Maximizing Profit Margins through Client Collaboration in Construction

This week, Wade Carpenter and Stephen Brown discuss the critical role of client collaboration in construction projects. The episode explores strategies for effective collaboration, from pre-project planning to managing supply chain challenges, labor shortages, and inflation.

Drawing insights from a recent report from Liberty Mutual and Dodge, they highlight how top contractors are navigating industry challenges by working closely with clients, subcontractors, and surety companies.

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Topics Wade and Stephen cover on this episode:

• 01:01 The Importance of Collaboration Culture
• 02:26 Technological and System Challenges
• 03:18 Impact of External Factors on Projects
• 04:33 Effective Risk Management Strategies
• 05:42 Contract Negotiations and Material Costs
• 07:19 Collaboration with Subcontractors
• 12:29 The Role of Technology in Collaboration
• 20:02 Collaboration with Surety Companies

LINKS

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

[00:00:00] Wade Carpenter: Did you know that collaboration with your clients could be the single most impactful strategy to protect your profit margin and keep your projects on track? It's a game changer that's reshaping how contractors handle risks and deliver results. 

Today we're diving into strategies that make client collaboration so effective. From pre-project planning to setting clear expectations, we'll show you how better communication can lead to improved schedules, reduced risks, and happier clients.

We'll also explore how top contractors are incorporating these practices to adapt to supply chain challenges, labor shortages and inflation.

This is the Contractor Success Forum, where we bring you the tools you need to run a more profitable construction business. I'm Wade Carpenter with Carpenter Company CPAs. With me as always, Stephen Brown with McDaniel Whitley, bonding and insurance. 

Stephen, collaboration is such a buzzword but is critical in today's market. What's one way you've seen contractors successfully use client collaboration to navigate these ongoing industry challenges?

[00:01:01] Stephen Brown: Well, there's so many different ways to do it, and I think the most important thing to me is that the collaboration culture has to exist in your construction company. 

[00:01:13] Wade Carpenter: Absolutely.

[00:01:14] Stephen Brown: What does that mean to you, like, when you think about something as a culture?

[00:01:19] Wade Carpenter: I think it means everybody's on the same page to me. And if they're not, everybody's sort of rowing the boat in different directions and you're not getting anywhere. 

[00:01:28] Stephen Brown: No, I agree with you. I see a lot of my customers just there's a miscommunication between the sales staff and the project management staff. Or the administrative staff isn't even brought in. And I also see after the fact when there are bond claims because of incredible amount of miscommunication on a project, and it just doesn't need to happen, in my opinion.

That's what this podcast is all about.

[00:01:54] Wade Carpenter: Well, getting together, I think, sometimes that does go to the culture. And if people are not taught that you need to be working as a team. That's one thing I've always stressed to my people is we got to work this as a team. Otherwise, somebody's out sick or vacation, balls get dropped. So that's why we've always everybody's generally familiar with what we do and as far as like each client, and somebody can step in if-- we have a backup.

But in the terms of construction, a lot of people don't have that. And sometimes it just goes, I'm not sure where you, your thoughts are on this, but I think a lot of times I see contractors have different systems. And those systems are not necessarily, one guy bids a project one way with Excel and one guy tries some kind of internet program to bid.

And, everybody's on different pages. So that's where my mind is going with this. What's your thoughts?

[00:02:50] Stephen Brown: No, you're right. The technological end of it is hugely important in how you communicate what's going on with the project. I guess the whole subject matter of why I wanted to discuss this way was just this Liberty Mutual DODGE report that I got. Liberty Mutual Surety and DODGE did a survey among a couple of hundred contractors, basically talking about the change of managing risk and what they've seen.

And the main thing I got out of that report was just the fact that in the last five years, from what they've measured, 80 to 90 percent of general contractors and trade contractors have realized how important client collaboration is because of inflation, and because of job costs, and because of the time frame to complete a project.

