Smart Construction Growth: Why Bigger Isn't Always Better

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ℹ ABOUT THIS EPISODE

Is chasing more revenue actually hurting your construction business? 

In this episode, Wade Carpenter and Stephen Brown break down why bigger isn't always better, and how blind growth can quietly destroy your cash flow, inflate your overhead, and leave you with less profit than before. 

You'll learn the warning signs your growth has gone too far, how to find your most profitable revenue level, and why a healthy company is your best foundation before you ever scale up.

⌚️ Key moments in this episode:

• 00:00 Pause Before You Grow
• 00:55 When Bigger Backfires
• 03:21 Smart Growth Mindset
• 04:28 Why Growth Breaks Cashflow
• 05:50 The Ugly Middle Phase
• 07:26 Approved vs Prepared to Grow
• 09:31 Signs Youve Grown Too Far
• 11:40 Build a Real Growth Model
• 13:14 Shrink to Profit Again
• 16:29 Profit First and Debt Reality
• 17:34 Wrap Up and Next Steps

The Contractor Profit Blueprint is a complete guide that breaks down exactly how to identify where your money's going and start keeping more of it. This isn't theory. It's the same framework I use with contractors I work with every single day.

Head to profitfirstconstruction.com/blueprint to download your free copy. 

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

Transcript

[00:00:00] 

Wade Carpenter: What if the smartest growth move this year is to stop growing long enough to check the foundation? Because if every new dollar just feeds the overhead machine, the second story may look impressive right before the whole thing starts cracking.

Today, we're talking about why the smartest growth move may be knowing when to pause.

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs, alongside Stephen Brown with McDaniel-Whitley Bonding & Insurance. And Stephen, is bigger actually better in construction?

Stephen Brown: Sometimes it's a wonderful thing, sometimes it's not. I think the key is your comment about when to pause, because we're naturally gonna say in our experience as a construction CPA and as a bonding agent, we've seen a lot of our customers just go into full growth mode without really considering the consequences of... or maybe not consequences, but side effects, would be a better way to describe it.

This is a great topic, Wade. Not every job is a good one. How do you know when to pause?

Wade Carpenter: Whether it's a [00:01:00] single job or what, I've had some contractors, one in particular I was discussing last week. And to their credit, they understood that they're an electrical contractor, they've gotten in with some great GC's and they want to keep feeding them as much work as they can do.

But they don't have their company healthy. They have ways of funding their projects, but it's a lot of stuff upside down. The point that I was making to them is, let's get your company healthy, and then you've got a long... he's in his 30s. He's got a long career ahead of him.

The false promise of more revenue equals more profit. My life is bigger, better, and all that stuff. Just cutting to the chase, sometimes the bigger leads to more debt and I've seen it where there's nothing left. They were better off being at a smaller revenue level, and they were making more profit.

You see that? 

Stephen Brown: Yeah, all the time. And it's tough. You don't want to be negative with your clients. You want to be upbeat and positive. But if their mindset is not to make the health of their company a priority, especially if it's driven [00:02:00] by ego or someone else talking you into doing it.

I've seen more bond claims because somebody else that a certain contractor made money with in the past is pushing them out of their comfort range and telling them, "We're gonna help you grow bigger and faster than you have ever grown before. Just stick with us. This relationship's gonna make things happen."

That's not who you want to hitch your wagon to. You want to hitch your wagon to consistent sources of providing you income and revenues in the range and capacity that you're used to performing and making profits.

Wade Carpenter: Yeah, I think, it's more of a false promise of more revenue equals more bottom line. And they're trying to chase this top line, bigger job, more backlog and when you run through a drought, you probably want to fill up that pipeline as much as you can.

We did an episode a few weeks back and it was talking about when to say no on some projects. Remember that one?

Maybe this is the time to say, what revenue level produces the best mix of profit? Who pays fastest? What are the [00:03:00] cash flow implications?

Because I'm still vividly from back in 2010, grading contractor, $20 million job grew themselves right out of business. And other people didn't have work.

And they bid this thing way too low. It was like, "Hey, we're just gonna push it on up," and it was their downfall. So it's just one of those things that I've seen multiple times over my career.

What I'm preaching is smart growth, right? 

Stephen Brown: Sure. What makes a large company that does large projects profitable? What makes them stay in business? Why are they a large contractor? They have perfected the art of running their business and managing their risk and the profit, the cash flow. They've got a healthy company before they started going after that.

 When you mentioned this idea for the podcast, I couldn't help, Wade, with just my mind spinning of different scenarios that make a logically minded contractor wanna go after stuff that just doesn't make sense.

