Verify In Field: The Millwork Podcast

If the Math Ain’t Mathing Part 2: High-Profit Habits

• Yuksel Nunez Araujo • Season 2 • Episode 10

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In Part 2 of this Verify Infield conversation, host Jacob Edmond and guest John Van Erem, Executive VP at Adams Group, dive deeper into the real-world strategies that separate high-profit millwork companies from the rest.

This episode goes beyond definitions and digs into plant vs. non-plant produced work, install pitfalls, margin per hour, and the silent killer—slippage. If your shop’s profitability feels like a mystery at the end of every year, this one gives you the math, the mindset, and the metrics to make real change.

About Our Guest

John Van Erem is a financial strategist and operations expert at Adams Group. He’s also an instructor with AWI, where he teaches cost modeling and project management with a no-BS, results-first approach. John is passionate about helping millwork teams use real numbers—not guesses—to improve margin, productivity, and profitability across the board.

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John:

So let's just be dramatic just for a minute. So let's say we sold that million dollar, projects and, really thought they were contributing to that$7 million average company that we're doing. However, if we look at that and only produce 10% of the work in the plant. Is that really a win that we should be celebrating? If, I'm gonna say if it was sold in a timeframe that we really needed some work, right? So if we really needed some work in that timeframe and we sold this job, man, we're gonna celebrate that we won. But where does the work actually go? To the project manager, not to the shop floor, right? The

Jacob:

We are back for part two of John VanErem here talking about revenue. Today we're gonna dive into indirect costs as a percentage of revenue, um, and all kind of more into the weeds of things. Building off of what we listened to, we talked about last episode. So if you are tuning in and you didn't listen to the previous episode, immediately go back to part one. We'll have it linked here. If you did, we're picking up where we left off. And, uh, we're gonna continue diving deeper into the numbers of, of your in millwork business.

John:

Lovely. Thank you. So we're gonna keep the last slide just to kind of tie these two together. Um, just a reminder, what we've done is to really identify what is revenue, what is direct cost, how does that compare to Cost of Doing Business? Really trying to lead down to like where I think the high profit firms are standing out against the average. And you could see on the slide here that there is, uh, a wide array once you get to the next, net profit. A lot of people assume and think that they're just selling it for more, so they're making more. That is true, but it's not the whole story. So I wanna try to get into why I think that, and why I think your business should be looking at some, some different metrics or ways to dissect your data. Now that we got a baseline understanding of, of where we are Cost of Doing Business. So let's dive into it. Our next section is what we're gonna call plant processed versus non-plant processed. It could be PP versus NPP, depending on how you look at it. But it's really what are the, in what I'm gonna call like the ingredients of this project. Like how is this project made up? So Jacob touched on this a little bit in the intro on the first podcast, or the first episode is, and plant processed stuff we actually make in our facility. It's something that we actually produce. Non plant processed is those things that support our work, but maybe made, made elsewhere. Those can be things like metal, stone, upholstery, uh, depending on your shop makeup, those will be different. But those are kind of the common things that, um, a lot of woodworking shops don't want to touch or do. And so we gotta understand that recipe, if you will. So.

Jacob:

And just to interject there, would you say it's also whole products that are not plant produced? We're not talking about hinges that you're gonna put in your product or things like that.

John:

Yeah. It's a value add. So if it's a hinge, again, I, now you're leading me into another one of my isms. But if, if we're, if the, the GCs often come to the project management team and want the breakdown of like, what is that cabinet made up?'Cause that's what they're used to with drywallers and framers and all that. It's very easy. I'm not talking about all the different pieces part. It is a cabinet that we've made. It doesn't matter that we bought out the laminate to get here or the pre laminated panel, like none of that. It is, it is ours. What the trap that I see most millwork companies falling into is they just focus on that single revenue line. They, you can hear it like, Hey, I'm gonna use an old mission bell thing. We rung the bell for$7 million job. Which on the surface is great as long as you understand what that's made of. If that's$7 million job is made up of$6 million of stuff we aren't making, not that it's bad, but we gotta understand that that's not filling the shop as a normal, right? A quote unquote normal$7 million job would, we might actually have a 50 or$60,000 job getting more to the shop than a million dollar job. Right? So using that terminology just to turn your brain in like, man, I've never thought about a project that way. I'm challenging you to do so in saying how much of it is filling your shop or your capacity. So. Makes sense, Jacob, to where I'm going with, uh, plant produced, so.