Timeframes to complete projects have escalated everywhere for a number of reasons. The time to finish a job has taken longer because of COVID. And when you talk about the last 5 years, you know, we were ending a recession and then COVID hit so hard. And I had customers that if they weren't ordering and locking down their materials and supplies on these hard bid jobs, they were losing money, and they did lose money.

[00:04:08] Wade Carpenter: Oh yeah.

[00:04:08] Stephen Brown: What did most people learn from that is that you have to collaborate ahead of time. You think about how a project starts it either goes out to bid or it's negotiated, right? So, either way, there's some design parameters involved. An owner or municipality meets with the architect or engineering firm to discuss their needs, and what their project needs to entail.

And at that time, if you're negotiating the work as a general contractor, or you're providing a design build services for that client, you're in a situation to really help share that risk with your client. And I'm talking about risk like weather delays, escalating costs due to inflation, and also being able to change the materials that you're using on a project because you can't get a hold of what you need.

What alternatives do you have and how does that affect the price? That's collaboration. And it's not just that. The hard bid contractors were when we started off in the business, Wade, it was, we'll give you a bid and we'll do the job. According to your contract, we will provide for you exactly what your contract says.

And we assume all the risk. And now, you can't assume risk that you can't measure, right? So, this collaboration is more important than ever. And, to me, if you can't collaborate with an owner or architect and engineer, you shouldn't bid the job. You should just back away if they don't want to work with you ahead of time.

For example, contract negotiations. The big thing among the associated general contractors right now is the effect of tariffs on material supplies. Folks are concerned about Trump's tarrifs coming in and how that'll affect their ability to get materials from overseas markets.

So that's an issue that's going to affect costs down the road. And this whole topic was how to negotiate that language into your contract about materials costs, that sort of thing. So this sort of collaboration just helps breed success. And the whole idea we've been preaching all along is you've got to protect your profit margin on a job.

So if you have to redo a project because you took on a risk that was out of your hands, you've got to eat that. That's my main point. I hear my customers all the time complaining about a certain architect or engineer or owner that they were working with that was just driving them crazy.

And I would say if you start collaborating from the beginning and they're hardheaded and hard to work with, it's a good sign not to sign a contract with them.

[00:06:51] Wade Carpenter: I agree with that. And I know the report was coming out of some of those COVID years where the supply chain just got dried up, and your point about the tariffs is probably well taken, because who knows what's going to happen with that, as far as, driving prices up, and so many contractors really did get caught with their pants down with material price escalations that just sort of went through the roof.

But from another angle on this collaboration thing, I also think about it a little differently. The general's got to collaborate with your subs as well. And from the standpoint of some of the things I saw coming out of COVID, sometimes, like the subcontractor may have some-- and I'll use one example that sticks in my mind.

Had a general contractor that was trying to build, it was actually a school, and the glass company couldn't get aluminum, and the prices of aluminum were going up. This wasn't from COVID supply chain, it was because of the war in Ukraine. Some of the aluminum was not coming out of Ukraine.

So yeah, they could get the glass all day long, but you know, they couldn't get the materials and all that stuff to actually put them in place. So going back to the collaboration part, what I'm saying is, the general contractor did not know that they were going to have a problem with getting aluminum for a glass and glazing contractor.

So, the idea is, well, okay, we got to work back and forth. And if you've got a general contractor that's expecting the sub to have this in place by this time, they need to be able to order it. So the sub needs to turn around and say, we got to order this soon enough, and you may need to get me some money up front so I can go ahead and order it and lock those prices down, like you were saying.

[00:08:33] Stephen Brown: I see that all the time, Wade. Let's order this material. It's a key component of the project now to lock it down. Because as a general rule, now just about everybody can hold their prices for 30 days. But then you've got situations on hard bid projects. especially federal government projects, where they're taking a long time to award the projects. And you've got to lock in your prices for an extended period of time. Not to mention, how do you negotiate changes that are beyond your control?

[00:09:03] Wade Carpenter: Well, I did find some of the statistics coming out of there pretty, like you said, the 90 percent of the contractors said they've been impacted by inflation. 86 percent of them had problems getting materials. 77 percent of those infrastructure contractors were dealing with large multi year contracts.