There's always certain situations involved. "It's [00:04:00] gonna solve my problems." "I owe it to them." "They're gonna quit feeding me work if I don't take this on." Really? Are they gonna pay for your losses if you lose money? Seriously. That's not the kind of relationship that you have to stay in business. It's just not.

You might say, "Stephen, you don't know what you're talking about. You're not a contractor." Yeah, that's true, but never take a project that doesn't make sense and sign that contract to perform it unless you're totally comfortable with it, and it makes sense for your business.

Wade Carpenter: Yeah. I mean, I think it'd be helpful maybe to talk about why growth actually breaks the math, because you've got a retail store, you sell clothing or whatever it is, and you got 30% markup. And, your company, the people come in and buy it, and you just... so, obviously if you are still keeping that markup at 30% or whatever, that grows because they're paying you as you go.

Versus a contractor, yeah, you got more, but you gotta think about you got more receivables that are sitting out there. And if you double your revenue, your receivables [00:05:00] tend to double, which means more money is sitting out there that is not in your pocket. That's why we run into all these cash flow problems we talk about in my book.

And that's where the overhead tends to grow really fast. Just thinking about all these different episodes, we've talked about the different levels when we grow and when we hit in some of those things, and we can talk about that in a minute.

But, this is where sometimes the growth breaks the math. And the math for a retail store is not the same math for a contractor.

Stephen Brown: Wade, this is exactly where this podcast needs to go. The nuts and bolts of what happens when you grow? What does that look like? I loved your comment about the overhead. It's growing whether you recognize it or not. It's growing. And it's changing things, and it's affecting not only this job, but the future of your company.

These are all things you kinda need to consider. Like any risk, it's something you can manage.

Wade Carpenter: Yeah. And you should be able to manage, but as we talked about in my book, in that episode years back, or six months back, I don't remember when we did it, but we talked about the different [00:06:00] levels.

And it is very common. As your revenue grows, your overhead's gotta grow at a higher rate. You've got more people, you've got more trucks, you've got more office space, whatever it is.

If that rate of growth on your overhead is growing faster than your revenue, that's another hidden thing that's gonna... So that's why I love the Profit First putting at least some cash parameters around it so you have some kind of clue as to–

I almost want to call it like this ugly middle where we get to a certain level and we're doing okay, but now let's go chase some more.

We jump to the next level, this ugly middle. And, too big, we start running lean. The owner is still stuck in every major decision. You got more people, more equipment, more debt, and it's a cycle that sometimes you need to be able to think about that...

i've also talked about the sustainable growth rate. Getting out of this ugly middle sometimes you have to pare that down a little bit to get where you want to go, instead of running right through it 

Stephen Brown: Yeah. Now that's a great point. You talk about overhead, you talk about, [00:07:00] the payroll coming up and the stress that comes with servicing the extra human resources. You talk about the stresses to your whole system as whatever you're going through is incrementally increased.

Whether it's good or bad, Wade, how can you tell and how can you manage and communicate to your estimators and everything else when you're bidding on something that's gonna cause your revenue to increase? Double it? Triple it? What are you seeing there?

Wade Carpenter: I don't know if it's a rule of thumb or anything like that, 'cause I think it's a case-by-case basis. But, are you hitting your bonding capacity? Or maybe you could do some more jobs, but should you do more jobs?

If you've grown a million or 2 million this year or whatever the number is, are you able to take a paycheck home? Is it a problem of, could you get more bonding capacity or are they telling you to slow down?

So there's a lot of things that go into it, but, approved to grow from maybe a bonding capacity, versus prepared to grow, that's two very different things.

Stephen Brown: It used to be the sign of arriving is to have your [00:08:00] company's name and sign out in front of a magnificent project. It just shows off your whole company, your capability, everything.

And then now almost because everything's so litigious, it's like the contractors are afraid to put their name on the job site because they might get sued.

It's the same from a financial situation. What drives you to want to grow your business is more profit, not more sales. More profit, maybe a consistent stream of profit, maybe taking a chance on something that really makes sense, and then bringing for example, your accountant and your surety team in to say, "This is how we've been positioning ourselves to do this properly."

And then letting those key board of directors, your CPA, your banker, your attorney, your bonding company, your bonding agent, come in and bounce that all off of them. What do you think? And then if everybody's on board, maybe you're ready to go. I don't know.

Wade Carpenter: Yeah, I mean, what is good enough? Where do you plateau? What's a good enough revenue plateau? [00:09:00] And that's where I think it all goes back to having great information.

