Why Your Construction Business Isn't Making Money: Avoid These Pitfalls!

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ℹ ABOUT THIS EPISODE

Feeling like your construction business is growing but your bank account isn't? You've hit the growth gap - that predictable wall between $2-10 million where contractors get stuck. 

Wade and Stephen break down why your company might be running on an outdated foundation, causing cash flow problems, pricing breakdowns, and management chaos. 

Learn the four key dynamics holding you back and actionable strategies to break through to profitable growth.

⌚️ Key moments in this episode:

• 00:00 Introduction: The Growth Gap in Construction
• 00:38 Understanding the Growth Paradox
• 02:16 Business Books on Growth Challenges
• 05:42 Identifying the Root Causes
• 11:12 Strategies for Overcoming Growth Barriers
• 17:27 Conclusion: Planning for Sustainable Growth

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Find all episodes and related links at ContractorSuccessForum.com.

Join the conversation on our LinkedIn page: https://www.linkedin.com/company/CarpenterCPAs

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

Transcript

[00:00:00] 

Wade Carpenter: Ever feel like your business is growing just fine on the outside, but your bank account looks like a job site porta potty after a chili cookoff?

Yeah, that's the growth gap. Somewhere between this 2 million dollar and 10 million dollar revenue mark, contractors hit this strange wall where jobs get bigger, the stress gets louder, and the numbers stop making sense.

You're not broken. You're just running a $5 million company on a $2 million foundation. Today we're talking about why contractors get stuck here and what to do about it. it

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter & Company CPAs, alongside Stephen Brown with McDaniel Whitley Bonding and Insurance. Stephen, we often talk about the growth paradox, but today let's talk about what causes this.

Stephen Brown: I think this is a great idea and we've talked about this before but we've always said that construction companies, and I know it's all companies, but especially in construction, there's certain plateaus that you reach. And then there's the pains that come with the [00:01:00] plateaus.

But there's actually a term called the growth gap that that you can look at and measure to see where you are and what your potential is, and how much you're leaving on the table by not doing certain things.

Wade Carpenter: Yeah, it's almost a predictable wall they hit between this two and 10 million mark. You're not failing, but your company has just hit this point where the old structure can no longer carry this load. I think of it like trying to run a high rise building off a garden hose waterline. You can only build so high before the pressure runs out.

A lot of the times when we get in this stage, we still feel busy as we can be like a kicked bed or something like that. Cash gets tighter as the jobs get bigger and the overhead balloons up like a tarp catching the wind.

So as I said, you're not broken. You're just running that $5 million company on this $2 million foundation. So what do we do about it?

Stephen Brown: I get what you're saying about the foundation. It's not built to support the load. Right?

Wade Carpenter: Right. Things have to change. [00:02:00] You can no longer run everything yourself, you have to start relying on people. We've often talked about the cash flow strains and those kind of things, but we don't really talk about what causes it. And is there really this wall that people hit? Why do we hit these growth plateaus?

So I wanted to walk through four or five different business books that talk about this thing and maybe dive into some reasons why.

Stephen Brown: Okay.

Wade Carpenter: There was one called No Man's Land. The author was Doug Tatum. He talked about this two to $10 million zone where you're driving this truck that's too heavy for the brakes you got on your truck.

You're too big to be small and you're too small to be big and you just can't seem to get past that pickup truck mindset and getting into the semi-truck world that you need to be into.

Stephen Brown: You're just full of analogies today. Keep going.

Wade Carpenter: Well, Verne Harnish wrote one called Scaling Up, and he talks about a few different plateaus. They all talk about different revenue levels. He calls these plateaus these valleys of death, which [00:03:00] sounds pretty dramatic, but any Contractor that tries to get past this $3 million mark knows that's pretty accurate.

Every level means upgrading your leadership, the tools, and the way you upgrade equipment and how do you handle bigger jobs? You may be getting into a different revenue level. So I think there's a lot of truth in that.