Jacob:

Yes, I think we can safely say we're down with NPP now. Right.

John:

That's right. You know me. All right. So let's just be dramatic just for a minute. So let's say we sold that million dollar, projects and, and really wants to contribute. Really thought they were contributing to that$7 million average company that we're doing. However, if we look at that and only produce 10% of the work in the plant. Is that really a win that we should be celebrating? If, I'm gonna say if it was sold in a timeframe that we really needed some work, right? So if we really needed some work in that timeframe and we sold this job, man, we're gonna celebrate that we won. But where does the work actually go? To the project manager, not to the shop floor, right? The project managers now gotta coordinate all this non-plant produced stuff. It's really under like, and I'm gonna speak to my project manager friends here. It's like, man, that this ratio that you're seeing on my pie chart, you gotta figure it out. But that is really your effort into the project. Not saying that you don't have effort into the shop floor and depending on your company, how that works. And I know that I'm speaking to a wide audience here, but there's usually shop engineering, something personnel that's making that, that product, you're the only one focused on the buyout stone or the buyout middle to to, to a certain degree to speak in broad brush terms. So, all that being said, like it's super under, important to understand this. It's very simple to do, if you're doing the, the product pricing method, uh, that we talked about and kind of the revenue, like, is this product made here or not made here? Right. And you can kind of get a quick percentage, so.

Jacob:

Yeah, because I think it is very easily, once you do decide that there's a difference in these two types of revenue, I've seen you get you, the first trap you fall into is, oh man, I just added a million dollars of revenue. And it's not even gonna affect us because it's not produced here.

John:

Yep.

Jacob:

Not realizing You're actually bogging down resources that now can't focus on your plant produced revenue. Um, so not only are you not filling your shop, maybe that's great. Hey, I got revenue that doesn't affect shop, but it's affecting those indirect resources.

John:

All right, so let's talk about that recipe on what AWI cost doing business shares.'Cause we've been doing that for, you know, throughout this presentation of kind of saying what does Cost of Doing Business say. They give us this information and saying that the average company in green there is 80% plant produced, but high profit is 88% produced. What does that tell you, right? Now we're starting to see the recipe of why their product might be, or their profitability might be higher than what we what we thought it would be. Right? On the same front, the non-plant produced, percentages are 10% for all and 7% for high. Those those aren't one-to-one relational. You get that, but I'm trying to figure out where the, where the rest of the product is in the high profit. But here we here we are. Install, we can see this and we're gonna dive into install here in a but the 5% for install on the, on the average firm is much higher than the 1%. And we're gonna dive into that and understand why that leads to some profitability. And then subcontract install, they're about level, so they're, they're doing some similar things, so. So all so all that being said, this is is now starting that recipe of understanding why we think, why I think that high profit firms are managing their plant produced better than non, uh, non high profit firms, or the average firm, I should say. This data's a dissection of that to understand, hey, we're filling our capacity first, and we're not giving it away. We're not moving some of that direct to indirect, uh, uh, if we don't fill our capacity, so.

Jacob:

So all of this should add up to a hundred percent right, on both sides?

John:

Uh, it should, yes. The way that they're doing this, yes. Okay. Um.

Jacob:

But the breakdown is different. And so, uh, what we're seeing is that high profit firms, do more plant produced and do less in-house install.