If you've grown to a certain point, you'd be surprised. I've seen some people grow to amazing revenue levels and have no better handle on where they are than they did when they started. It's just by the seat of their pants.

We also had that episode a few other weeks back, we had one great year. That doesn't mean the next year is gonna be as good, but now you've scaled up your overhead and you can't find that sweet job, so you take something at a lower margin just to cover that overhead.

It becomes a problem. And that's what I want to talk about next is, what are the signs maybe your growth has passed a useful point and maybe we should slow down? Got any thoughts on that? 

Stephen Brown: I absolutely do. One of the key indicators for providing surety credit is your working capital, your current assets minus your current liability, the net worth of your company. And a healthy company has working capital or cash reserves that weather storms.

You've got 20 projects going on and one [00:10:00] of them loses $150,000, that could sink one contractor's ship. But for another one it's "Yeah, we took a hit on that one. Yeah." Not every job's a home run, but that one just... and then the surety, "Well, what happened?" And then the contractor said this is what happened, this is what happened there." "Oh man, I'm sorry." And you just move on from it, right?

So, I always have that perspective, and then you've always got the perspective from the accounting is, are you watching the things you need to watch and managing the things you need to watch?

For example, you're worried about the systems keeping up with the new revenues as an accountant. I'm worried about the estimators bidding projects and you're telling them, "We're gonna have enough profit in this that we can overcome a lot of unknowns," okay? Maybe that's the case, maybe it's not.

Wade Carpenter: Heard that many times. I was just sitting there smiling when you said that. I don't know. For me, I think some of the signs, you obviously already said it, your revenue's up, but your cash is actually tighter. Your owner [00:11:00] can't take a paycheck themselves, but maybe they've finally gotten to a point where they could.

Maybe they're maxing out their line of credit, their credit cards. I've seen some credit card companies cutting people off. It's like, okay, something's going on here.

From your standpoint, I'm sure you see your financials come in late because they don't wanna admit what's going on, right?

Stephen Brown: Yeah. I think your credit card analogy's a good one, because from a credit card company they're like, "I'm gonna give you more credit the more you use the card and the more you pay it off on time. But also, if you don't pay it off on time, you're gonna pay 20% interest." So if your ship isn't already sunk, we're gonna help sink it for you.

Wade Carpenter: I've seen some like, okay, we hit a wall and now we're getting cut off, and now what do we do? What's the better question? Should we be asking like, how do we get to 10 million? Is the better question more like, would we be better off at 10 million? What's the required margin? What overhead would we need to support that? How much working capital do we need? Do we have enough management? Do we have the people to do it? Do we have cash reserves?

We need to have a growth model before we [00:12:00] just, it's like, okay, let's just jump to 10 million and whatever that number is.

Stephen Brown: That's one thing I like so much about your book, Profit First for Commercial Construction, because first of all, it lets the contractor see how to process money when it comes in and how to disperse it. It takes a lot of the emotions out of how you run your business, which is important.

But you were just talking about everything else that's in place. You're talking about a healthy company making these decisions. Someone that has to understand what a healthy company looks like, and a lot of contractors don't know that.

They know how to build things. They have confidence in their abilities, and the more you build things, and the more you finish a project, the more confidence you have in yourself and your abilities.

So you have to analyze, as a construction company owner, whether everybody on your team is at that same level of confidence and ability. There's an art form in that as well, isn't there, Wade? 

Wade Carpenter: Yeah, and again, it all goes back to, I hate to say it, the data. [00:13:00] Where do we find that inflection point? Maybe we should stop and look and compare our revenue and our gross profit. Is that sinking? Is our overhead growing faster than we're growing our top line? And are we just chasing top line so that we can cover overhead?

Stephen Brown: How would we speak to a listener that says, "You don't understand my market. In my town, I'm a plumbing contractor, and there's 20 good plumbing contractors in a small market, and there's just not any work going on right now, and I need to stay in business. You guys just don't understand what I'm going through."

What would you say to them?

Wade Carpenter: I can point to so many failures, whether they believe me or not, but I do remember one probably about 15 years ago. They realized that, okay, we're not making money.

And so they actually cut their crew and cut their overhead and chased specific jobs they were not-- because they were bidding so many jobs and like 8% to 10% of the jobs they bid were actually winning.

And so they pulled back on a lot of that. Whether somebody would believe me or not, but they [00:14:00] made more money getting small again.

 What they did is, went back and looked at where they were and looked at their history. Just like a five-year average, year over year, and we looked at that overhead, that point where the overhead jumped faster than the gross profit.

And to them, they're like, "Okay, that was a huge wake-up call." And I'm not saying that's what you should do, but it's something to think about.