Stephen Brown: You're exactly right. There's so much truth in that. You think about the reason the bonding companies require so much cash or working capital to prove your bonds. It's just simply because you need capital in order to grow. You need of course, capital to make up for any losses you may have on a job.

But when you talk about growth, I think Wade, we're talking about the plateaus that are inherently there among construction companies in sales. And then you think about, okay, is this just happening organically or am I actually thinking of how I wanna grow to the next level and how do I determine what that next level is?

Wade Carpenter: Yeah. Just a few more of these books just because I'm not making this up. Michael Gerber [00:04:00] talks about it in the E Myth Revisited, and the adolescent stage is what he calls it. And it's almost like you're hitting puberty. You're tall enough to reach the top shelf. Maybe you still got the pimples, but you're not really mature enough to drive that truck. It's a suddenly this business becomes too much for one person's shoulders, and that's what a lot of people are experiencing.

Stephen Brown: Oh yeah. Puberty is a hair raising experience. You remember that?

Wade Carpenter: It is been a long time since me and you went through puberty, but anyway.

Gino Wickman, the book Traction, he talks about this organizational ceiling. It's like hitting your head on this low beam while you're in this crawl space. You can stay there, but nobody's gonna enjoy being in that crawl space. It's like you can't get out of this proverbial hell that you're in.

Stephen Brown: What a yet another great analogy. Okay.

Wade Carpenter: Oh, I'm just picking other people's. I got one more and I'll stop with them, but there was one, and I'm probably gonna butcher his name. It was Les McKeown. He wrote a book called Predictable [00:05:00] Success. And he talks about this whitewater stage where your business is like this raft that's running into the rapids and you've got a guide who's still reading the manual for this thing.

You know, have the systems failing. You have everything all sort of like jostling around like the whitewater. People start falling out of the raft, and it becomes chaos.

Stephen Brown: All right. Oh, we've got all these allegories of too much of a load, whitewater rafting, Your raft's maybe spinning outta control while your captain's reading the how to book. All these analogies are great, but how do you bring order out of this chaos? How do you break it down and think, okay, where am I now and what do I need to do about it?

Wade Carpenter: Part of what I wanted to do today was talk about some of the thoughts of what causes this, and how do you get out of it?

 First of all, takes understanding what is happening. Number one, a lot of times contractors get in this, the talk about the market dynamics. Your pricing breaks down, and so, you know, how you [00:06:00] are bidding jobs from the one to $2 million mark.

Then jumping up to these higher levels, maybe you built your business on your handyman prices, but now you're building a federal courthouse. These bigger jobs require a lot more administration, more meetings, more paperwork, more risk, but too often the contractors keep pricing them like they were these simple jobs that they grew up on.

Stephen Brown: That's huge. There's the first stop. Recognize what it is that you are doing tha t's taking you in the wrong direction. Back to the rafting analogy. You're going down the river, there's a certain rock. That rock may be underwater, it may be sticking straight up and you're running right into it, but you gotta steer a course around it.

And a lot of times, you spend so much time going through the rapids that you just forget how to steer. That's my analogy.

Wade Carpenter: Maybe, but you probably do have a different overhead structure when you get to this level. You got more infrastructure you gotta have in place to be able to support it. And your profit starts leaking out a lot faster than this cracked garden [00:07:00] hose. I think the market dynamics and how you price your jobs and looking at your overhead structure is one of the major problems with it.

Stephen Brown: Okay.

Wade Carpenter: I guess the second one I would say is the management dynamics. Yeah, you got more overhead, but you got staffing and leadership breakdown sometimes. The one owner that has been the unofficial superintendent, project manager, estimator, negotiator, a therapist and sometimes the janitor, they can't do all these things. Maybe they could do everything up to a point, but they're still the only ones with the keys.

So everyone lines up at your truck every morning when you walk in the door. There's only so long you can do that, and there's only so much work you can support when you have that kind of structure.