John:

Um, or the less install as a period. As a, as a whole, right? It's It's only 5% of their revenue is install. So it tells us the story for sure. So fascinating data of how to take revenue and just dissecting it a little bit further, so we're not just looking at one number, but we're looking at the makeup or the recipe and my fun picture of all the different woods in the pot there kind of demonstrate it takes all types. And if we're, if I'm gonna share with you, I'm gonna kind of precursor: we don't make money on install. I'm gonna share that with you. But if you got 5% more of your revenue going to install, that's a loser. That's also affecting your profitability as well. So we're gonna tie into that later. But this is a good picture of how to, how to break down that revenue a little bit deeper. And your company should be doing something similar. Hopefully you're closer to the high, high profit side. Makes sense? Alright. So capacity to me is where it's at. Like we've got to understand our capacity to know where the holes need to be filled. So if again, I'm gonna go back to our analogy of if the shop was not full in Q1, but we sold this million job, dollar job that didn't bring any shop labor to the floor, that's not necessarily a real win. That's to to me as understanding capacity. It's simple. You can start today. It is just literally kinda laying out by week by month. Understanding where that goes and just mapping it to see where your holes are at. It could be in total, it could be by department, it could be as complex or as not complex as as we want, but that's where that is. So All right. Now that we talked about, you know how the recipe is made up in our project. I think it's important to kind of have a metric that shows us this. It's, some of that data can be data mining madness, right? So to try to understand like how the breakdown of those four qualities, or those four categories of my bid. Again, systems can tell you those things pretty quickly and tell you, Hey, this is, this is your ratio, this is your makeup, this is your recipe. But I, I feel, and this is just, my analyzation of this tool is the margin per production hour, kinda level loads a little bit of this. It does not take install into equation. We're gonna talk about install at a different mindset, but I want to take contribution margin now, not revenue that we just did, and break it down into how much contribution are we making per production hour. And that should start showing us the amount of, plant produced, non plant produced, if you will. So

Jacob:

Would you say that's also a measure of efficiency?

John:

It a hundred percent is, it should give you your metric and you should really know. And, and again, what I love about this on the indirect side, so when. Let's say our shop makes$50 an hour in margin, right? If we don't work an hour in the shop and we didn't fill capacity. Guess what? We didn't make$50 a margin and we actually spent$30. I'm just gonna use$30 as a, let's go$20 for everybody listening. But that, that employee making$20 now got moved over to indirect and it's actually a double negative right now. I've really lost$70. That multiplying effect is huge. And that's why I'm saying filling capacity is usually where high profit firms are winning. They understand that logic, and they know that fill the plane is, is vital, even if it means to sell a project at much less than they would want to sell it for, because they know how important it is not to lose that$70 that I just described. Right? But even if I just covered it, I'm making the, I'm making the 20 and I've covered the 20. Even if I sold it at zero margin right, now I've broken even on that 20, I didn't lose 70, I'm actually winning. Right. That's deep. That's deeper logic than I wanted to give on the podcast, but like these are the kind of analytics that you can do with a metric like this. So what does AWI say about it is where we go next. But go ahead, Jacob.

Jacob:

Well, and I think that's why it's important.'Cause I I, in the previous episode what I asked, you alluded to like, some people might be listening, wondering how, why the heck would I go through this much effort? And, and like this feels like a lot as we're talking about it, but this is the power of it is because you can't change what you can't measure or quantify. And so once you start to quantify these things, and we're also talking in kind of annual terms still, but once, once you start tracking these numbers, you can see them month by month. And it's a lot easier to pinpoint and notice, oh wow. Our one, our revenue was down this month from what it was, but not only that, our contribution margin was down our, margin per production hour. You can start to see and say, oh, that's because we had this job that was a stinker and we screwed this up and I know that we're not gonna do that again next month. Or I know that we need to do this differently. That's where the power in this comes in as one, being able to quantify and be able to see real time or, or close to real time when the impact is hitting and be able to make it, change your actions to affect the future numbers. Right? And I think you have to have your numbers to be able to quantify, to be able to know, okay, how do I, how, how do I change this? How do I make an impact in the future, uh, of these numbers?

