
basically just a network, right?
So then we share a lot ofthings, and inside that, we've
got a builder 10 group. Andthat's where I really started,
(06:33):
you know, I got talked intothat, so I wasn't even going to
join it. And then I had, I hadbasically this phone call with
our Tom, the guy who puts thesebuilder 10 groups together, and
they finally taught me to joinin. And then guy, we're gonna
have a first meeting. We'regonna share financials. You're
up and like, I was embarrassed,like I was like, Oh my gosh, I
can go toe to toe with theseguys on the air ceiling and
(06:58):
talking about all that, but Idon't have a freaking clue how
they came up with 13% netincome. Should be a goal for
your company. I'm like, Whatdoes that even mean? Like, I
don't even know what you'retalking about. And so that's
when I was started askingquestions. And I'm like, oh,
okay, we got to get serious. Sogotta
get serious, okay, so, like, youlaid the foundation with the
(07:19):
building science, which I thinkis justifiable. I mean, if
you're building a product, likea house and a very high end
product at that building scienceshould be absolutely yes, but I
think it kind of takes those,those vulnerable moments, those
accountability checks of kind ofopening your eyes, like, this
(07:41):
isn't status quo, like you needwhat was it you said 13% is what
you shouldbe, yeah, yeah, that was the
number that we were all talkingabout. And I'm like, yeah.
Again, I'm like, what downthere's got
to be listeners out there.
There's got to be listeners outthere that are like, think of
the same thing. Like, what, whatis the 13% that you're talking
about? Where were you at whenthat conversation was brought
up, how'd you get out of it?
(08:03):
Let's thread up.
Yeah. Well, what was funny isthat we what we thought we were
at was more like 15 or 16% basedoff how we were doing our
statements, okay, but then weliterally realized what we were
calling, you know, above orbelow the line. We were kind of
jacked up on that. And so thenwhen we really recalculated and
(08:23):
got input from my group, we weremore about, like six to 7% so we
were performing about half ofwhere we needed to be, yeah, and
so that, that sucked, you know,of course, you know, there's,
there's good years, there's badyears. Everybody has ups and
downs, a work in progress. But,yeah, that that was what, you
know, but, but, you know, I alsohad to remind, remind myself
(08:45):
that, like, okay, at that pointwe were like, a, you know, five
years, six year old company,yeah, okay. And we had managed
to get up to about seven or $8million a year in revenue, and
then we had 10 employees at thetime. I mean, so really, I
wasn't as bad as I thought Iwas, but it just I was
embarrassed, like, I just, Idon't like, I don't like not
(09:06):
winning. Let's just be honest,right? You gotta win if you're
gonna play ball. Sure. So, yeah,I mean, that's, that's when, I
guess my attention got flipped,and then we started, you know
Madison, who works in my office,she's our in house, accountant,
controller, now, where westarted focusing more on
meeting. I wasn't even askingfor pmls, you know, I wasn't
(09:28):
even like, hey, let's meetquarterly, let's meet monthly.
Like, I was just like, hey, wegood. You good.
All right, let's get out andfocus on building science.
Yeah. Sell houses. Yeah, yeah.
Go ahead. So and I will say,like, just to clarify, but then
to go, like, I do think it's ahard line to say like, which one
you should focus on first. Imean, really perfect world. You
focus on both. But I am reallyproud that we started off
(09:51):
focusing on just building a goodhouse, because I don't want to
be the builder ever who's justfocused on money and not
building. A good house, becausewithout the reputation and
without people like, you know,around here now it's like, when
there's like, Oh, that's a hotcotton house, like, oh, like,
you know, and that's exactlywhere I want it to be, you know,
totally. Whereas there's othercontractors that, like, if they
(10:15):
say, Oh, that guy built it,everybody's like, Ooh, yeah, I
don't want to be that guy. I'mglad we focused on that, but,
but, yeah, that group reallymade me start paying attention
to, you know, an actual P and Land looking at, hey. Like, why
are we paying so much in allthese subscriptions? Like,
(10:36):
that's one that comes to mind.
Like, you know, stuff that wehad canceled stuff that was
running away from us, likeQuickBooks fees that I didn't
even know we were paying that,like, didn't make any sense. You
know, there's like, horriblestories attached to that one,
yeah. So there's just, like,before you know it, like you're
just paying out more and moreand more things, like
(10:56):
subscriptions to softwares thatyou thought you canceled maybe
you didn't. And then, you know,whether it's not even just
keeping up with your field, justtracking your feel like, I mean,
I wasn't paying attention, man,like I just,
you know, wait, said again, andmaintenance, like vehicle
maintenance, I didn't realizehow that we were getting crushed
(11:16):
on taking trucks shop, dude. SoI want to, I want to backtrack
this because you had met Did youcall it 13% net income, like a
net profit? Is that you calledit right? So I hear it all the
time. Have been for years,builders saying I'm a cost plus
20, yeah. Like that 20% is,like, that's what we mark
(11:36):
everything up. And that's whatbuilders think. Is the take
home, Oh, yeah. And then theyalways get juiced and they sleep
on, like, the overhead, theoperating costs, the
maintenance, all the stuff thatyou don't think about. And
that's typically what I hear, iswhat gets builders heavy, and
that's when they start clearingthat 456, percent net profit,
yeah. And they're just like,stuck. They're like, How is this
(11:59):
possible? We're markingeverything up 20% we're building
beautiful homes, huge top line.
Like, we should be crushing but,yeah, don't. So get specific on
yours if you remember, yeah,yeah. So was it chewing up or
what?
Well, one thing that we starteddoing is we reevaluated our we
(12:20):
have a lot of in house labor,right? Well, let's start there.
So, so we were, we were pretty Istarted the company. We were
like, cost plus 10% and that'smarkup, not margin, okay, so,
and that's going to depend onwhere you're building and that
kind of thing. And so then, youknow, we were like, Okay, well,
let's go to 12% let's go to 13%and 13 is about where I was when
(12:41):
we joined the son of LivingProgram. And now that's again,
that's markup. And then, youknow what, once you take out all
the things, because I startedadding, you know, I was trying
to get health insurance, and Iwas trying to add all these
benefits to have to retainemployees, which I think you
have to do, by the way, like, ifyou want to retain good
employees, you have to do thosethings, or they're gonna leave.
(13:02):
But then we really startedfocusing on our pre construction
agreements. And I know thatsounds crazy, but like, we now
bring in a some income,basically, in pre con. That goes
to the bottom line, which isgood our margin on our in house
labor. So instead of saying,like, you know, here's the at
(13:22):
cost rate of this employee plusour contractor fee, we just came
up with composite rates. So wejust have like, a 25% margin
built into our in house labor.
And that varies, of course,depending on pay scales, but
that's what we shoot for, istoward that 20 to 25% margin on
the in house employee. We knowthat helped a lot. We started,
(13:43):
we upped our design fees, like,so we're drawing house plans. So
we we went up on that startedchanging, like we even check,
went from, like, heated squarefoot to covered square foot.
Small change, small change,small change. That helped the
bottom line that was, that wassomething that really caught my
attention to, like, we weren'teven really paying for the draft
(14:05):
at that point, wow, before wechanged it. You know, it's like,
well, I just need plans tobuild, but let's make money
doing it right. What else? Westarted doing a lot of dirt
work. That's one thing webrought in house, was a lot of
the excavation. So we, like,we'll dig our own basements, we
do our own lot clearing, we demohouses and, you know, being able
to charge for that on the frontend, with our equipment and all
(14:27):
that. It's not that we'recharging unfair rates, because
we're not, but it's, it's justmore income, right? So it's so
ancillary stuff, I guess, iswhere this conversation is
going totally well. And that'swhat I was going to say, is so
it sounds like to insulateyourself, to get up to that net
profit that you're looking for,you started bringing in more or
adopting more service that youcould sell. That's
(14:50):
right, yep, yep, yep. We did.
And you know, and then,depending on where we're
building now, because now we'recovering like Southern Middle
Tennessee as well. Like our, ourbuilders fee has gone up, you
know, we have a spread now fromlike 15 to 20% and several of
those are now margin, notmarket. So that helps, that
(15:10):
helps push, push us right? Andthen we started playing with
some project management, monthlyfit, monthly stuff, you know,
monthly fees, depending on,again, how far the travel is for
the job, because totally, youhave to recoup some of that.
And, you know, so it's justlittle things like, you I just,
I just struggled, because I waslike, man, you can't just say,
(15:32):
Okay, well, I'm cost pluswhatever, 15% but obviously say,
Oh, I'm cost plus 20. Well, theguy, the customer you're talking
to is probably going to walk outof your office, right, right? So
trying to recoup things likegeneral liability, which we were
already doing, but I knowbuilders that don't do that,
right? I mean, so that's asignificant amount of money per
project that you're losing ifyou're not collecting that back.
(15:54):
So it's really easy just to addit into your contract, or add it
into your estimate, or both.
It's not like you're hiding it,but it's just a percentage. You
know, I think ours like pointoh, eight, 5% what we charge?
Okay? So it's like, what point8% of 1% would be way to say
that. So, but like, recently, Iput together like, a whatever,
(16:14):
$5 million proposal, and I thinkthe GL fee alone was like almost
40 grand, 3037, grand. So you'regonna lose that, right? I mean,
so that, that kind of stuff,like we've strategized, even
though, like delivery fees, likeadding more stuff, adding more
numbers to our estimate forthings like building cleanup
(16:38):
site, work, labor, stuff, that'sjust general labor for our in
house employees, becauseotherwise they're just straight
overhead, like, if you're notbilling them out, right? So that
helped collect. So we juststarted, we just really tried to
start paying attention to allthe little things that we could
do, that we were already doingwe just weren't charging
for. Well, and I think so I'mnot going to sidestep here, but
(16:59):
I have a change order examplethat I want to explain, yeah,
and I think ultimately, like,what I'm hearing from this is,
as you started bringing in moreservice, you started looking at
what you were providing as anactual service. And that's where
I start to say there arebuilders, and they typically,
there's, like, typically twolanes. It's like, one lane is
they're monetizing a hobby,right? Some of their massively
passionate about they love beingbags on. They want to build a
(17:21):
great product that they don'tnecessarily view their business
as a business. And then fromthere, it's like, it's either
you're monetizing a hobby oryou're running a business. And
that's what I hear like, kind ofthat progression of you doing is
you started evaluating yourbusiness, of like, how do I
generate more income? How do Iprovide more service in house
that I can generate income onand I can actually run a profit
margin on but I think the secondpiece, and this is where the
(17:43):
change order example comesthrough. And I want you to
correct me on this if you thinkit's bullshit, okay, but when
what you're explaining to me isis you're looking at everything
you're doing and you're markingit up respectively, okay? And
when I typically hear it withchange orders, is, builders will
lose on change orders becausethey don't mark them up
(18:03):
appropriately. Typically,they'll hang on to like a markup
that's consistent with what wasin the contract, or whatever it
might be, but they don't takeinto consideration all the
administrative, all theexpedited shipping, or what's
going to happen if we have to wejust installed recessed can
lights, and we want to tearthose out and we want to put
something else in. Are weincluding all that demolition
(18:24):
and labor and everything has togo into it, and that's usually
where they get scorched. It'snot just we have to buy track
lighting instead of recessedcans, yeah. Is that fair? Like
you start to view it as, how doI make it
is going out, and if I madehonest, that's like, that's the
next step for us right now,like, we're actually in the
middle of evaluating how wehandle that and our contracts
(18:47):
and how we can charge for that.