If you're not making money, if you're bidding and winning 80% of your bids, that's a lot of work. Maybe you should chase the work you wanna chase, and what you can make money at.

The point is finding that model, what does that revenue look like? What does it need to look like so that we can take home a good paycheck, cover our taxes, cover all that stuff, get a great bonding relationship going, hire and you know, get the company you always wanted. 

Stephen Brown: That's a great point, Wade.

Wade Carpenter: I come back to my book all the time, but, these things that Profit First exposes when you're seeing this overhead jump. Is all of a sudden your overhead, your OpEx [00:15:00] expenses, is it getting stronger or are you starving that?

You're having to come out of pocket more. Those are the things that actually resonate with people rather than, "Okay, we're just too busy. We don't have time to look at the numbers. We don't know how to look at the numbers." The revenue's draining the buckets, and the company is not scaling up.

Stephen Brown: Yeah. that's a great point. And it's why you wrote the book, Wade. It's why you embraced it all those years ago. It makes so much sense to me. It's so frustrating for our listeners to listen to us and go, "These guys, they don't know my situation. They don't know what I'm going through." Talk about it. You know, there's always a way to figure something out.

And one thing I loved about your book is it starts off in the premise– folks, if you hadn't gotten his book, get one on Amazon and read it. It's a story, and it starts off bad, and it's got a happy ending. I don't know what else you could want for in not only a book to read, but also something that would just change your mind.

It's not a business book that's gonna put you to sleep. It's a story. [00:16:00] And just like the best way to market yourself and your abilities is through a story, it's the same in your line of work.

You guys don't know what it's like. Let's talk about it. What are you going through? What are your stresses? And what makes sense? There's so many moving parts that we could help you with. That's all we wanna do. We wanna help you understand why sometimes just increasing your revenues is not the key to profit and to accomplishing the goals that you have for your company

Wade Carpenter: Yeah. A lot of these principles are baked into my head that I never really codified before I wrote the book.

The debt reduction, as you're growing, you're raising this debt and the stupid simple which this finally, this electrical contractor, because he was cash flowing it, but he did not realize what it was doing, and it was like spiraling.

He was like, okay, the same kind of things we always talk about. I don't want to pay taxes, but you look up and it's like, okay, you got all this debt now, you gotta have profit to pay it back in [00:17:00] cash. It's not gonna come out of somebody else's pocket. You know, It doesn't just magically appear. You gotta have profit to do it.

And that, I think, was one of the turning points for him and said, " Oh, crap. What have I done?" We're all too busy trying to run our business and I don't know. I just... It's one of those things that it's rewarding to see when people actually get it. It's rewarding to see, okay, I fight the battle every day. I can say it all day long. You're chasing the no taxes. We could do that all day long, but at some point are you gonna have a company to worry about? Are you gonna have anything to retire on?

Stephen Brown: Great point. Listeners, I don't know how well of a job we did at explaining these concepts, but we're passionate about it. We're passionate about understanding these elements and how they affect your cash flow, your profit, your sanity, your stress, all of these things.

It's tough being a contractor. It is a risky, tough business. It's thankless. And as we always say, there's a limit on how much profit you can make, but [00:18:00] there's no limit on how much money you can lose. What other business is like that, huh? I don't know. But these are key fundamental concepts and I just love it.

We talk about it. I would say, listeners, reach out to Wade. You've got a problem in a certain situation, tell him about it. He'll listen to you and let him give you some options, some ideas of some things maybe that Carpenter & Company can do to help you.

And by all means read the book. I buy it for customers. I tell them how wonderful it is, and the ones that read it say, "Yeah, I really enjoyed that. I got that." And they also will reach out and communicate with Wade more, which he likes. And it makes it easier for me to get them bonding, which I like. So, it's a win-win for everybody, isn't it? 

Wade Carpenter: Yeah. Thank you for the shameless plugs. But anyway, the point of today really is, growth in itself is not bad. Blind growth is bad. Bigger is not better, but I'd say better is better.

So the idea is, contractors should choose their growth consciously, know what they're [00:19:00] doing with their margin, with their cash, their systems, their people, the risk. Just looking at it and not just blindly going at it.

And so that was my point for today.

Stephen Brown: Good point.

Wade Carpenter: If we reach one person, I feel like we maybe we saved a business today. I don't know. 

Stephen Brown: There you go. Thank you, Wade.

Wade Carpenter: All right. If you're still with us, we appreciate you being with us. We do this every single week. We'd appreciate it if you like, share, subscribe. It always helps us out a ton. And if you would, please come back next week and we'll see you on the next show.