John:

I love it. Very well said. So just take what AWI cost doing business says to follow our model here. We already said that$7 million as a revenue, we said 37%. I rounded down, I kept rounding down just to kind of make the point. So we already said$2.6 million of margin is the average AWI firm. So that last, last episode, go back and listen to it if you want to hear more. What this now says is I was able to pull from Cost of Doing Business Survey, the average direct employee that they're calling on the headcount thing. I told you in the slide, Hey, there's so much more this gives you. I was able to pull this data from them to say, on average a company has 21 production employees working the shop floor, making product, and if they work 2080 hours a year, is 43,000 roughly hours a year right? Now I can take that margin, divide it by those hours and really get what industry average margin per hour is. Now you could take your estimate, you could take your current sole projects and recalculate this number with a simple math like, Hey, how many, many hours does it say I'm gonna do this? Now, do not include install. This is a John thing. A lot of times people will throw in install hours as well. I don't like to muddy the waters with that because install to me is infinite to some degree. Like I can buy resources if that gets full. This is finite in my shop and I can only really do that. I hypothetically can maybe move it up to 22 one month, but I can't just throw a bunch of people in. It's not like they're sitting on a street ready to go. So without planning, this is about our normal. So I'm gonna say it differently. Like I've said all along, if we sold 40, those 43,000 hours with a margin of$59, we would get to the$2.6 million average. Right? It's just math is math at that point. And understanding, like I said before, what that means. Now, you said this in last episode, Jacob, doesn't mean all jobs need to be at$59, right? We might strategically do that to sell a job or plant produced, non plant produced is really gonna skew this number, right? And so all of a sudden, now I'm gonna take my extreme example. I said this million dollar job that had, you know,$900,000 of buyout on it, now I got so few hours, right? So stick with me for a little bit'cause it's getting a little wild. But I got so few manufacturing hours with that million dollar job, but I'm still making margin on, I'm gonna call the non plant produced, or sorry, the plant produced products, right? That those have margin on top of them. Now it may not be as much as our shop goes, but now you take all that margin from the whole job and divide it by the much smaller hours. All of a sudden. Now that's gonna skyrocket again, not bad. Not saying that we should bring it down to the 59'cause you never want to do that, but now you can offset those with a lower margin per hour job in that month, that quarter, that year, depending on how your system evaluates it. As long as those offset each other and we get to the$59, we should be good. So there's a lot of of analytics and math that goes into that. I promise you. It's a lot simpler once you do it yourself. Uh, it may seem like a lot here, but super powerful and that's, um, I think it's super, super important for you to, to be able to do that.

Jacob:

Well, and I think what's really interesting is once, if you get to this point, right, where you're doing this math or you've done this math, what, some of the things that become so much easier going forward is, it is a lot easier to very quickly have your production manager come to you and say, Hey, I need another saw operator. Well, you can very quickly do the math here and know whether you can afford to do that or not, whether that's gonna work out for what you've sold already to this date. The other thing that becomes really interesting, if you're tracking this month over month, usually we just look back at the end of the year and think, oh, how much money did I make? How many hours did we work? Whatever. But you're gonna start to see things like, man, when July hits and I see the numbers from July and everybody took a week off for 4th of July, holy crap, my revenue, why was my billing so low? Oh, I can actually see because my labor was low, my hours work was low. And you start to see those. And what happens is you can start to plan for those and you can say, okay, well I need my June revenue to be higher and we're gonna make sure, you know, you start to be able to manage, the things that impact those numbers because you've seen'em in the past and you can anticipate them in the future.

John:

Yep, totally agree. All you need to do to get a selling rate here now that we got margin per hour, is add your direct cost to it. So I'm gonna go with that$20 an hour that I said before. I need to do is add$20 to that 59, and now all of a sudden I got a selling rate.

Jacob:

Mm-hmm.

John:

Just to kind of say that out loud, you should continue that as best you can on that project level, if you will. So like, Hey, this is the selling rate we sold this job at, or it should be something that your estimating team should be evaluating. So just another quick data point in math and how you can, use this

Jacob:

And just to reinforce that, if you're listening to this and you're selling your, your install on a job for$75 an hour, and you're paying your installers$50 an hour, you're losing money.

John:

Yep.

Jacob:

And you can very quickly see that by doing this math. And if you've been giving your, or you've been paying outsource installers more, but you haven't raised your selling rate in 10 years, that's probably why your other math that we've looked at so far is not mathing.

John:

Yeah, so that's a great point. So you could do the same logic for install. So take revenue and revenue you're gaining on install. If your system allows that, divide it by some overhead that it takes to run that department, divide it by your hours. Like the same logic happens. I'm just keeping it on the shop floor'cause it

Jacob:

Yeah.