So, you know, you have theability to charge a change order
fee, or you can charge a higherpercentage, like, you know,
let's just use numbers, forexample. Like, if you're
whatever cost plus 15% and thencost plus 20. Let's just say
it's common for builders to thencome in on a change order, and
it's in their contract thatchange orders will be charged
(19:07):
that cost plus, say, 30% 35% andthat's, that's money that you're
losing. And I've got a reallygood friend in in Florida that's
doing that, and it's beenamazing how much money that
they're bringing in from changeorders. And it's because here's
the thing, if you don't bring itin, you're really losing it, and
that's what I think I'mrealizing more and more now, you
(19:29):
know, because it's like, you'regonna, it's brain power, right?
It's, it's, it's scheduledelays, which means if you're
not billing, you're not makingmoney. So if you're delayed,
you're losing money. So you'rereally losing it if you're not
charging for that, and that'swhat we've been doing, if I'm
being really honest, you know,I've always struggled with,
(19:51):
like, what's specifically achange order and what's really
just a selection, right? BecauseI'm like, Let's do. Your light.
Example, track light, can light,okay, let's just pretend like
they selected can lights. And Iknow the right answer is like,
Oh, they've selected it. Thenthat's a specification. Then
that's what they're doing. Ifthey change the track lighting,
then it's a change order. Butlet's just say we're still
(20:13):
framing right, or maybe framingis wrapping up, and they're
like, hey, you know, really beenthinking about it. We want to do
the track lights instead of thecan lines. That's a hard spot as
a builder, right? Is that achange order, or is it really
just them changing theselection? It doesn't impact
you. I mean, what do you care?
Right? It's just buying thislight versus that line. So
that's, that's part of thedebate that we're in as a group
(20:34):
right now. It's like, that's afine line of being like, Captain
butthole here and saying, Okay,well, I'm gonna charge you an
extra three grand Charlie,because, you know, you changed
your mind. Right to me, if weinstalled the can lights, and
then it was like, hey, we wanttrack lighting, then I think
you're obviously in change orterritory. But there's builders
that treat it the first way,like there's for sure, yeah,
(20:56):
that existstotally but I think that even
goes back to your commentearlier, of like, wanting to
just not be the just lack of abetter term, like the money
hungry builder, right? Like youactually do care. You wanted to
build a brand. You wanted tofocus on the build science, but
even more so to your guys'conversation. Because I think
it's a great conversation. Icandidly haven't heard it, and I
think that, like, is there anylogic to that decision making,
(21:18):
being and setting expectationswith clients in pre con of being
like, Look, if there isreasonable belief that the
change you're suggesting orpotentially suggest is going to
throw off more than one towhatever Excel process, then it
will be issued as a changeorder. Because I think that's
(21:38):
where the cost happens. Right toyour point. You have to finish
on time. And if you've alreadygot electricians lined up,
they've already got materialpurchased, like, they've got all
this stuff going, and it's like,a week out, yeah? And if
changing from recess to track isgoing to be that big of a deal,
rip them for a change order.
Yeah, yeah. I think you're,you're out on the money. I think
(21:58):
there's that got to be a goodset of parameters, or whatever,
where it's like, okay, if, if itdelays us more than two days,
three days, whatever thatthreshold is to be, you know, if
it, if it causes a subcontractorto take work down, if it, you
know, whatever that did, yeah,then that would have to beat it.
So I think to me, you have toreally identify that though, in
(22:19):
your contract, because if not,it's just a gray area, and
you're going to get destroyed onit, right? So I think that's the
that's the difficult part. Imean, also feel like, with us
doing design in house, like it'sreally our responsibility to get
ahead of those things and like,have design figured out before
we need it, and not, you know,and really figure it out, not
(22:40):
just concepts. And then you getto rough ends and everybody
changes their mind. So, I mean,totally, we're doing better and
better and better at that. And Ithink that's, that's one of the
reasons I brought interiordesign in house, by the way,
it's because I want to be ableto control that. That's a whole,
that's a whole episode, if youwant to go there one day.
Well, I think so, like to thispoint, like, I think this is
(23:00):
great, because I think, like alot of our conversation, it
doesn't necessarily go aroundfor builders adding in
additional, we'll call itrevenue streams, right? We're
not adding in excavation. We'renot adding in or thinking about
project management revenuestream. My question to you is,
for the builder that doesn'twant to do that, right? For the
builder that doesn't want toincrease their net income or
their net profit, right? Whatcan they do just to make sure
(23:25):
that, like, I'm gonna build thishouse, and my goal is to hit a
10 to 15% net net on this thing,what can they what can they do
just without adding in revenueto really stay on top of that?
So ifyou're not gonna increase your
volume, you know? And you're notgoing to try to do additional
streams of income, like selfperforming work or whatever it
(23:48):
might be. It really just comesdown to your overhead and then
what you're charging, right? Soyou're going to have to run a
tight ship, right? You may not.
You may be the project manager,the salesperson, the warranty
guy, and I don't know, maybeeven the designer at that point.
I mean, because that's, that'sa, that's a that's a tough one.
(24:10):
I think I was there for a whiledoing that, and I was miserable.
So I mean, hats off to you ifthat's, if that's the path
you're on. But I think you'regonna have to just learn to, you
know, figure out how you canincrease your your contractor
fee. And I tell you one thingthat you can do just thinking as
I'm talking, but if you don'tknow the difference between
(24:33):
markup and margin, you need toright? So there's a difference,
right? So, and if you you know,for the sake of that, you know,
an easy conversation, like, ifyou're charging 10% markup, you
take the cost of construction,so it's $100 of construction
cost times that 1.1 right? Soit's 110 bucks. But if you
(24:55):
wanted to do margin, you'regoing to take that, that $1 that
$100 and you're going. Divide itby point 90, and then it's going
to get you a higher if it'sactually, like, really, what
you're making as income off ofthat contractor fee. And you're
not changing your contractorfee, you're just calculating,
you know, margin versus markup.
And then, you know, so like, a15% margin ends up being like a
(25:17):
17 and a half percent market. Sookay, so I think this is worth
going into. Yeah, it's a bigit's deep, totally well. And I
think that this is, like, wherea lot of people go, and I'm
certainly not a mathematician byany stretch of the example, but
how I've always explained it,and again, correct me if I'm
wrong, but it's really the wayto look at markup is going to
(25:40):
be, I've got a million dollarhome market up 20% I'm going to
sell it to the customer for 1.2right? That 200 grand, about 50%
of that is going to be towardsoverhead, and about 50% of that
should be towards your bottomline or your net profit. Sure,
(26:01):
that's how I've just simplyexplained it. But I think from
like your math and like this,where I've always got hung up on
markup and margin is you, Iunderstand the markup of your
number times the 1.1 to get yourmarkup number, but then the
point nine divided by or thenumber
right, you're dividing it andinstead of multiplying it,
right, right, right. So if it'sa 10% margin, you take one and
(26:26):
you subtract that 10 Point,point one from it, or whatever.
And so then you you end up withpoint nine, sure. And so then
you just divide by that. And Iknow it's crazy, but I would
encourage you to, like,literally, get on chat, GPT, get
on Google and just like, there'svideos of, like, explain markup
versus margin as a builder,there's 1000s of videos. I had
(26:48):
to clarify the contract in mythe language of my contract
about it, you know, and I,what's interesting, though, is,
like, it's, it's very wellreceived. It's not an uncommon
way to calculate things in ourindustry, especially like in the
commercial world, it's moreaccepted there, or more more
common there. It's acceptedhere, too. But I would encourage
(27:10):
everybody to educate their stuffon that, because, you know,
that's one thing. I'll give Tomcredit. So Tom's a retired
builder. Tom, was it? He's likethe moderator for our builder 10
group, okay? And I remember heasked me, like, hey, what do you
charge? It's like, 13% he'slike, markup or margin. Like,
13% you know, like, I don'tknow. Like, and he's like, You
(27:30):
don't know the difference. I'mlike, I don't have a clue what
you're talking about. And so,and then, you know, go around
the horn and hear everybodyelse. And there was a mix of
people that did markup versusmargin. And so, you know, it's
just, it's one of those things,like, it's, it can be, I find
that a lot of times customers,they all get hung up on, like,
what's the house cost per squarefoot, which they ask you that in
(27:52):
the first phone call, like,they're probably not your
customer. They're not mycustomer, typically, yeah. And
then they also, then they getdown to the wire on builders,
they want to just look at thepercentage, right? They don't.
They don't really look at thatpoint. They're not even playing.
So there's is no cost estimate.
They're just looking at. So it'snot, I mean, it's a fine line, I
guess, but I mean, we don't hideit like you were very clear with
what it is, and they understandit. But I think it's better
(28:15):
received than then going up tosay, 17 and a half percent
markup, you know, and then it'sto just run a 50% margin. So
that's something Ithink it's received so well. Why
do you like? I think it makessense. Where my head goes is, is
like, I mean, if just for theaverage consumer, right? They're
not buying building homesregularly. Of course, people
that will do multiple in thelifetime, but the majority like,
(28:38):
that's just a one timetransaction for them. I think
most people look at this andthey go, like, the business has
to make money. Like, if I go andbuy a shirt from Shiels, do you
know what sheils is? It's like,it's like a sporting goods or
call it Cabela's whatever. Okay,like you assume that there's
probably, like a 30 to 50, maybe60% markup on it, and, like, you
(29:00):
just kind of like palette anddigest that as the consumer, and
you buy it, and you move on.
Right? Do you think that theconsumer is like, way, okay,
talking about margin and like,what you're actually going to be
marking this thing up and makingbecause they assume that you
have to make a living too, andyou have to make money. Because
I think a lot of builders getscared of that, and they're
(29:21):
like, Yeah, over what I'm makingand building this house. And I
thinkthat I was never a fixed cost
builder. Okay, so I've alwaysbeen cost plus. So it's always
been a conversation with us. NowI've had to explain to people
that we don't really make 15%like, that's not what I take
(29:43):
home, right? I mean, there'stimes that I have to explain
that more than others toclients, but I mean, they get it
right. I mean, they know that.
Here's the thing, if a customerdoesn't value that and value
what you're bringing to thetable. Well, then you're you're
building for the wrong people.
Like, that's just straight up,if that's the those clients are
(30:04):
going to buy spec home that'sbuilt to the lowest builder
grade cabinets and everythingelse in that house. And that's
where you just build that dudeas fast as you can do your
thing, and then just sell it onthe MLS. Like, sell the real
estate agent and move on. But ifyou're gonna try to live in the
custom world that we're doing,you've got to find clients that
value what you bring to thetable. I mean, if you're not
(30:24):
gonna, I don't think you couldsurvive if you don't find those
clients, because they're gonnadestroy you, like it's you know,
they want you to make moneybecause they want you to be
successful, and they want you tocontinue to deliver them a good
house and bring ideas to thetable and just take care of
them. You know, I think a lot ofthe clients that we build for,
(30:46):
they just want, they just wanttrust that you're taking care of
them, and they know that youhave their best interest. And
that's probably first andforemost with a lot of the
clients we build for now, youknow,
totally, totally No. I thinkthat's, I mean, just with this
episode largely being aboutmaking money, right? Yeah, yeah.