So it was compounding because the prices were changing over time. 

[00:09:26] Stephen Brown: That's exactly what I wanted to talk about today. The constraints on the budget. The owner hasn't got an unlimited amount of money to spend, and the trade contractors really need to be involved in the design process with the architect or engineer before the job is put out to bid.

But how do you do that when you've got to hire a general contractor to do the work? It creates a dilemma. From the time you kick off the job, you've heard that expression, put your right foot forward. And that literally comes from the military, from marching. You start with your right foot. But it's an expression that means you want to be on track to build that foundation of that project with the owner, literally and collaboratively. 

You're literally communicating everything beforehand. Then you're negotiating the contract, and if you've communicated ahead of time, that contract usually is something that you can work with. And then, last but not least, you're bringing in the subs, and you're sharing with that client the projected timeline. And you've got to have the trade contractors involved, of course, to be able to hit those timelines, but you also have to order the materials like you said, that are needed on the project. And you've got to be paid for those materials. 

A lot of times, I'll have those materials stored in a warehouse where the architect or the owner just physically checks that inventory and shows that it's secure for the project. Now, if it's a bonded project, then the payment for those materials are guaranteed anyway.

But, as a general rule, most owners or municipalities will front load you those materials. They want to know it's there. That takes some hard negotiation. You can't just ask for that after the fact. 

[00:11:10] Wade Carpenter: Well, going back to that, what you said about substituting materials, I think that report actually said 93 percent of contractorshave been able to do things like substituting materials when they can, but, your point about like architect being unwilling to change, and I think I told this story maybe two years ago.

Because I had a multifamily contractor that told me a story about they were holding up on almost a million dollars worth of retainage because they couldn't get the specific brand. It was a brand new version of, not the fire alarm system, but like the lights and stuff like that.

Nothing functionally different. But it was on a boat from China, and they couldn't get it. And the fire inspector would not sign off on it because it was not this specific part, and the architect said this is what it had to be. So, those kind of things were, going back and collaborating with that architect or the owners or whoever to be able to get through that, that's a point well taken.

[00:12:10] Stephen Brown: Well, I guess the good news is everybody's doing it now, I guess the main thing that I wanted our listeners to think about: is this culture we were talking about saturated within our organization? Are we doing everything we can to make these collaborations take place? And how do we define what that looks like?

 Is our technology able to provide the reports needed to communicate properly in real time to the owners, to the clients? First of all, is that communicating amongst ourselves? And what's our ability to communicate that to the client? And that's usually not something that the project manager has to do.

That's usually someone else within the organization, or someone that facilitated the sale, if it was a negotiated project, in the sales end of things. They're taking that information that the technology is producing to give the owner information from their system. And talking with the project manager, collaboratively, this is what we do as a team.

One of our last podcasts were just on great hacks to use for 2025 and just how otter AI can take notes in meetings for you, and summarize that.

[00:13:20] Wade Carpenter: Pivoting to the team, what you just said sort of goes hand in hand with what we've been saying about 41 percent of, according to this report, the general contractors building these stronger relationships with the subs made a lot of difference. 

They were talking about doing things like collaborating with the unions. And there's always a contentious relationship between somebody and having to deal with the unions, but being able to collaborate with them and getting the workers they need.

Because part of the issues that we've seen, obviously, is having the workforce available to do this. As well as this is along the same topic, but not really covered in the report. Who knows what's going to happen as the Trump administration comes in and talks about deporting workers.

We can say all day long all these people are legal, but quite frankly, I still have plenty of contractors that are out there that are not getting proper 1099s and those kind of things, and it doesn't take a rocket science to know some of them are maybe working with not legal immigrants.

[00:14:23] Stephen Brown: That's a risk of the project, Wade, of course. Maybe not something that you have to collaborate with the owners, but it's all about collaboration. There's behind the scene collaborations and I guess what I wanted to talk about more is the collaboration with the owners, with the clients.