Stephen Brown: Yeah, you have to ask yourself as owner of the construction company, are you the bottleneck that's keeping things from flowing? Are you the bottleneck that's holding things back? That's a tough call to make because you're so used to doing everything yourself and you're [00:08:00] absolutely convinced nobody can do anything better than you, but you have to depend on so many different people.

Wade Carpenter: Yeah. And that does take some doing to, number one, let go of some of those thoughts. A lot of times the constraint to growth lies in the owner being the bottleneck.

It's a tough thing getting in people that you trust and can rely on. Sometimes you put people in feet on the bus that maybe they're not suited for.

I still think of the E Myth Revisited, that the story about, you put somebody in a position, then they leave. Or you go through a bunch of people to find that one person, and meanwhile they've been dragging you down for years because you can't seem to get that piece in place.

Stephen Brown: You were talking about that contractor taking the same mentality of smaller jobs into the bigger job workspace, like the carpenter that's building a new courthouse. That certain stage of development, I think anybody in the construction industry knows the difference.

There's so much more. It's different on a different [00:09:00] level. You just take what it takes to heat and air condition a giant, something like that. You take what it takes to roof it. You take what it takes to make it solid with thousands of people coming and going. You look at the plans of that project and you see how big it is. Why do contractors get stuck in each one of these areas? You mentioned pricing, staffing, overhead, and inner structure. Do you wanna get into that a little bit more?

Wade Carpenter: That all sort of interrelates. From a people standpoint, the owners hire everybody, but then all of a sudden they've got a huge crew and they can only do so much. Now you gotta hire somebody for HR.

Maybe you've had somebody doing your insurance that really doesn't know anything about bonding. We run into this, this is sort of our sweet spot, that people get above this level and they know they need a higher quality, something more than a bookkeeper, but they really need some expertise and growth at this stage really requires some leaders, not just warm [00:10:00] bodies. Ones that can step in and take the reigns.

Stephen Brown: Yeah. It really helps too. I think we've talked so many times about your board of directors on your construction company. You said it was your sweet spot. It's our sweet spot too at McDaniel Whitley, you're having growing pains, you're having trouble with your insurance, you're bonding your accounting systems. These are things we see all the time.

So you can say who else better might give a podcast like this? Maybe a contractor that was an accountant and an insurance and bonding agent. I don't know. But my point is we see this all the time and we see the structures that we can help you with. We see the growing pains and the frustrations you have.

So my advice is, go to that board of directors, go to those advisors, and tell them what your frustrations are and where you want to go and what your problems are. I think you'd be amazed at the answers you get. I think a lot of people just forget to ask.

Wade Carpenter: Yeah, and sometimes you've done it all without that board of directors. If [00:11:00] you've had some people advising you that are saying the same thing, maybe it's time to think about a different board of directors. Sometimes people are comfortable at a certain level, but they have no idea, they've never worked in that space either.

That also sort of leads into the next one that's more of the financial dynamics. The overhead and the cash flow all seem to break down at this stage. You've got overhead, sort of like growing like kudzu, it sort of stakes up and spreads everywhere and suddenly you can't see the building anymore. 

Stephen Brown: Yeah, that's another good one. Like one Mississippi Farmer said, you know how you grow kudzu, you just throw it on the ground and run like hell.

No, I get it overhead like that. And you're like, what happened? And you're looking at your financials and you've already had six months of being busy running your projects and all of a sudden you say, what?

I spent, what, how did they-- and then you get mad about everything and you say what am I gonna do about it? And you're right, that upsets your cash flow, you're not billing properly. The cash is stopping. Maybe you're not [00:12:00] pricing it right. But then again, how many podcasts have we done on this topic?

Wade Carpenter: Yeah, and unfortunately I've had one that's actually going through this really huge growth spurt right now. He's hiring. He's just taking on people left and right, and I know what he's trying to do, but he's failing with the cash flow because he hasn't realized that you gotta start changing the pricing and the stuff's gotta catch up to it.