Is it all starts with the withthe customer, or the process
(31:07):
that point, yeah? Like, maybe,like, from an action item
standpoint, is, like, I thinkprobably, like, learning the
right customer happens overtime. Like, maybe correct me if
I'm wrong. But you might have toget burned by one or two to,
like, really have conviction inthose red
flags. Yeah, yeah, that's a goodthat's a good, good way to go
here. I mean, I think learningto say no is important, just by
(31:29):
the way, you never heard thatbefore. You know, if you have
that customer that's doing allthat. Because here's the thing,
like we I like to date customersbefore I marry them. Totally
okay. That should be writtenlike, somewhere in a board in my
office, like we're going to dateyou before we marry you. Yeah?
Because, you know, you can, youcan figure out in that pre con,
(31:51):
you know, because, yeah, I thinkif we're, if we're drawing plans
and all, you know, that wholepre con experience, that's,
that's six months minimum inthat timeframe, dealing with
them, delivering plans, gettingfeedback, welcoming them into
your office, talking about theirdogs, talking about whatever it
is, you can figure out who theyare, I mean, and then you can
(32:13):
decide, and if there's redflags, get out right. And we've
done it. I mean, we've done it,we still do it. You know,
learning to say no is probablyone of the hardest things as a
builder to really understand whyyou should do it, you know,
let's hear your script. How doyou do it? How do you dump a
customer? Oh,man, you know, I've had it both
ways. I've had it to where,like, it was kind of the ugly
(32:37):
breakup, you know, I guessthat's like, you know, yeah, I
had a we were doing a pre con,so during our pre construction
agreement. So like, we'redrawing plans, we're designing
your house. We're building yourbudget, your estimate, with you.
But also, like, if there's,like, a house to demo or trees
to take down, like we selfperform that stuff. And so we
(32:59):
were going out to basicallyclear this lot. And, you know, I
told this guy, this is probably,like, a $2 million project right
the house. And, you know, he'slike, I need to know exactly
what it's gonna cost before yougo out there and clear this lot
off so the surveyors can work.
I'm like, Man, I mean, we'retalking about a range. It's
(33:21):
probably gonna take us abouteight hours on the machine,
whole day's worth of work foroperator and a laborer, you
know. So whatever you're talkingthree, $4,000 like, maybe five.
I said, it depends on what allwe run into. We just don't know
till we get in there. Dude, he,like, lost his mind, like he's
just wanted to know, like, tothe penny, and he called and got
(33:43):
violent on the phone with me,and I said, let me just stop you
right there. Yeah. I said, I'mnot your builder anymore. Yeah.
And it was, like, it was one ofthose things, like, the veins
are like, popping on your neckand your blood's boiling, and
you're like, Oh my gosh. Iprobably shouldn't have said
that. He's like, What do youmean? I said, I'm not your
builder anymore. Yeah, you'regonna act like this before we
(34:04):
even get started. I'm not yourbuilder. I'm out. You need to
find somebody else. And wepacked up our crap. Oh, man, it
was like, so that was like, kindof an ugly breakup, pre con,
yeah, the other ones have been,you know, you were too busy, you
know, look, it's gonna be like,our schedule's gotten crazy.
(34:25):
We've taken on more work. We hadsomebody leave the company like,
I'm really sorry, but I thinkyou'd be a better fit with this
guy over here. And I'll try tomake a recommendation. I mean,
sometimes that's kind of like,probably, I'm sure those guys
appreciate the send off, but,you know, and sometimes we have
to break up with them because wedon't have time, right? I mean,
I really like, it's not aprofitable enough job, it's too
(34:47):
far away, and it's just not agood fit for us, and so we have
to just have that conversation.
And it just depends, man,sometimes you can kind of like,
I'd say, price your way out ofit, but, I mean, it's one of
those, like, if. If that's whereyou need to do it, where it's
like, okay, if we're going totake this project, it's going to
be good for the company. If it'snot a good fit for the company
at this margin, then, sorry. Andso sometimes those things take
(35:11):
care of themselves. Yeah. Soyeah. I mean, I would say it's
case by case, but I definitely,I've had a big range of
breakups, ofcourse, so I Yeah, so of course,
it's not, and, yeah, certainlynot to be suggested. It's easy.
But that is, I'm not yourbuilder. That is what I hear,
like, most commonly in the roughbreakup, yeah, like I've had, we
(35:34):
had another episode with, Ithink it was Scott bland. It
might have just been aconversation I was having with
Scott. He's a builder down atWaco, and the same thing, it was
like, got the plans on the desk.
Gal walked in the office, if I'mremembering correctly, it was
like barking orders. Scottstarted getting red red flags,
(35:54):
and he just rolled up the plans,handing it back to her, and
said, I'm not your builder,like, you got to go find someone
else. And they're always kind oflike dumbfounded, because they
got called out finally, but toinsulate yourself, and what I
think you said, which is themost important the business,
those conversations have to behad, especially when we're
talking about profitability. Howdo you make money on jobs? It's
(36:16):
like you cannot set yourself upat the beginning of a project
trying to make money with thattype of customer.
Yeah, and let me throw this inthere too. So I guess I'm just
thinking about the listenersthat are, that are, I guess,
somewhat new in their business.
They're trying to figure out howto make money and not waste
their time. Because if you'rewasting time, you're losing
money. So when I first started,I was not doing pre construction
(36:36):
agreements like I was just likeyou come in, we could talk. We
could talk 47 times. You couldjust keep coming back, and we'd
talk some more, and then I'dprice it, then I'd price it
again, then I'd price it again.
And next thing you know, you'vebeen dating this guy, whatever,
1010, months, 12 months. Andthen they're like, oh, yeah, we
can't afford that. We're outbrutal. And so that happened to
(36:59):
me time and time again. And thenI remember, I forget who it was.
It might have actually been JakeBrewton, somebody I was talking
to. I can't remember. They werelike, Oh yeah, you got charged
pre construction agreement.
That's like, What the crap isthat? You know? Yeah. They were
like, oh yeah. You just gottaget a deposit from them. And
then if they they walk away.
Then then you keep the money,yeah. And I'm like, Oh crap, you
(37:19):
know, how can you do that? Like,so I remember, I put, I've,
like, found this agreement,like, you know, it's pretty,
pretty short, like, it's a onepage or maybe two pager, and it
basically just says that, like,This deposit is going to cover
these services. And it's like,you know, client meetings up to
so many hours it's going tocover, you know, your estimate.
(37:43):
It's going to cover any sitemeetings with professionals like
surveyors, blah, blah, blah. Andthen associated with that, you
know, is this the amount ofdeposit. And then mine has a
line that says, you know, within12 months, if we build your
house, if we start your house,within 12 months, we'll give you
X percent of it back as acredit. And I remember, man,
(38:03):
that first time I asked somebodyfor 2500 bucks, like, I was
nervous. I remember, man, I waslike, Oh, man. I'm like, close.
I'm trying to get through thissales meeting, and I'm like,
trying to enter, like, what'sthe next steps? And I remember,
like, well, you know, we've gotthis agreement that we signed
next so. And they were like,okay, yeah, no problem. And it's
like, without checkbook. And itwas like, Oh, here you go. We'll
(38:24):
do it today. And I'mYeah, well, that was easy. And
you're like, I just saved somuch heartache. Yeah, asking
yeah at the time, I was like,Okay, well, I'll give like, 90%
of it back if I start yourhouse, like, you know, or maybe
100% like, if I forget what itwas. And now, now it's
progressed, and now we're like,minimum 10,000 and we give half
of it back, you know. And it'sjust enough to where it's like
(38:47):
people, they commit, and if theywon't sign it, they won't give
you a check, then they're notserious, you know. And so, and
honestly, you would be surprisedabout the people that have paid
it, spent time with us in ameeting or two. Maybe they paid
for plans. That's a separateagreement, by the way. And then
they're like, Hey, man, webought a house. Like we're not
(39:08):
gonna build anymore. Never evenask for their money back, but
contractually, they can't get itback. I mean, right, you know,
whatever, I'm a nice guy. I'mnot if I, you know, understand
the situation, I obviously makeexceptions sometimes, but, but
that helps make money, becauseyou're not wasting your time. It
goes to the bottom dollar. Evenif you build their house, you
(39:29):
know, you still collect aportion of that to your income.
So it's totally if you're notdoing PCAs, start like, that's,
that's like, constructionagreement, yes, like that,
absolutely. Start that today. Ifyou need one, email me. I'll
send you my template. I mean,that's like, 100% like, you have
to start doing pre constructionagreements,
(39:49):
beautiful dude, I think so. Andlike, I think even, like, how
you explain, like, the preconstruction agreement and then
the plans was, like, a separateagreement, yeah, a separate fee.
But I think that's like,probably one of the. Biggest
takeaways with like, kind of theumbrella theme of this episode
being like, how to make money,yeah, like, even just start, but
also like, how do you insulateyourself at the beginning? Last
(40:11):
question here, and if you'relike, recess is a whole nother
episode. That's fine. But when Ihear pre construction agreement,
I'm hearing service planning,site walks, prep stuff like
that. More like, service, yeah,level fees. Then do you, like,
once everything's good plans arethere, like, everything's locked
in, we're gonna break ground,then do you go in for another
(40:33):
deposit? Because I hear thatwith like, material and getting
subs landed and all that wedo, yeah, yeah. So advanced
payment is part of ourconstruction contract. Is what
we call that, or AP, and it's asimilar deal. So we get it, you
know, when you execute ourcontract and you didn't have to
then pay us an advanced payment.
We hold that money ourselves,and we use it to stay cash
(40:57):
positive, right? Because we'rewe're buying material, we're
paying subcontractors, and thenwe bill out our customers, kind
of in reverse and so, and thenalso, like, once they sign, like
an acceptance letter at the end,there's, like a, I think 75% of
that gets applied to theiraccount, and then the remainder
we hold for an additional, Ithink, 45 days. And just to
(41:19):
catch, like, straggling billsthat come in, you know? But,
yeah, that that's been, ifyou're having cash flow
problems, start that too becauseor anything, if you're not doing
it, started because people,again, good customers that are
serious, they're going to do it,you know, even if you just get
$10,000 like that still helps,makes logical sense. Like, as a
(41:41):
consumer, I'm not a builder,right? I'm in software. Like, if
someone if I'm like, Yeah, buildmy house. And I'm like, I know I
need a hole dug in the groundand a foundation port in it.
Yeah? I wouldn't even cross mymind to suggest that the builder
is going to front load thatcost.