Because good collaboration gets repeat business. We've talked about over the years, what's that key project that made you the most money? What made it so wonderful and how can you replicate that over and over again? And almost always there are repeat clients involved that are easy to collaborate with, that pay on time, and you can make a consistent profit doing work for them.

Ideally, every one of your clients needs to be that way. But even if you're a federal contractor, you are working with contracting officers, some civilians, some military, all across the country. 

And those people, they know whether they like working with you or not. How do you help communicate with them? How do you help them look good in their jobs? And also, how do you comply with all of the regulations that are required on top of that?

All of this collaboration is is the culture that in your specific situation as a listener to this podcast, you know what that is. That's all I wanted from this podcast standpoint is to just have our listeners think about, is this part of our culture, and what could we do better?

There's so many different situations involved. A lot of times, I'll look at a certain contractor's website, especially a general contractor, and they stress collaboration. And trade contractors on their websites, they'll stress partnerships. And the success of those partnerships.

And almost always when they talk about a project, they're not saying, look at what we did individually. They're saying, collaboratively speaking, look what we accomplished as a team. And they recognize the different people involved that helped make that project success. And everybody wants to work with people like that, wouldn't you say?

[00:16:25] Wade Carpenter: Absolutely. And what you were talking about going back to working with your client, I think that's some good points. I was just looking at some of the statistics that were in that report, and as far as generating a good rapport with your client, the statistics in the report said 76 percent of them said it was very important to set expectations about inflation and supply chain with your clients, so that they're not disappointed or-- I think they said project outcomes. 66 percent said, we got to work on the project outcomes and communicate that to the client. 

And if you think that something, you know, may, hopefully it comes in better, but don't say everything's going to be peaches and cream when, there's something that could go wrong.

There's always something that can go wrong in construction. But, being proactive, that's another thing. About half of them said being proactive with your client can go a long way to enhancing that collaboration and feeling a partnership with your client. 

[00:17:22] Stephen Brown: People do business with people they like to do business with. That's universal in every type of business. Why would it be any different in construction? 

What I've seen over and over again is the contractors saying, this architect they're in outer space as far as their expectations. They can't even conceive of what we're going through. The architect is and another realm of reality of being stubborn about creating their artistic vision for what that project is going to look like. Then engineers being incredibly picky and demanding because they know how to engineer it, right?

They know how to engineer it the right way. And I'm not going to be a part of signing off on something that's not done exactly the way I want it done. It's just not going to happen. 

But at the same time, you have an architect, an engineer, and an owner, and a contractor that have worked together before and collaborated. They want to work in the future. And nobody gets paid if a project doesn't get completed. Maybe the suppliers might make money, but as a supplier, don't you want to repeat that business over and over again successfully? 

So, this collaboration, what it looks like, what I've seen, the best possible best practices that I see my customers doing, is they're sitting down and they're starting the project off right. And they're sitting down with the owner and they're saying, generally, this is what we do. What else do you want to know from us? And how often do you want that information? 

Well, we can do that or we can't do that. Okay. All right. Let's talk about the budget for this project. And let's talk about the reality of cost and the timeframe that you need this project completed. Because a lot of times in a hard bid project, the owner's saying, well, the only way I can control this timeframe is just to bond the project and put huge liquidated damages on this project, and a real close timeframe.

So in that case, the contractor says, okay, yeah, I can do that, but you're going to pay through the nose, because I've got to take all of my forces and all of my trades and hit this project hard and fast. And you've given me all the risks, so you're going to pay for it. So if you're an owner, this is equally important to you have a relationship with this collaboration from the contractor.

And this goes down , Wade, from everything from residential contractor to the heaviest industrial contractor. The construction industry has so many moving parts to it. Getting a project done, there's just hundreds and hundreds of moving parts. And the integration of those parts and the execution of those parts have to be discussed, have to be collaborated and have to be communicated.

[00:20:02] Wade Carpenter: Well, if we could sort of stay on this topic, but pivoting a little bit, something the report went into a little more was collaboration between a contractor and the surety company. And I know the report said like 80% of the general contractors really felt working back and forth with the surety company reduced risk, versus the trade contractors, the subs, 15 percent or so, valued that.