You need the infrastructure. Again, the owner starts getting, hey, I got a big job now. I can afford this, but the cash has gotta catch up. And you just can't keep pricing things like you used to.

Stephen Brown: Yeah. We talk about this, Wade, and I think about our listeners who have hit these plateaus, have broken through and then had problems as a result of not planning for that.

Also the contractors that are sitting there, going, you know, we're happy we're doing X amount of volume a year and we're happy with that. What would it look like if we pushed that to the next plateau? What would that look [00:13:00] like? How do we measure that?

Ideally, isn't it great that you don't find yourself in problems and figure out how to react, but you could just sit there and say, okay, I'm doing $10 million a year in sales and I wanna do $18 million a year in sales.

There's a gap in growth of $8 million. How do we measure that? How do we plan for it? Before we go after it, what would it take? What would it look like? So we know in our mind what those systems and what that foundation needs to be in place before you start.

And a lot of times I see so many contractors saying, I just need to get the volume up. My plate needs to be full. And then your plate's a little bit too full because you're so anxious about having that work on the books that you've already priced it, it's already set in stone. You've already committed to doing that project, those projects, multiple projects, and you're saying, okay how do I go backwards from here? Because I just got too emotional about it and I jumped on too [00:14:00] much work.

Wade Carpenter: Yeah. That sort of leads into where I was gonna go with the structure, but you just actually really reminded me. I had somebody reach out about two months ago that had read my book, and this was a bridge contractor that does 10 plus million a year. He had his son on the call, but after we were talking for a little bit, he kicked his son off the Zoom call and said, I want to admit this. I don't want my son to know this, but I have never paid myself. I'm always scrapping. And at that $10 million mark, everybody thinks they're going to get past that.

You know, I mean, every mark we think we were gonna get there, but that was sort of eye-opening to me. I know I've said it, but when you get somebody at 10 million that says, I've never paid myself in the entire history of this company.

Stephen Brown: Yeah.

Wade Carpenter: Really sad.

Stephen Brown: When we know that, as your accounts or bonding agent, we know when you're not paying yourself. And it is sad. I guess you're ashamed of the fact that you got so busy growing things for other people that you're not looking after yourself.

And [00:15:00] again, your book is perfect for that, Wade. I'm so glad he found it. Now, tell him what wonderful things are gonna happen with him and his son and his company, you know, now that light came on in his head.

We talk about, I wanna go back to the rafting analogy again. Because you decide you're gonna go down the river because it's a lot faster than walking. And you jump in a boat and you forget your paddle, you jump in. This is the whole analogy of saying, I'm gonna grow, I'm going after more volume without planning for it, okay.

You're gonna hit rocks, you're gonna get stuck, you're gonna get snagged. But even if you've done it, there's a way to work your way out of it to think and plan your way out of it. And you just need someone else to help you see the forest through the trees.

And that's why when you suggested this topic, Wade, I thought this is absolutely perfect because this is exactly what we do. And if our podcast listeners can even remotely understand how many different customers we deal with and talk to and help through this all [00:16:00] the time.

We have our own case studies. It's something that's almost happening daily with us. And the reason we do what we do, because we love contractors, we love the construction business. Contractors are some of the greatest people on the face of the earth. It takes a unique person and people to be contractors, but here we are hitting these plateaus, hitting these growth stages and all the stress that comes along with it.

Wade Carpenter: Yeah. There was one more major area, and I know we're getting a little long on this. I was wanting to get into more of the how to fix it, but there's so much of it that all interrelates. And we talked about like maybe now you need somebody to be an HR manager. All of a sudden your growth, your structure breaks down. Now you have five project managers and they all do things a different way. You have to have structure in place, standard operating procedures written down. Otherwise it becomes trying to frame this house where everybody has no plans, and they just, or truckloads of lumber and use what you can.