Yeah? And it's one of those. Ithink what you have to look at,
is your your cycle right on yourAR, right? So like, how, how
(42:07):
often are you invoicing yourcustomers? And you know, you
don't want to let yourself gettoo far behind, right? And
because, if you haven't had acustomer not pay you yet, you
will give it time. It's coming,and it could be because they're
trying to be a turd. It could bebecause they're out of cash and
they're waiting on this otheraccount to sell, or they're
(42:30):
trying to sell some some stocks,and they're trying to there's
always a reason, you know. Butif you have advanced payments
from people, right? And not just1789, jobs, however many jobs
you got going. You got, you gotthis pile of deposits. You know,
you can withstand a little bitof a storm from people, like,
(42:51):
when they get hung up, you know,good, bad or ugly, right? It
doesn't matter why they're hungup. They're hung up. They can't
pay you this month for whateverreason. It eliminates that panic
of like, Oh my gosh. Like, howare we going to make payroll? Or
how are we going to so, youknow, and then to, if they're,
if they're really going to bebad customers, and try to skip
(43:11):
out on paying you, you've gotthis deposit, right? And then,
and then you just, you get, thegoal was to not let yourself get
behind that deposit. So if yougot 100,000 so if you got
$100,000 from somebody, don'tlet their account get past that
Bill often, you know, Billoften, don't, don't, don't let
things just don't be so busy atthe end you forget to Bill, and
(43:33):
then all of a sudden, findyourself sending them $180,000
invoice and pray and they makethat payment right, like that
will absolutely bury you if theycan. And so, and also too, I
find that customers, like,always were like, oh, man, I
forgot about that. Like, man,that makes me feel so much
better because now, like, I wasstressing, like, Oh, that's
great, yeah. So, so that'salways part of it. But I mean,
(43:57):
if you you know, I actually hada good friend of mine tell me,
if you're building, like, forcash customers, it's probably
even more important to get anadvanced payment. And I didn't
understand that when he firstsaid it, but after we talked, it
made sense he had a guy thatwas, you know, very wealthy
client, cash pay. Basically, atthe end was like, Yeah, I'm not
(44:18):
gonna pay you. Like, I'm nothappy with that, you know, like,
sue me if you want to. And itwas, like, this total flex. And
he like, filed a lien on him,but it didn't matter. Everything
was like, there's no financinginvolved. So he had, he had no
leverage, right? And so he'slike, it really hurt him bad.
And so he realized, then he'slike, Okay, I have to start
(44:39):
protecting myself and so, yeah,this just also, don't ever let
yourself get in a bind like thatif you can prevent it. You know,
theways that contractors can lose
absurd amounts of money issickening.
It is. It's every step of theway
I literally was on the. Phonewith another contractor, one of
(45:02):
our clients 1000 miles away fromyou, told me the same story
about forgetting to build acustomer 180 grand, I think, or
something crazy, yeah. And hewas like, part of it was the
project manager's fault, part ofit was our fault. But he was
like, I had to go back to thecustomer, and I asked for half.
Yeah, right. You're like, Butdude, that's coming out of the
(45:24):
bottom line. Like, yeah. It'slike, we're talking like 10%
annual profit bleed, yeah, nuts,nuts, nuts. And you just start
to think about, you're like, youdon't have to have those
experiences, right? I mean, it'salmost like, how many badges of
honor. Do people have to get forthe rest of the community to
know that? Yeah, don't have todo that, right? Like, that's
(45:47):
like, the difference betweensuccess in a business and
failing, right? And, like, I getit right. I mean, it's easy to
get lost in the weeds of thisbusiness. Like, it's easy as a
builder, you get focused, like,especially in your first 510,
years, like you're just tryingto survive. You're trying to get
the next sale. You're trying tofigure out why Miss Sally's mad
about, you know, her sheet rockfinish or something like that.
(46:10):
You know, you're just stuck inthe weeds and you're not paying
attention to your accountingsystem. You're not You're not
tracking expenses. You're nothave a even just you don't have
a good organized system. Like, Imean, I was very fortunate,
like, so my father in law helpedme get off the ground, not from
a financial standpoint, but fromjust the organization
(46:31):
standpoint. Like he he was help.
He was helping run anengineering company that he was
at, and so he had a really goodunderstanding of, like, file
management, even, you know, andeven QuickBooks, really, he
helped me get all that off theground. We kind of, like, set
our roots in CO construct, weset our roots in Google Drive,
(46:52):
and we set our roots inQuickBooks Online and so, but I
can understand if you don't havethose systems. I mean, you're
still the guy who's got stuffstuck in folders. And like, you
don't have anybody in youroffice helping you, like you're
gonna forget about invoices. Andthen, you know, maybe that
concrete guy forgot to ask youabout it, and the next thing you
(47:13):
know, you've closed this jobout. And he said, Hey, man, when
am I gonna get paid for that?
And then you realize that youdidn't pay him 70 grand. Like, I
hear those stories, man, it'sit's mind blowing. It's insane,
yeah, yeah, it's a lot. It'swild. It's wild. We have, I
probably told this story a halfa dozen times. I need to get a
new story, just because thepodcast, but hand on the Bible,
(47:34):
we have one of our her name'sChloe Brown, wildest dreams
consulting. And I always giveChloe shit for this, because,
like, she's like, a ChiefOperating Officer, Chief
Financial Officer. She's justlike, wicked smart when it comes
to processes and accounting. Butthe point being is, she has a
blog with us, and it's goingover. One of her clients, they
(47:55):
exposed over $5 million inunbilled cost over the life of a
business, oh my gosh, in whichthe owner was confident they
were just, like, making greatmoney at work. And it's like,
but then you think about, it'slike, okay, like, this is like a
20 year old business, or howeverold they are. And you start to
compound 7080, 100k Yeah, right,like half a million on a bad
(48:19):
year, big volume year, and youdon't have the processes in
place, and cost is slipping.
Jobs get closed, bills come up.
Like, yep, dude, it's nuts. Itis. And then that, that's where
it goes back and like, are youmonetizing a hobby? Are you
running a business? Yeah. And Ilike, as brash as that is, it's
the truth. It's like, when youreally get excited about
understanding the percentagesthat go in hand with this and
(48:42):
the mistakes that you canprevent with solid process,
solid teams, solid understandingcontracts. We talked a lot about
contracts. That's where it getsfun. Yep, and it's not always
like, I'm gonna net a milliondollars this year, because I'm
gonna go and I'm gonna be amillionaire. It's like, Dude,
you could net a million and gohire the two employees that you
drastically need, or you couldinvest in consulting or
(49:05):
advertising or a new office,right, or equipment, a fleet of
trucks, whatever, right, thestuff that you need to continue
elevating your business. So,yeah, it's all good stuff, man.
I mean, I've just been focusedon, trying to grow. You know,
I've been, I've been grow modesince I started. I'm still
there, even I still like to havebigger plans. You know, there's
(49:26):
been years where, you know,we've taken a loss, but it's
because we've added moreemployees. We bought more
vehicles. We're like, we'regetting ready, like, we're just
trying to keep going. And, youknow, I don't know, I would just
encourage anybody that's like inmy shoes, maybe they're before
me, maybe they're after me andexperience but find a, find a
(49:46):
group of people to plug into,right? It you have to, if you're
if you're going to grow. Firstof all, I like that. Yeah, if
you're not growing, you're done,right? I had a really good
friend who passed away back inthe fall, who was a killer
builder, and he told me that,and it's like, just stuck in my
(50:09):
brain. If you're not growing,you're done. But find a peer
group, right? And even if you'renot that social person, get over
yourself. Find you some guys,what? What I've always like
thought to be fascinating aboutthis industry, is it, when you
get involved with a group ofbuilders, they want nothing more
than to help you, like they'repassionate about it. They all
(50:31):
want to help each other. I'm nottalking about the guy down the
street, right? Your competition,but get out of your market. Go
to the trade shows, you know,join the nhB and get in the
builder 20 group. Or, you know,you don't have to be still
living, but there's, there'sother groups out there, and just
ask for help. Man, people wantto help you. People want to help
you. Ask grace, hey. Man,somebody I can talk to, because
(50:52):
totally, you don't have toreinvent the wheel. Man, people
will give it to you. You justhave to ask. And you got to get
your systems in place or you'regoing to forget to bill out your
client $7 million in the life ofyour business. Don't be that
guy. You knowit hurts, and it doesn't have to
be that way, right? I hear it,and it's usually guys about, oh,
(51:13):
it's just a cost of doingbusiness. Well, it's just a
lesson that I learned. It'slike, well, they don't have to.
And to your point is, like, whenyou've got these networks,
whether it's Southern Living,whether it's a builder 20 group,
whether it's a piece of softwareyou use, like adaptive, we talk
to contractors for a living,yep, coast to coast, border to
border, everyone is on our list.
(51:34):
So it's one of those thingswhere it's like, if you've got
those interests, you've gotthose curiosities, yeah, there's
a ton of avenues you can take,yeah, but yeah, it's about
making money. It's aboutbuilding a quality product,
making money. Oh,man, building experiences. What
we say, That'sright, exactly. Well, this was a
(51:55):
killer episode. I appreciate thehell out of you. Thank you for
coming on, and I wish you thebest with all thanks, man,
I appreciate it.
(52:19):
You.
Welcome to another episode ofbuilders budgets and beers, and
today was a doozy, with our goodfriend will king over at high
cotton homes. I say this is adoozy, and I feel like I might
have said this already onintros, but the entire crux of
this episode is how to makemoney in construction. We talk
(00:20):
about pre constructionagreements. We talk about
picking the right customer. Wetalk about the difference in
markup and margin, which youshould absolutely know. We talk
about huge losses and burns thatwill had come across just from
simple practices that he didn'tfollow. And Will's an absolute
open book. So go ahead jump in.
Let's get to it and learn alittle bit about how to make
(00:41):
money in construction.
Thanks so much for jumpingon, dude, absolutely man. Thanks
for having me.
Of course, we had some some nicewarm chatter here. We just said,
Damn, we got to just hit recordand get the record and get this
(01:03):
thing running for the for thelisteners, we'll go ahead jump
in. Give the give the listenersa little bit of an idea of who
you are. And high cottonAll right, yeah, so will King,
like you said, high cotton homesis our company. We are a design
build custom home buildingcompany here in Florence,
Alabama, which nobody knows whatthat is, hardly. So it's
Northwest Alabama. We're almostin Tennessee. We're almost in
(01:26):
Mississippi. Everybody alwaysthinks we're on the coast. For
some reason. It's kind of funny,the complete opposite end of the
state, Gulf Shores. Yeah. Sothere's a city across the river
called Muscle Shoals, which islike famous for the Swampers,
and it's actually when I went tohigh school. But when people
hear that, they justautomatically assume you're at
the beach. Yeah, so, but yeah,so we are, I guess we started
(01:49):
the company in 2016 so we'recoming up on 10 years to
celebrate. Of 10 years of what,survival, growth, celebration,
business ownership, yeah, yeah.
Butwe are just mainly focused on
custom building. Man. We don'tdo any, we don't really do any
spec building at all. You know,I have a little bit of a rental
(02:13):
business going on the side, butthat's, that's the pride of our
company. Our bread and butter isjust custom all building. So
we're just doing just doing moreand more parts of it, so
customer experience andbeautiful product. Yeah, yeah,
we're doing over at high cotton,everybody, that was the episode
next year. Yeah, exactly No,dude. I love it. I mean, will a
(02:37):
you've been a great customer ofours. Would be like you are who
we built this product for? Ithink, you know, even just kind
of piggybacking on ourconversation before we hit
record. You know, we weretalking about the builders that
do they build a product verysimilar to yours, sometimes
bigger, better, more passive,more whatever, right? Like, it's
(02:57):
always a contest inconstruction. But we were just
kind of discussing, like, thechallenges if you could build
this killer product but stillreally not have a strong pulse
or really even a clue on whatyou're making from a financial
standpoint. Um, I think justlike, generally, like, what's
your take? Like, how do you getinto a position to build that
type of product and not knowyour numbers?