John:

be easier, but I I totally love that. Alright let's lay this out because again, i, I, it sounds harder, but if those that are watching on YouTube, I say, say, I'm gonna say it again, suggest that you watch it on YouTube. There's a lot of slides that you can screenshot and share with your team that we have project example number one, that we, uh, sold for a hundred thousand dollars at 35% margin. Now keep in mind that 35% margin to kind of go back in time. Just want you to remember that before we get to the next slide. That means we got 35 per$35,000 of margin and our hours, direct hours on this job were 750, so our margin per hour is 46. Initial reactions might be like, well, why didn't we sell it for 59? That's what our company wants, right? It's 59, it's 59, it's 59. What do you guys doing? Right? All right, let's go to project two. Same revenue, same margin, same margin dollars. The only variable here is now we're doing it in a lot less hours, now we're saying this margin per hour at one 17, we're like, man, this is great. What this probably tells me is the makeup of plant produced, non plant produced hours are an indicator, a KPI to that. That metric that we talked about in the last session, but I'm saying like now we've kind of normalized this through margin per hour to say, well, if it's higher than our average, it must be heavy plant or non plant produced, right? This is, this is how, math is math, right? That's kind of the name of our thing. So let's put those two together. Shoot. I did the math wrong on this, but I think you guys, I, I, I think I did it and I think the 66 is right. I just forgot to go change the 200. So that should say 200,000, 35% and 70,000. But I, but I'm saying they, those two combined are still, now we've offset the 46 with the 117 to come to 66. We're much more in line with our 59% or$59 an hour. But it's super awesome to, to have that and say, those two jobs now happen in the same month or same time period, have now offset each other. By themselves, they might've been, we're pricing it too high, we've sold it too low, whatever. Now the logic comes together and says, no. These two together, where they're at. Now, there's gonna be critical for slippage and some of the other things is that we may have intentionally sold these together with this logic, and they bought a time slot in our shop. Buying a time slot in our shop is the only thing our team should be focused on, if this is your sales strategy, like you should revamp your entire process to say, we are keeping this time slot. Because oftentimes the project manager is like, thank God the project schedule just came out and this project moved. Well, if that$46 project moved in with another$46 project that we sold in the next month, I'm speaking hypothetically now, guess what? We're only gonna get$46 that month and we're not gonna make margins. Right. So it gets a little bit crazy and, and, and sketchy. Uh, we'll try to fix the slide for the presentation to kind of show you the real math, but I think that's super important on the logic side, if that makes sense.

Jacob:

Yeah. Something else I think that's important is if in practice project A that was very low margin. If you give that to project manager A and project B, you give to project manager B, that project manager B with the high margin job may put his foot off the gas and be, man, I got all this margin here. I can't screw this up. And erode that margin with bad decisions or not paying attention to the job when you needed that margin.

John:

Yeah.

Jacob:

You planned for that margin. So don't let it erode just because you have a high margin job and don't let. In practice, you know, I, I've seen that a lot where it could happen where somebody says, and then there's no communication between the two of like, Hey, this was a strategy across multiple jobs.

John:

Yeah, totally agree. Again, there's a ton of risk to this. I'm not saying this is a perfect model. It's more conceptual base to tie in together profitability and what I think high profit firms are doing and managing well. This doesn't always work as the rosy situation I've laid out on the slides here, don't get me wrong, but I think they are putting a set of, you know, integrated set of activities. Now I'm sounding like a certain somebody in place to really attack a problem that they said, I want our margins. I want a profit of bx. This is one of those, pop the balloons to continue the, the friend that I have to pop the balloon. This is one of the activities that we're trying to pop that balloon with. It's not perfect all the time, but it's a great way to kind of share with you guys, with your listeners what is going on here. So. I love margin per hour. I think you guys should do it. And I think I want to now unfortunately share some bad news with you. So, all right, install. So I cleverly title this. Do we have to, right? Unfortunately install is such an uncontrolled environment for us that I do feel like it needs to be discussed, evaluated. There is some strategies that I think I have to fix it. But it is kind of a necessary evil for most of us, if you will. So. I think Cost of Doing Business Surveys' data on this is super fascinating. It it's almost year after year, the same thing. um, I didn't believe it when I first heard it years ago. But here, here is the unfortunate truth and, and high profit firms are doing no better, I'll be honest. So what you're seeing on the screen is kind of our average and high profit side by side. What it's trying to do is saying it's pulling those data points that I brought in earlier and saying 4.5 of their revenue is coming from in-house sales. On the average, I'm gonna go down the average side first. Plus there's subcontract sales to get total install. So we got four and a half plus five equals nine point half. So 9.5% of their revenue is coming from install. Unfortunately, the cost that Cost of Doing Business Survey says is 9.76 or a loss of 0.26%. There's no rosy things here like that is raw data. Unfortunately it's worse on the high profit and the, the only thing that I can say, and again, I'll read down, for those that are listening, they have a total install sales of 5.5 versus the 9.5. So they already know they're doing something better, right? They already know this to some degree that that doesn't make us money. But on some level they don't care because their install costs are 7.3% or a net loss of 2.3. So they're actually losing money on their install revenue at a pretty dramatic clip. But I'm just gonna say that's not where their focus is because they know they can crush everything else and probably take the loss on this one. It is the only outcome I can see here. Unless you see something different. Jacob, there's fascinating data.

Jacob:

So essentially on both sides, we're losing money on install. Right? And this is the average. This isn't the mean. And so, uh, if anybody's making any money to average this, other people are doing worse than this. Right? But in a strange turn of events, high profit firms are losing more money as a percentage of revenue, uh, but they're making it up elsewhere.

John:

Yep. And so I think that the difference is is that 5.5 to the 9.5 is the story in the slide.

Jacob:

Mm-hmm.

John:

Again, yes, they're losing 2.3 versus the point 026,

Jacob:

Mm-hmm.

John:

but if you were to put real numbers on this, the dollars are wildly different because it's only on 5%, not 9%. Does

Jacob:

And the biggest change here is from the amount of in in-house. And so one, you know, just knowing how install goes and how companies make a decision whether to have in in-house team versus external, right? And you know, one might say, okay, well this is like the difference between paid by piece produced versus by hour, right? You know, your internal installers, are they incentivized based to be efficient, right? Or are your in-house installers cleaning up after external installers, right? Are you, are you basically just throwing money away, unmanaged, unmitigated, um, by maintaining that staff? And then you're finding reasons to keep them busy? And this is where you might say, okay, do I need to have this many people on staff to begin with?

John:

Totally agree. And again, I think you hit the nail on the head with all of that. I got a little bit here on the next, slide. I think where I'm, I'm at is that I think if you could, think in-house teams are bad, but I'm gonna go back to the rollercoaster we mentioned last episode, is that just like drafting, install can be that same roller coaster where it's feast or famine. Again, when those guys are not working, you can't fill their schedule because the job site's not ready. Where's their time going? Right. It's going right to that indirect. So I think high profit firms, I'm gonna go back slide. I think high profit firms realize that and want to be like, man, I don't want to deal with that, like that roller coaster. So I'm not gonna staff as much. The lower my staff level is, the more I can, probably keep their capacity.'Cause I'm gonna, I'm gonna make an assumption that high profit firms are capacity focused people. They do the same concept to install and say, I gotta fill capacity. And I know that it's such a rollercoaster that I can't do it, all the time because of, of things out of my control. So I think they do that.

Jacob:

Something else. Oh, sorry.

John:

No, go ahead.

Jacob:

Well, I'm just going to. This is Jacob conjecture you know, but some, and a hypothesis here and is, I think what happens if you're not a company that doesn't have these types of numbers and you're a company that you're have more of those labor categories as overhead, as indirect than direct. You're most likely also a company that's not tracking and looking at those numbers on a regular basis. And so what happens in practice, in my opinion, and this is an example with in-house install, I think it's the same with drafting and engineering and a lot of the other categories that shift from company to company, from a direct to indirect, as you say. That's a foregone conclusion, that's a sunk cost or that's something that's just a part of doing business. So I'm not managing it for efficiency. I'm not thinking about it on a job to job basis. And I'm probably losing money there. And this shows in the numbers because the high profit firms have much lower indirect costs. And, moving something from indirect to direct forces you to actively manage it. And it forces you, even if I understand some jobs, you're spending more dollar for dollar, you're managing it. And so this is where subcontracting out install, subcontracting out labor, subcontracting out drafting. It allows you to say, okay, just by moving it from an indirect to direct, even if it's on a temporary basis or on a job by job basis, you're now saying this is now something that's being actively managed as a direct cost from this project. That somebody's making sure that we're at least hitting what we budgeted and we sold the job for. And when it's an indirect cost, you're not actively thinking about that as a part of your budget. And I think a lot of times what happens is it just becomes a, oh shoot, we didn't realize we did that at the end of the year.