But [00:17:00] you know that tribal knowledge that you had when you were growing, then you add two more estimators, they do things very differently. That all sort of goes out the window.

Stephen Brown: That house looks like the Winchester house.

Wade Carpenter: Yeah.

Stephen Brown: Know what I'm talking about? Where that Winchester heir lady kept building and building?

Wade Carpenter: Yeah. You remember that one, huh?

We can't run things the way we always run. And again, they all inter relate. You gotta have more people, more structure and then, it translates to more overhead.

How do we break through this growth gap? 

Stephen Brown: I feel like we need to let our listeners leave with an idea of the game plan here for handling the growth gap, for dealing with the situation you're in, because right now it's like we're trying to tell a whole book in 30 minutes when we're just hitting the premises of it.

And again your book so perfectly illustrates all these examples, but there are certain metrics, capacity potential and then on this growth gap that you have to measure and it's just steps you take. [00:18:00] Right?

Wade Carpenter: Just a couple of thoughts on each one of these things I threw out.

 First of all, really need to think about your real margin, and driving your pricing. Because as we said, the overhead structure probably has changed. You can't keep doing it the same way you've been doing it.

And a lot of people get to this point and all of a sudden they are wondering why they're not making money on their jobs. And, if you sort of hit this wall, have you taken a step back and like, are we pricing these correctly?

The second part is you may need a new mid-level management layer that we put in place. Somebody with the authority to train and say, this is where we're gonna do things.

And I'll be honest with you, I've worked with contractors, business owners of all kinds really. Some people are not born leaders. And some people are not ones to say this is, yeah, he's a boss, but this is a way we gotta do it here.

A lot of people don't have that. So if it's not you and you're the constraint, maybe you should think about that.

Stephen Brown: Yeah.

Wade Carpenter: Going back to the [00:19:00] predictable overhead, the cash flow systems. I know I'm touting Profit First, this is where we really need some structure, not only on how we're doing things, but our financial structure. And Profit First, I think it encapsulates that if you can put some constraints around your cash. Again, a lot of it goes to organizational structure, but again I don't wanna belabor this one too much. If nothing else, I hope people started thinking about, are we in a spot that we just really can't grow through. Do you see that?

Stephen Brown: I do, and I want people to also think about the big picture. And you mentioned that just a minute ago, but that big picture is your margin of profit. And if you say to yourself, my goal is to operate within a gross profit margin of three to 5%. How do I manage that?

Those margins, when you look at your projects and they're going up and down on their margins, then something's broken that needs to be fixed. And that's obvious to everyone in my line of business.[00:20:00] 

But to you as a contractor, when you think about growth and volume and you say, can I get these margins? And the whole fun of the construction game beside building great structures and wonderful things that people need and providing jobs for everyone, is when you say I'm gonna operate between this margin area, and then I'm gonna absolutely push things to see if we can't tweak a little more margin out of it.

And when you're doing that, you're forcing all your systems to perform better. 

Wade Carpenter: I know there's a lot to unpack on this one, and maybe we could do some deeper dives, but again, it reminds me of situations where, you know, not just the bridge contractor that says he's never taken stuff, but I've also seen contractors that were actually taking home a decent salary, but then they jump over to this bigger tier, and now all of a sudden they can't take home a salary themselves and they're loaning the company money back and start mortgaging the house and those kind of things.

If you hit this growth gap as we called it on this episode, [00:21:00] maybe think about doing some things differently. What do you need to do? Do you have the right board of directors that you talked about?

Do you have the right people around you? The structure, the systems, the financial systems? It is just the whole infrastructure has to change sometimes.

So if we made you think about it, we'd love some comments. Drop them in below. You know, If you're running into some of these things yourself that we didn't talk about, let us know about it. We'd love to do a podcast episode about it. If you're hanging out with us this long, we appreciate it.

We always appreciate it if you like, share, subscribe, it always helps the channel out. And we will see you on the next show.