(03:18):
Yeah, I mean, so I guess I canjust tell a little bit of the
story there. I mean, that'sreally when I so I was a fireman
for 10 years, and kind of laterin my fire career, I started
building houses. We had beendoing some, like, flip houses,
and we'd like some more rentalproperty. Then decided that, you
know, we wanted to take it, youknow, I guess all in, right? And
(03:41):
be be doing this. Well, Iremember, man, like, my first,
first child was born, and we hadthis house we were framing, and
this dude was wearing me outabout, like, what kind of house
wrap I wanted, right? And Isaid, Man, I don't know. It's
just whatever they bring out tothe yard or the job sites, just
house wrap. And he sent me thisarticle from a dude named Matt
(04:03):
Reisinger. And I was like, well,that's, that's awesome. Who's
this guy, you know? And so, butthen I realized I didn't know a
lot of things, right. And so Istarted going down a rabbit
hole, man of just hours andhours and days and days of
reading about perm ratings andweather barriers and how to air
seal. And then I really realizedthat we had this big need for,
(04:23):
like, good building sites, goodconstruction in my area. So that
was, like, my passion, right? Sothen for the next, let's say,
five years, like that was myfocus. Like, I just wanted to
build it better, right? I justwanted to make it more airtight,
more watertight, crazy designstuff. I loved it, and I still
love it, like, there's still apassion of mine. But to your
(04:44):
point, I was really just focusedon that. I mean, I was kind of
just trusting my office andtrusting our process, and even
though they were doing what Ithink was a really good job with
how I'd set them up, like, youknow, I've started to realize
years into. It like, Okay, I'mbuilding a cool product, but
like, I don't think we're evenmaking money, you know, and
(05:06):
like, when that feeling hitsyou, what is that?
It sucks. I mean, because you'relike, man, I've been not
sleeping. I've been grinding andgrinding and grinding to try to
get all these projects done and,you know, make everybody happy
and get employees set up. Andthen it's like, at the end of
the day, you're like, looking ata P and L statement. You're
(05:26):
like, what? Like, how did welose money? Like, we're, we're
crushing it out there. And then,you know, it just, I wasn't
paying attention, man, I didn'tunderstand a lot of the things.
And so, you know what reallyflipped for me. I got in, of
course, you can see it on myshirt today, but I'm in the
Southern Living custom builderprogram, and love it, man. It's,
(05:47):
it's been life changing for me.
It's, it's so similar to, like,the nhB, where you've got, like,
builder 20 groups, you know?
Sure. So well, okay, let me backup. So living is, like,
obviously the brand, right? Themagazine, everybody knows,
selling living it's obviously avery famous brand, and one of
the most popular, if not thebiggest, magazine in the
country. Love it. But they puttogether a custom builder
(06:10):
program. They have, like, thishuge website for House plans.
And there's about 80 builders,85 builders. And so you claim
your territory, you apply, theyinterview you, and then you, you
know, hopefully you qualify tojoin. And then, sure, you
basically just a network, right?
So then we share a lot ofthings, and inside that, we've
got a builder 10 group. Andthat's where I really started,
(06:33):
you know, I got talked intothat, so I wasn't even going to
join it. And then I had, I hadbasically this phone call with
our Tom, the guy who puts thesebuilder 10 groups together, and
they finally taught me to joinin. And then guy, we're gonna
have a first meeting. We'regonna share financials. You're
up and like, I was embarrassed,like I was like, Oh my gosh, I
can go toe to toe with theseguys on the air ceiling and
(06:58):
talking about all that, but Idon't have a freaking clue how
they came up with 13% netincome. Should be a goal for
your company. I'm like, Whatdoes that even mean? Like, I
don't even know what you'retalking about. And so that's
when I was started askingquestions. And I'm like, oh,
okay, we got to get serious. Sogotta
get serious, okay, so, like, youlaid the foundation with the
(07:19):
building science, which I thinkis justifiable. I mean, if
you're building a product, likea house and a very high end
product at that building scienceshould be absolutely yes, but I
think it kind of takes those,those vulnerable moments, those
accountability checks of kind ofopening your eyes, like, this
(07:41):
isn't status quo, like you needwhat was it you said 13% is what
you shouldbe, yeah, yeah, that was the
number that we were all talkingabout. And I'm like, yeah.
Again, I'm like, what downthere's got
to be listeners out there.
There's got to be listeners outthere that are like, think of
the same thing. Like, what, whatis the 13% that you're talking
about? Where were you at whenthat conversation was brought
up, how'd you get out of it?
(08:03):
Let's thread up.
Yeah. Well, what was funny isthat we what we thought we were
at was more like 15 or 16% basedoff how we were doing our
statements, okay, but then weliterally realized what we were
calling, you know, above orbelow the line. We were kind of
jacked up on that. And so thenwhen we really recalculated and
(08:23):
got input from my group, we weremore about, like six to 7% so we
were performing about half ofwhere we needed to be, yeah, and
so that, that sucked, you know,of course, you know, there's,
there's good years, there's badyears. Everybody has ups and
downs, a work in progress. But,yeah, that that was what, you
know, but, but, you know, I alsohad to remind, remind myself
(08:45):
that, like, okay, at that pointwe were like, a, you know, five
years, six year old company,yeah, okay. And we had managed
to get up to about seven or $8million a year in revenue, and
then we had 10 employees at thetime. I mean, so really, I
wasn't as bad as I thought Iwas, but it just I was
embarrassed, like, I just, Idon't like, I don't like not
(09:06):
winning. Let's just be honest,right? You gotta win if you're
gonna play ball. Sure. So, yeah,I mean, that's, that's when, I
guess my attention got flipped,and then we started, you know
Madison, who works in my office,she's our in house, accountant,
controller, now, where westarted focusing more on
meeting. I wasn't even askingfor pmls, you know, I wasn't
(09:28):
even like, hey, let's meetquarterly, let's meet monthly.
Like, I was just like, hey, wegood. You good.
All right, let's get out andfocus on building science.
Yeah. Sell houses. Yeah, yeah.
Go ahead. So and I will say,like, just to clarify, but then
to go, like, I do think it's ahard line to say like, which one
you should focus on first. Imean, really perfect world. You
focus on both. But I am reallyproud that we started off
(09:51):
focusing on just building a goodhouse, because I don't want to
be the builder ever who's justfocused on money and not
building. A good house, becausewithout the reputation and
without people like, you know,around here now it's like, when
there's like, Oh, that's a hotcotton house, like, oh, like,
you know, and that's exactlywhere I want it to be, you know,
totally. Whereas there's othercontractors that, like, if they
(10:15):
say, Oh, that guy built it,everybody's like, Ooh, yeah, I
don't want to be that guy. I'mglad we focused on that, but,
but, yeah, that group reallymade me start paying attention
to, you know, an actual P and Land looking at, hey. Like, why
are we paying so much in allthese subscriptions? Like,
(10:36):
that's one that comes to mind.
Like, you know, stuff that wehad canceled stuff that was
running away from us, likeQuickBooks fees that I didn't
even know we were paying that,like, didn't make any sense. You
know, there's like, horriblestories attached to that one,
yeah. So there's just, like,before you know it, like you're
just paying out more and moreand more things, like
(10:56):
subscriptions to softwares thatyou thought you canceled maybe
you didn't. And then, you know,whether it's not even just
keeping up with your field, justtracking your feel like, I mean,
I wasn't paying attention, man,like I just,
you know, wait, said again, andmaintenance, like vehicle
maintenance, I didn't realizehow that we were getting crushed
(11:16):
on taking trucks shop, dude. SoI want to, I want to backtrack
this because you had met Did youcall it 13% net income, like a
net profit? Is that you calledit right? So I hear it all the
time. Have been for years,builders saying I'm a cost plus
20, yeah. Like that 20% is,like, that's what we mark
(11:36):
everything up. And that's whatbuilders think. Is the take
home, Oh, yeah. And then theyalways get juiced and they sleep
on, like, the overhead, theoperating costs, the
maintenance, all the stuff thatyou don't think about. And
that's typically what I hear, iswhat gets builders heavy, and
that's when they start clearingthat 456, percent net profit,
yeah. And they're just like,stuck. They're like, How is this
(11:59):
possible? We're markingeverything up 20% we're building
beautiful homes, huge top line.
Like, we should be crushing but,yeah, don't. So get specific on
yours if you remember, yeah,yeah. So was it chewing up or
what?
Well, one thing that we starteddoing is we reevaluated our we
(12:20):
have a lot of in house labor,right? Well, let's start there.
So, so we were, we were pretty Istarted the company. We were
like, cost plus 10% and that'smarkup, not margin, okay, so,
and that's going to depend onwhere you're building and that
kind of thing. And so then, youknow, we were like, Okay, well,
let's go to 12% let's go to 13%and 13 is about where I was when
(12:41):
we joined the son of LivingProgram. And now that's again,
that's markup. And then, youknow what, once you take out all
the things, because I startedadding, you know, I was trying
to get health insurance, and Iwas trying to add all these
benefits to have to retainemployees, which I think you
have to do, by the way, like, ifyou want to retain good
employees, you have to do thosethings, or they're gonna leave.
(13:02):
But then we really startedfocusing on our pre construction
agreements. And I know thatsounds crazy, but like, we now
bring in a some income,basically, in pre con. That goes
to the bottom line, which isgood our margin on our in house
labor. So instead of saying,like, you know, here's the at
(13:22):
cost rate of this employee plusour contractor fee, we just came
up with composite rates. So wejust have like, a 25% margin
built into our in house labor.
And that varies, of course,depending on pay scales, but
that's what we shoot for, istoward that 20 to 25% margin on
the in house employee. We knowthat helped a lot. We started,
(13:43):
we upped our design fees, like,so we're drawing house plans. So
we we went up on that startedchanging, like we even check,
went from, like, heated squarefoot to covered square foot.
Small change, small change,small change. That helped the
bottom line that was, that wassomething that really caught my
attention to, like, we weren'teven really paying for the draft
(14:05):
at that point, wow, before wechanged it. You know, it's like,
well, I just need plans tobuild, but let's make money
doing it right. What else? Westarted doing a lot of dirt
work. That's one thing webrought in house, was a lot of
the excavation. So we, like,we'll dig our own basements, we
do our own lot clearing, we demohouses and, you know, being able
to charge for that on the frontend, with our equipment and all
(14:27):
that. It's not that we'recharging unfair rates, because
we're not, but it's, it's justmore income, right? So it's so
ancillary stuff, I guess, iswhere this conversation is
going totally well. And that'swhat I was going to say, is so
it sounds like to insulateyourself, to get up to that net
profit that you're looking for,you started bringing in more or
adopting more service that youcould sell. That's
(14:50):
right, yep, yep, yep. We did.
And you know, and then,depending on where we're
building now, because now we'recovering like Southern Middle
Tennessee as well. Like our, ourbuilders fee has gone up, you
know, we have a spread now fromlike 15 to 20% and several of
those are now margin, notmarket. So that helps, that
(15:10):
helps push, push us right? Andthen we started playing with
some project management, monthlyfit, monthly stuff, you know,
monthly fees, depending on,again, how far the travel is for
the job, because totally, youhave to recoup some of that.