Any thoughts on that from collaborating? Cause I always felt like just, from the working standpoint, but it also translates to the risk. Working with your bond agent, as well as the surety company itself, their agents that can go a long way. There's a lot to be said for that type of collaboration too.

[00:20:45] Stephen Brown: So many of our listeners may not even know who their surety company is, or who their underwriter is there. There may not be a lot of bonds involved and there's no need for that. But as the projects get larger and more complicated, the more you can communicate and collaborate with your surety, it's amazing the resources that a big, good surety company can provide a contractor that they don't utilize.

And another thing, Wade, was just how much that report said technology was underutilized. There's so much technology involved on a construction project. Is your technology able to produce the information that you need to communicate with that client as well? And it looked to me from the survey that most of the contractors were way under utilizing technology for collaboration purposes.

[00:21:35] Wade Carpenter: Yeah, I was looking at that. I think there's a lot of gains to be had in that. We had one episode where we talked about how the technology and GPS can, like on a grading contractor. 

But, one of the things I thought was really interesting was talking about this-- and I had seen some demos of this. I'd love to maybe get somebody on here that can talk about it.

But the estimation software. now is getting near universal adoption because it is saving quite a bit of time and increasing accuracy.

[00:22:04] Stephen Brown: You're exactly right. So when you're collaborating with your client and you're running different projection scenarios for them based on decisions to be made, if you can do that early on in the process, it's just going to get you more repeat business, from that client and also the same type of business that you like to do over and over again.

This report from Liberty Mutual Dodge was not just about collaboration. It was about managing risk going into the future. And the two go hand in hand. You want to manage the risk with your client.

So that's why this is such a key component of our podcast today. When you're managing risk, you can manage safety, you can manage the risk involved with the financing, if you're financing the project, you can manage the risk of your equipment. 

You can manage the risk of your ability to get your materials. What strategies do you have when you can't get your materials? All these things are things traditionally that contractors do that don't usually involve their clients. And I guess my point is, what can you be doing to involve your clients more that might help you develop a better relationship and separate that risk, transfer it to help mitigate that risk with the owner so you don't have to take it all on yourself?

Almost always in every road building job, for example, there's a cost escalation guide for fuel cost. Because it's so dependent on fuel to manufacture asphalt and for all your heavy equipment needs. So that's built into all of the state contracts everywhere, basically. 

What else can you put negotiating with your contractors to protect yourself beside uh, weather delays? The timeframe, the ability to substitute materials, just like your glass contractor they may have bid that project with the aluminum historically, and they have to replace those frames with stainless steel or some other product beside aluminum. What does that do to the cost?

The main thing that I was getting from that Liberty Mutual Dodge Report, Wade, was just the fact that in the last five years, managing risk has been more important than ever. And the most effective way of doing that is collaborate with your clients. And I would argue, not only is that a smart thing to do, but it's a way to protect your profits, which is everything.

And it's a way to minimize your risk. And more importantly, as well, it's gives you the ability to have a good track record going forward to get more of the type of work that makes you the most money. 

[00:24:44] Wade Carpenter: Well said.

[00:24:45] Stephen Brown: Okay.

[00:24:45] Wade Carpenter: Well, if there's nothing else, I guess the takeaway today, I guess if you're a contractor, don't navigate these challenges alone. Work with your suppliers, your owners, and think about your sureties, everybody, and it can go a long way to not only your short term success, but long term success.

[00:25:04] Stephen Brown: That's right.

[00:25:05] Wade Carpenter: Okay. Well, thank you, Stephen. That's been great. 

If you've got any thoughts or feedback on today's discussion, always happy to answer questions or hear your thoughts on topics you'd like us to cover. Drop them in the comments below. 

Wanted to thank you for listening to the Contractor Success Forum. For more information, visit the ContractorsSuccessForum. com or CarpentersCPA's YouTube channel. If you enjoyed the episode, please share, subscribe, do all that stuff. Follow us every week for new episodes and we will look forward to seeing you on the next show.