And, you know, so it's justlittle things like, you I just,
I just struggled, because I waslike, man, you can't just say,
(15:32):
Okay, well, I'm cost pluswhatever, 15% but obviously say,
Oh, I'm cost plus 20. Well, theguy, the customer you're talking
to is probably going to walk outof your office, right, right? So
trying to recoup things likegeneral liability, which we were
already doing, but I knowbuilders that don't do that,
right? I mean, so that's asignificant amount of money per
project that you're losing ifyou're not collecting that back.
(15:54):
So it's really easy just to addit into your contract, or add it
into your estimate, or both.
It's not like you're hiding it,but it's just a percentage. You
know, I think ours like pointoh, eight, 5% what we charge?
Okay? So it's like, what point8% of 1% would be way to say
that. So, but like, recently, Iput together like, a whatever,
(16:14):
$5 million proposal, and I thinkthe GL fee alone was like almost
40 grand, 3037, grand. So you'regonna lose that, right? I mean,
so that, that kind of stuff,like we've strategized, even
though, like delivery fees, likeadding more stuff, adding more
numbers to our estimate forthings like building cleanup
(16:38):
site, work, labor, stuff, that'sjust general labor for our in
house employees, becauseotherwise they're just straight
overhead, like, if you're notbilling them out, right? So that
helped collect. So we juststarted, we just really tried to
start paying attention to allthe little things that we could
do, that we were already doingwe just weren't charging
for. Well, and I think so I'mnot going to sidestep here, but
(16:59):
I have a change order examplethat I want to explain, yeah,
and I think ultimately, like,what I'm hearing from this is,
as you started bringing in moreservice, you started looking at
what you were providing as anactual service. And that's where
I start to say there arebuilders, and they typically,
there's, like, typically twolanes. It's like, one lane is
they're monetizing a hobby,right? Some of their massively
passionate about they love beingbags on. They want to build a
(17:21):
great product that they don'tnecessarily view their business
as a business. And then fromthere, it's like, it's either
you're monetizing a hobby oryou're running a business. And
that's what I hear like, kind ofthat progression of you doing is
you started evaluating yourbusiness, of like, how do I
generate more income? How do Iprovide more service in house
that I can generate income onand I can actually run a profit
margin on but I think the secondpiece, and this is where the
(17:43):
change order example comesthrough. And I want you to
correct me on this if you thinkit's bullshit, okay, but when
what you're explaining to me isis you're looking at everything
you're doing and you're markingit up respectively, okay? And
when I typically hear it withchange orders, is, builders will
lose on change orders becausethey don't mark them up
(18:03):
appropriately. Typically,they'll hang on to like a markup
that's consistent with what wasin the contract, or whatever it
might be, but they don't takeinto consideration all the
administrative, all theexpedited shipping, or what's
going to happen if we have to wejust installed recessed can
lights, and we want to tearthose out and we want to put
something else in. Are weincluding all that demolition
(18:24):
and labor and everything has togo into it, and that's usually
where they get scorched. It'snot just we have to buy track
lighting instead of recessedcans, yeah. Is that fair? Like
you start to view it as, how doI make it
is going out, and if I madehonest, that's like, that's the
next step for us right now,like, we're actually in the
middle of evaluating how wehandle that and our contracts
(18:47):
and how we can charge for that.
So, you know, you have theability to charge a change order
fee, or you can charge a higherpercentage, like, you know,
let's just use numbers, forexample. Like, if you're
whatever cost plus 15% and thencost plus 20. Let's just say
it's common for builders to thencome in on a change order, and
it's in their contract thatchange orders will be charged
(19:07):
that cost plus, say, 30% 35% andthat's, that's money that you're
losing. And I've got a reallygood friend in in Florida that's
doing that, and it's beenamazing how much money that
they're bringing in from changeorders. And it's because here's
the thing, if you don't bring itin, you're really losing it, and
that's what I think I'mrealizing more and more now, you
(19:29):
know, because it's like, you'regonna, it's brain power, right?
It's, it's, it's scheduledelays, which means if you're
not billing, you're not makingmoney. So if you're delayed,
you're losing money. So you'rereally losing it if you're not
charging for that, and that'swhat we've been doing, if I'm
being really honest, you know,I've always struggled with,
(19:51):
like, what's specifically achange order and what's really
just a selection, right? BecauseI'm like, Let's do. Your light.
Example, track light, can light,okay, let's just pretend like
they selected can lights. And Iknow the right answer is like,
Oh, they've selected it. Thenthat's a specification. Then
that's what they're doing. Ifthey change the track lighting,
then it's a change order. Butlet's just say we're still
(20:13):
framing right, or maybe framingis wrapping up, and they're
like, hey, you know, really beenthinking about it. We want to do
the track lights instead of thecan lines. That's a hard spot as
a builder, right? Is that achange order, or is it really
just them changing theselection? It doesn't impact
you. I mean, what do you care?
Right? It's just buying thislight versus that line. So
that's, that's part of thedebate that we're in as a group
(20:34):
right now. It's like, that's afine line of being like, Captain
butthole here and saying, Okay,well, I'm gonna charge you an
extra three grand Charlie,because, you know, you changed
your mind. Right to me, if weinstalled the can lights, and
then it was like, hey, we wanttrack lighting, then I think
you're obviously in change orterritory. But there's builders
that treat it the first way,like there's for sure, yeah,
(20:56):
that existstotally but I think that even
goes back to your commentearlier, of like, wanting to
just not be the just lack of abetter term, like the money
hungry builder, right? Like youactually do care. You wanted to
build a brand. You wanted tofocus on the build science, but
even more so to your guys'conversation. Because I think
it's a great conversation. Icandidly haven't heard it, and I
think that, like, is there anylogic to that decision making,
(21:18):
being and setting expectationswith clients in pre con of being
like, Look, if there isreasonable belief that the
change you're suggesting orpotentially suggest is going to
throw off more than one towhatever Excel process, then it
will be issued as a changeorder. Because I think that's
(21:38):
where the cost happens. Right toyour point. You have to finish
on time. And if you've alreadygot electricians lined up,
they've already got materialpurchased, like, they've got all
this stuff going, and it's like,a week out, yeah? And if
changing from recess to track isgoing to be that big of a deal,
rip them for a change order.
Yeah, yeah. I think you're,you're out on the money. I think
(21:58):
there's that got to be a goodset of parameters, or whatever,
where it's like, okay, if, if itdelays us more than two days,
three days, whatever thatthreshold is to be, you know, if
it, if it causes a subcontractorto take work down, if it, you
know, whatever that did, yeah,then that would have to beat it.
So I think to me, you have toreally identify that though, in
(22:19):
your contract, because if not,it's just a gray area, and
you're going to get destroyed onit, right? So I think that's the
that's the difficult part. Imean, also feel like, with us
doing design in house, like it'sreally our responsibility to get
ahead of those things and like,have design figured out before
we need it, and not, you know,and really figure it out, not
(22:40):
just concepts. And then you getto rough ends and everybody
changes their mind. So, I mean,totally, we're doing better and
better and better at that. And Ithink that's, that's one of the
reasons I brought interiordesign in house, by the way,
it's because I want to be ableto control that. That's a whole,
that's a whole episode, if youwant to go there one day.
Well, I think so, like to thispoint, like, I think this is
(23:00):
great, because I think, like alot of our conversation, it
doesn't necessarily go aroundfor builders adding in
additional, we'll call itrevenue streams, right? We're
not adding in excavation. We'renot adding in or thinking about
project management revenuestream. My question to you is,
for the builder that doesn'twant to do that, right? For the
builder that doesn't want toincrease their net income or
their net profit, right? Whatcan they do just to make sure
(23:25):
that, like, I'm gonna build thishouse, and my goal is to hit a
10 to 15% net net on this thing,what can they what can they do
just without adding in revenueto really stay on top of that?
So ifyou're not gonna increase your
volume, you know? And you're notgoing to try to do additional
streams of income, like selfperforming work or whatever it
(23:48):
might be. It really just comesdown to your overhead and then
what you're charging, right? Soyou're going to have to run a
tight ship, right? You may not.
You may be the project manager,the salesperson, the warranty
guy, and I don't know, maybeeven the designer at that point.
I mean, because that's, that'sa, that's a that's a tough one.
(24:10):
I think I was there for a whiledoing that, and I was miserable.
So I mean, hats off to you ifthat's, if that's the path
you're on. But I think you'regonna have to just learn to, you
know, figure out how you canincrease your your contractor
fee. And I tell you one thingthat you can do just thinking as
I'm talking, but if you don'tknow the difference between
(24:33):
markup and margin, you need toright? So there's a difference,
right? So, and if you you know,for the sake of that, you know,
an easy conversation, like, ifyou're charging 10% markup, you
take the cost of construction,so it's $100 of construction
cost times that 1.1 right? Soit's 110 bucks. But if you
(24:55):
wanted to do margin, you'regoing to take that, that $1 that
$100 and you're going. Divide itby point 90, and then it's going
to get you a higher if it'sactually, like, really, what
you're making as income off ofthat contractor fee. And you're
not changing your contractorfee, you're just calculating,
you know, margin versus markup.
And then, you know, so like, a15% margin ends up being like a
(25:17):
17 and a half percent market. Sookay, so I think this is worth
going into. Yeah, it's a bigit's deep, totally well. And I
think that this is, like, wherea lot of people go, and I'm
certainly not a mathematician byany stretch of the example, but
how I've always explained it,and again, correct me if I'm
wrong, but it's really the wayto look at markup is going to
(25:40):
be, I've got a million dollarhome market up 20% I'm going to
sell it to the customer for 1.2right? That 200 grand, about 50%
of that is going to be towardsoverhead, and about 50% of that
should be towards your bottomline or your net profit. Sure,
(26:01):
that's how I've just simplyexplained it. But I think from
like your math and like this,where I've always got hung up on
markup and margin is you, Iunderstand the markup of your
number times the 1.1 to get yourmarkup number, but then the
point nine divided by or thenumber
right, you're dividing it andinstead of multiplying it,
right, right, right. So if it'sa 10% margin, you take one and
(26:26):
you subtract that 10 Point,point one from it, or whatever.
And so then you you end up withpoint nine, sure. And so then
you just divide by that. And Iknow it's crazy, but I would
encourage you to, like,literally, get on chat, GPT, get
on Google and just like, there'svideos of, like, explain markup
versus margin as a builder,there's 1000s of videos. I had
(26:48):
to clarify the contract in mythe language of my contract
about it, you know, and I,what's interesting, though, is,
like, it's, it's very wellreceived. It's not an uncommon
way to calculate things in ourindustry, especially like in the
commercial world, it's moreaccepted there, or more more
common there. It's acceptedhere, too. But I would encourage
(27:10):
everybody to educate their stuffon that, because, you know,
that's one thing. I'll give Tomcredit. So Tom's a retired
builder. Tom, was it? He's likethe moderator for our builder 10
group, okay? And I remember heasked me, like, hey, what do you
charge? It's like, 13% he'slike, markup or margin. Like,
13% you know, like, I don'tknow. Like, and he's like, You
(27:30):
don't know the difference. I'mlike, I don't have a clue what
you're talking about. And so,and then, you know, go around
the horn and hear everybodyelse. And there was a mix of
people that did markup versusmargin. And so, you know, it's
just, it's one of those things,like, it's, it can be, I find
that a lot of times customers,they all get hung up on, like,
what's the house cost per squarefoot, which they ask you that in
(27:52):
the first phone call, like,they're probably not your
customer. They're not mycustomer, typically, yeah. And
then they also, then they getdown to the wire on builders,
they want to just look at thepercentage, right? They don't.
They don't really look at thatpoint. They're not even playing.
So there's is no cost estimate.
They're just looking at. So it'snot, I mean, it's a fine line, I
guess, but I mean, we don't hideit like you were very clear with
what it is, and they understandit. But I think it's better
(28:15):
received than then going up tosay, 17 and a half percent
markup, you know, and then it'sto just run a 50% margin. So
that's something Ithink it's received so well. Why
do you like? I think it makessense. Where my head goes is, is
like, I mean, if just for theaverage consumer, right? They're
not buying building homesregularly. Of course, people
that will do multiple in thelifetime, but the majority like,
(28:38):
that's just a one timetransaction for them. I think
most people look at this andthey go, like, the business has
to make money. Like, if I go andbuy a shirt from Shiels, do you
know what sheils is? It's like,it's like a sporting goods or
call it Cabela's whatever. Okay,like you assume that there's
probably, like a 30 to 50, maybe60% markup on it, and, like, you
(29:00):
just kind of like palette anddigest that as the consumer, and
you buy it, and you move on.
Right? Do you think that theconsumer is like, way, okay,
talking about margin and like,what you're actually going to be
marking this thing up and makingbecause they assume that you
have to make a living too, andyou have to make money. Because
I think a lot of builders getscared of that, and they're
(29:21):
like, Yeah, over what I'm makingand building this house. And I
thinkthat I was never a fixed cost
builder. Okay, so I've alwaysbeen cost plus. So it's always
been a conversation with us. NowI've had to explain to people
that we don't really make 15%like, that's not what I take
(29:43):
home, right? I mean, there'stimes that I have to explain
that more than others toclients, but I mean, they get it
right. I mean, they know that.
Here's the thing, if a customerdoesn't value that and value
what you're bringing to thetable. Well, then you're you're
building for the wrong people.
Like, that's just straight up,if that's the those clients are
(30:04):
going to buy spec home that'sbuilt to the lowest builder
grade cabinets and everythingelse in that house. And that's
where you just build that dudeas fast as you can do your
thing, and then just sell it onthe MLS. Like, sell the real
estate agent and move on. But ifyou're gonna try to live in the
custom world that we're doing,you've got to find clients that
value what you bring to thetable. I mean, if you're not
(30:24):
gonna, I don't think you couldsurvive if you don't find those
clients, because they're gonnadestroy you, like it's you know,
they want you to make moneybecause they want you to be
successful, and they want you tocontinue to deliver them a good
house and bring ideas to thetable and just take care of
them. You know, I think a lot ofthe clients that we build for,
(30:46):
they just want, they just wanttrust that you're taking care of
them, and they know that youhave their best interest. And
that's probably first andforemost with a lot of the
clients we build for now, youknow,
totally, totally No. I thinkthat's, I mean, just with this
episode largely being aboutmaking money, right? Yeah, yeah.
Is it all starts with the withthe customer, or the process
(31:07):
that point, yeah? Like, maybe,like, from an action item
standpoint, is, like, I thinkprobably, like, learning the
right customer happens overtime. Like, maybe correct me if
I'm wrong. But you might have toget burned by one or two to,
like, really have conviction inthose red
flags. Yeah, yeah, that's a goodthat's a good, good way to go
here. I mean, I think learningto say no is important, just by
(31:29):
the way, you never heard thatbefore. You know, if you have
that customer that's doing allthat. Because here's the thing,
like we I like to date customersbefore I marry them. Totally
okay. That should be writtenlike, somewhere in a board in my
office, like we're going to dateyou before we marry you. Yeah?
Because, you know, you can, youcan figure out in that pre con,
(31:51):
you know, because, yeah, I thinkif we're, if we're drawing plans
and all, you know, that wholepre con experience, that's,
that's six months minimum inthat timeframe, dealing with
them, delivering plans, gettingfeedback, welcoming them into
your office, talking about theirdogs, talking about whatever it
is, you can figure out who theyare, I mean, and then you can
(32:13):
decide, and if there's redflags, get out right. And we've
done it. I mean, we've done it,we still do it. You know,
learning to say no is probablyone of the hardest things as a
builder to really understand whyyou should do it, you know,
let's hear your script. How doyou do it? How do you dump a
customer? Oh,man, you know, I've had it both
ways. I've had it to where,like, it was kind of the ugly
(32:37):
breakup, you know, I guessthat's like, you know, yeah, I
had a we were doing a pre con,so during our pre construction
agreement. So like, we'redrawing plans, we're designing
your house. We're building yourbudget, your estimate, with you.
But also, like, if there's,like, a house to demo or trees
to take down, like we selfperform that stuff. And so we
(32:59):
were going out to basicallyclear this lot. And, you know, I
told this guy, this is probably,like, a $2 million project right
the house. And, you know, he'slike, I need to know exactly
what it's gonna cost before yougo out there and clear this lot
off so the surveyors can work.
I'm like, Man, I mean, we'retalking about a range. It's
(33:21):
probably gonna take us abouteight hours on the machine,
whole day's worth of work foroperator and a laborer, you
know. So whatever you're talkingthree, $4,000 like, maybe five.
I said, it depends on what allwe run into. We just don't know
till we get in there. Dude, he,like, lost his mind, like he's
just wanted to know, like, tothe penny, and he called and got
(33:43):
violent on the phone with me,and I said, let me just stop you
right there. Yeah. I said, I'mnot your builder anymore. Yeah.
And it was, like, it was one ofthose things, like, the veins
are like, popping on your neckand your blood's boiling, and
you're like, Oh my gosh. Iprobably shouldn't have said
that. He's like, What do youmean? I said, I'm not your
builder anymore. Yeah, you'regonna act like this before we
(34:04):
even get started. I'm not yourbuilder. I'm out. You need to
find somebody else. And wepacked up our crap. Oh, man, it
was like, so that was like, kindof an ugly breakup, pre con,
yeah, the other ones have been,you know, you were too busy, you
know, look, it's gonna be like,our schedule's gotten crazy.
(34:25):
We've taken on more work. We hadsomebody leave the company like,
I'm really sorry, but I thinkyou'd be a better fit with this
guy over here. And I'll try tomake a recommendation. I mean,
sometimes that's kind of like,probably, I'm sure those guys
appreciate the send off, but,you know, and sometimes we have
to break up with them because wedon't have time, right? I mean,
I really like, it's not aprofitable enough job, it's too
(34:47):
far away, and it's just not agood fit for us, and so we have
to just have that conversation.
And it just depends, man,sometimes you can kind of like,
I'd say, price your way out ofit, but, I mean, it's one of
those, like, if. If that's whereyou need to do it, where it's
like, okay, if we're going totake this project, it's going to
be good for the company. If it'snot a good fit for the company
at this margin, then, sorry. Andso sometimes those things take
(35:11):
care of themselves. Yeah. Soyeah. I mean, I would say it's
case by case, but I definitely,I've had a big range of
breakups, ofcourse, so I Yeah, so of course,
it's not, and, yeah, certainlynot to be suggested. It's easy.
But that is, I'm not yourbuilder. That is what I hear,
like, most commonly in the roughbreakup, yeah, like I've had, we
(35:34):
had another episode with, Ithink it was Scott bland. It
might have just been aconversation I was having with
Scott. He's a builder down atWaco, and the same thing, it was
like, got the plans on the desk.
Gal walked in the office, if I'mremembering correctly, it was
like barking orders. Scottstarted getting red red flags,
(35:54):
and he just rolled up the plans,handing it back to her, and
said, I'm not your builder,like, you got to go find someone
else. And they're always kind oflike dumbfounded, because they
got called out finally, but toinsulate yourself, and what I
think you said, which is themost important the business,
those conversations have to behad, especially when we're
talking about profitability. Howdo you make money on jobs? It's
(36:16):
like you cannot set yourself upat the beginning of a project
trying to make money with thattype of customer.
Yeah, and let me throw this inthere too. So I guess I'm just
thinking about the listenersthat are, that are, I guess,
somewhat new in their business.
They're trying to figure out howto make money and not waste
their time. Because if you'rewasting time, you're losing
money. So when I first started,I was not doing pre construction
(36:36):
agreements like I was just likeyou come in, we could talk. We
could talk 47 times. You couldjust keep coming back, and we'd
talk some more, and then I'dprice it, then I'd price it
again, then I'd price it again.
And next thing you know, you'vebeen dating this guy, whatever,
1010, months, 12 months. Andthen they're like, oh, yeah, we
can't afford that. We're outbrutal. And so that happened to
(36:59):
me time and time again. And thenI remember, I forget who it was.
It might have actually been JakeBrewton, somebody I was talking
to. I can't remember. They werelike, Oh yeah, you got charged
pre construction agreement.
That's like, What the crap isthat? You know? Yeah. They were
like, oh yeah. You just gottaget a deposit from them. And
then if they they walk away.
Then then you keep the money,yeah. And I'm like, Oh crap, you
(37:19):
know, how can you do that? Like,so I remember, I put, I've,
like, found this agreement,like, you know, it's pretty,
pretty short, like, it's a onepage or maybe two pager, and it
basically just says that, like,This deposit is going to cover
these services. And it's like,you know, client meetings up to
so many hours it's going tocover, you know, your estimate.
(37:43):
It's going to cover any sitemeetings with professionals like
surveyors, blah, blah, blah. Andthen associated with that, you
know, is this the amount ofdeposit. And then mine has a
line that says, you know, within12 months, if we build your
house, if we start your house,within 12 months, we'll give you
X percent of it back as acredit. And I remember, man,
(38:03):
that first time I asked somebodyfor 2500 bucks, like, I was
nervous. I remember, man, I waslike, Oh, man. I'm like, close.
I'm trying to get through thissales meeting, and I'm like,
trying to enter, like, what'sthe next steps? And I remember,
like, well, you know, we've gotthis agreement that we signed
next so. And they were like,okay, yeah, no problem. And it's
like, without checkbook. And itwas like, Oh, here you go. We'll
(38:24):
do it today. And I'mYeah, well, that was easy. And
you're like, I just saved somuch heartache. Yeah, asking
yeah at the time, I was like,Okay, well, I'll give like, 90%
of it back if I start yourhouse, like, you know, or maybe
100% like, if I forget what itwas. And now, now it's
progressed, and now we're like,minimum 10,000 and we give half
of it back, you know. And it'sjust enough to where it's like
(38:47):
people, they commit, and if theywon't sign it, they won't give
you a check, then they're notserious, you know. And so, and
honestly, you would be surprisedabout the people that have paid
it, spent time with us in ameeting or two. Maybe they paid
for plans. That's a separateagreement, by the way. And then
they're like, Hey, man, webought a house. Like we're not
(39:08):
gonna build anymore. Never evenask for their money back, but
contractually, they can't get itback. I mean, right, you know,
whatever, I'm a nice guy. I'mnot if I, you know, understand
the situation, I obviously makeexceptions sometimes, but, but
that helps make money, becauseyou're not wasting your time. It
goes to the bottom dollar. Evenif you build their house, you
(39:29):
know, you still collect aportion of that to your income.
So it's totally if you're notdoing PCAs, start like, that's,
that's like, constructionagreement, yes, like that,
absolutely. Start that today. Ifyou need one, email me. I'll
send you my template. I mean,that's like, 100% like, you have
to start doing pre constructionagreements,
(39:49):
beautiful dude, I think so. Andlike, I think even, like, how
you explain, like, the preconstruction agreement and then
the plans was, like, a separateagreement, yeah, a separate fee.
But I think that's like,probably one of the. Biggest
takeaways with like, kind of theumbrella theme of this episode
being like, how to make money,yeah, like, even just start, but
also like, how do you insulateyourself at the beginning? Last
(40:11):
question here, and if you'relike, recess is a whole nother
episode. That's fine. But when Ihear pre construction agreement,
I'm hearing service planning,site walks, prep stuff like
that. More like, service, yeah,level fees. Then do you, like,
once everything's good plans arethere, like, everything's locked
in, we're gonna break ground,then do you go in for another
(40:33):
deposit? Because I hear thatwith like, material and getting
subs landed and all that wedo, yeah, yeah. So advanced
payment is part of ourconstruction contract. Is what
we call that, or AP, and it's asimilar deal. So we get it, you
know, when you execute ourcontract and you didn't have to
then pay us an advanced payment.
We hold that money ourselves,and we use it to stay cash
(40:57):
positive, right? Because we'rewe're buying material, we're
paying subcontractors, and thenwe bill out our customers, kind
of in reverse and so, and thenalso, like, once they sign, like
an acceptance letter at the end,there's, like a, I think 75% of
that gets applied to theiraccount, and then the remainder
we hold for an additional, Ithink, 45 days. And just to
(41:19):
catch, like, straggling billsthat come in, you know? But,
yeah, that that's been, ifyou're having cash flow
problems, start that too becauseor anything, if you're not doing
it, started because people,again, good customers that are
serious, they're going to do it,you know, even if you just get
$10,000 like that still helps,makes logical sense. Like, as a
(41:41):
consumer, I'm not a builder,right? I'm in software. Like, if
someone if I'm like, Yeah, buildmy house. And I'm like, I know I
need a hole dug in the groundand a foundation port in it.
Yeah? I wouldn't even cross mymind to suggest that the builder
is going to front load thatcost.
Yeah? And it's one of those. Ithink what you have to look at,
is your your cycle right on yourAR, right? So like, how, how
(42:07):
often are you invoicing yourcustomers? And you know, you
don't want to let yourself gettoo far behind, right? And
because, if you haven't had acustomer not pay you yet, you
will give it time. It's coming,and it could be because they're
trying to be a turd. It could bebecause they're out of cash and
they're waiting on this otheraccount to sell, or they're
(42:30):
trying to sell some some stocks,and they're trying to there's
always a reason, you know. Butif you have advanced payments
from people, right? And not just1789, jobs, however many jobs
you got going. You got, you gotthis pile of deposits. You know,
you can withstand a little bitof a storm from people, like,
(42:51):
when they get hung up, you know,good, bad or ugly, right? It
doesn't matter why they're hungup. They're hung up. They can't
pay you this month for whateverreason. It eliminates that panic
of like, Oh my gosh. Like, howare we going to make payroll? Or
how are we going to so, youknow, and then to, if they're,
if they're really going to bebad customers, and try to skip
(43:11):
out on paying you, you've gotthis deposit, right? And then,
and then you just, you get, thegoal was to not let yourself get
behind that deposit. So if yougot 100,000 so if you got
$100,000 from somebody, don'tlet their account get past that
Bill often, you know, Billoften, don't, don't, don't let
things just don't be so busy atthe end you forget to Bill, and
(43:33):
then all of a sudden, findyourself sending them $180,000
invoice and pray and they makethat payment right, like that
will absolutely bury you if theycan. And so, and also too, I
find that customers, like,always were like, oh, man, I
forgot about that. Like, man,that makes me feel so much
better because now, like, I wasstressing, like, Oh, that's
great, yeah. So, so that'salways part of it. But I mean,
(43:57):
if you you know, I actually hada good friend of mine tell me,
if you're building, like, forcash customers, it's probably
even more important to get anadvanced payment. And I didn't
understand that when he firstsaid it, but after we talked, it
made sense he had a guy thatwas, you know, very wealthy
client, cash pay. Basically, atthe end was like, Yeah, I'm not
(44:18):
gonna pay you. Like, I'm nothappy with that, you know, like,
sue me if you want to. And itwas, like, this total flex. And
he like, filed a lien on him,but it didn't matter. Everything
was like, there's no financinginvolved. So he had, he had no
leverage, right? And so he'slike, it really hurt him bad.
And so he realized, then he'slike, Okay, I have to start
(44:39):
protecting myself and so, yeah,this just also, don't ever let
yourself get in a bind like thatif you can prevent it. You know,
theways that contractors can lose
absurd amounts of money issickening.
It is. It's every step of theway
I literally was on the. Phonewith another contractor, one of
(45:02):
our clients 1000 miles away fromyou, told me the same story
about forgetting to build acustomer 180 grand, I think, or
something crazy, yeah. And hewas like, part of it was the
project manager's fault, part ofit was our fault. But he was
like, I had to go back to thecustomer, and I asked for half.
Yeah, right. You're like, Butdude, that's coming out of the
(45:24):
bottom line. Like, yeah. It'slike, we're talking like 10%
annual profit bleed, yeah, nuts,nuts, nuts. And you just start
to think about, you're like, youdon't have to have those
experiences, right? I mean, it'salmost like, how many badges of
honor. Do people have to get forthe rest of the community to
know that? Yeah, don't have todo that, right? Like, that's
(45:47):
like, the difference betweensuccess in a business and
failing, right? And, like, I getit right. I mean, it's easy to
get lost in the weeds of thisbusiness. Like, it's easy as a
builder, you get focused, like,especially in your first 510,
years, like you're just tryingto survive. You're trying to get
the next sale. You're trying tofigure out why Miss Sally's mad
about, you know, her sheet rockfinish or something like that.
(46:10):
You know, you're just stuck inthe weeds and you're not paying
attention to your accountingsystem. You're not You're not
tracking expenses. You're nothave a even just you don't have
a good organized system. Like, Imean, I was very fortunate,
like, so my father in law helpedme get off the ground, not from
a financial standpoint, but fromjust the organization
(46:31):
standpoint. Like he he was help.
He was helping run anengineering company that he was
at, and so he had a really goodunderstanding of, like, file
management, even, you know, andeven QuickBooks, really, he
helped me get all that off theground. We kind of, like, set
our roots in CO construct, weset our roots in Google Drive,
(46:52):
and we set our roots inQuickBooks Online and so, but I
can understand if you don't havethose systems. I mean, you're
still the guy who's got stuffstuck in folders. And like, you
don't have anybody in youroffice helping you, like you're
gonna forget about invoices. Andthen, you know, maybe that
concrete guy forgot to ask youabout it, and the next thing you
(47:13):
know, you've closed this jobout. And he said, Hey, man, when
am I gonna get paid for that?
And then you realize that youdidn't pay him 70 grand. Like, I
hear those stories, man, it'sit's mind blowing. It's insane,
yeah, yeah, it's a lot. It'swild. It's wild. We have, I
probably told this story a halfa dozen times. I need to get a
new story, just because thepodcast, but hand on the Bible,
(47:34):
we have one of our her name'sChloe Brown, wildest dreams
consulting. And I always giveChloe shit for this, because,
like, she's like, a ChiefOperating Officer, Chief
Financial Officer. She's justlike, wicked smart when it comes
to processes and accounting. Butthe point being is, she has a
blog with us, and it's goingover. One of her clients, they
(47:55):
exposed over $5 million inunbilled cost over the life of a
business, oh my gosh, in whichthe owner was confident they
were just, like, making greatmoney at work. And it's like,
but then you think about, it'slike, okay, like, this is like a
20 year old business, or howeverold they are. And you start to
compound 7080, 100k Yeah, right,like half a million on a bad
(48:19):
year, big volume year, and youdon't have the processes in
place, and cost is slipping.
Jobs get closed, bills come up.
Like, yep, dude, it's nuts. Itis. And then that, that's where
it goes back and like, are youmonetizing a hobby? Are you
running a business? Yeah. And Ilike, as brash as that is, it's
the truth. It's like, when youreally get excited about
understanding the percentagesthat go in hand with this and
(48:42):
the mistakes that you canprevent with solid process,
solid teams, solid understandingcontracts. We talked a lot about
contracts. That's where it getsfun. Yep, and it's not always
like, I'm gonna net a milliondollars this year, because I'm
gonna go and I'm gonna be amillionaire. It's like, Dude,
you could net a million and gohire the two employees that you
drastically need, or you couldinvest in consulting or
(49:05):
advertising or a new office,right, or equipment, a fleet of
trucks, whatever, right, thestuff that you need to continue
elevating your business. So,yeah, it's all good stuff, man.
I mean, I've just been focusedon, trying to grow. You know,
I've been, I've been grow modesince I started. I'm still
there, even I still like to havebigger plans. You know, there's
(49:26):
been years where, you know,we've taken a loss, but it's
because we've added moreemployees. We bought more
vehicles. We're like, we'regetting ready, like, we're just
trying to keep going. And, youknow, I don't know, I would just
encourage anybody that's like inmy shoes, maybe they're before
me, maybe they're after me andexperience but find a, find a
(49:46):
group of people to plug into,right? It you have to, if you're
if you're going to grow. Firstof all, I like that. Yeah, if
you're not growing, you're done,right? I had a really good
friend who passed away back inthe fall, who was a killer
builder, and he told me that,and it's like, just stuck in my
(50:09):
brain. If you're not growing,you're done. But find a peer
group, right? And even if you'renot that social person, get over
yourself. Find you some guys,what? What I've always like
thought to be fascinating aboutthis industry, is it, when you
get involved with a group ofbuilders, they want nothing more
than to help you, like they'repassionate about it. They all
(50:31):
want to help each other. I'm nottalking about the guy down the
street, right? Your competition,but get out of your market. Go
to the trade shows, you know,join the nhB and get in the
builder 20 group. Or, you know,you don't have to be still
living, but there's, there'sother groups out there, and just
ask for help. Man, people wantto help you. People want to help
you. Ask grace, hey. Man,somebody I can talk to, because
(50:52):
totally, you don't have toreinvent the wheel. Man, people
will give it to you. You justhave to ask. And you got to get
your systems in place or you'regoing to forget to bill out your
client $7 million in the life ofyour business. Don't be that
guy. You knowit hurts, and it doesn't have to
be that way, right? I hear it,and it's usually guys about, oh,
(51:13):
it's just a cost of doingbusiness. Well, it's just a
lesson that I learned. It'slike, well, they don't have to.
And to your point is, like, whenyou've got these networks,
whether it's Southern Living,whether it's a builder 20 group,
whether it's a piece of softwareyou use, like adaptive, we talk
to contractors for a living,yep, coast to coast, border to
border, everyone is on our list.
(51:34):
So it's one of those thingswhere it's like, if you've got
those interests, you've gotthose curiosities, yeah, there's
a ton of avenues you can take,yeah, but yeah, it's about
making money. It's aboutbuilding a quality product,
making money. Oh,man, building experiences. What
we say, That'sright, exactly. Well, this was a
(51:55):
killer episode. I appreciate thehell out of you. Thank you for
coming on, and I wish you thebest with all thanks, man,
I appreciate it.
(52:19):
You.
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