John:

Yeah, what gets measured gets managed, a hundred percent. Like I totally agree. That's a, that's great analysis I didn't even think about. But yeah, I think it's starting to show in some of those data sets for sure. So a lot of good stuff. So what do we do with it? Like, I'm trying to give some tangible things. This is my best of my ability. I'm not saying this is perfect, but man, if you don't have to do install. You know, avoid it, get it outta your contracts. Like that is the, the data's telling us to go do that. Not everybody can. Um, but I'm gonna say that if you do have an in-house team, don't book it. Don't try to fill it with a hundred percent of your install sales. Like scale it down to, you know, I'm only gonna install 50% of the jobs and be okay with subbing out the other 50% that, or, you know, you take it more extreme. I think high profit firms are doing like 20% of their in-house, right? That's what the data says. Again, trying to level load that rollercoaster and always keep those guys busy. It's a capacity thing, just like the shop and we gotta treat it as such. I think we're not change ordering enough. I think as an industry we're way too nice of people, um, to be honest with you. And I think we get taken advantage of for doing so. I love the people in this industry. And I love them for a reason.'Cause they're nice, right? They're good, they're the people I want to hang out with, but they get taken advantage of. So don't forget to change order for things that happened. Like I brought up last episode, like storage material. Like you didn't have your site ready. I have to store this now. I don't think of that as a cost and my cabinet's sitting in the corner of the shop, but there's value there. There's rent value there, there's electricity value in that square foot, man charge'em for it every month. Those are, those are how you can kind of claw back. And then I think we just don't document enough. I don't think we use technology enough as a whole. I think we can get a little old school when it comes to this. A lot of these guys are older and don't want to do things. Having an indirect, and I know I'm, I'm, I'm debunking what you said to some degree, but having an indirect person just to go do this, to pay for themself and get that money back, like, man, if you could turn that loss into a gain by, by having a$60,000 person going out to sites all the time to document and document and document and do something with it, it might pay for itself. I'm just saying. So, um, something to throw out there.

Jacob:

Yeah, I think that important part is it's a conscious decision and you're, you're measuring it upfront as well as, is it yielding the results you, you invested in for it. And I think too, all of this boils down to you know, we said, you said this already, you know, measure what matters. And I think that this goes to change orders and, and GCs know this inherently, and they teach it, they in school and degrees, right? Nothing exists outside of the contract or change orders. And so if you haven't learned this yet as a project manager or even as an owner of, and you're not getting responses or action, dollars and change orders very quickly spur action from your customer, from the GC and client. And it's the same thing internally is, and measuring and knowing when you're spending money is the best way to change behavior. And so both for your customer, both for your people internally, and I think it all starts with knowing your numbers. Like everything you're, you're talking about here, John.

John:

Totally agree. And again, I'm gonna give a little tip that I didn't plan on giving, but it's good stuff for the, the listeners. Something that we're experimenting with right now, and it's gaining some traction, schedule movement, right? It, schedules always move. We give about a four week window to schedule movement on site.'Cause we know that things move and shake. But if it moves out of that month,'cause again, we're selling a time slot. I want to, I wanna preface that. If that moves out of the month into a new month, guess what just happened? I just stacked all my install on top of something else. So what we're doing is GCs, um, to some level don't know our plan, don't know how we, if we plan that for buyout, plan for in-house, but we always want to keep our in-house team fed. Right Now we have opportunity loss by that moving out because we planned our team. That one's hard to get. I'm not gonna say, GCs have a hard time getting their mind around like, wait a minute. Yeah, I gotta pay you for not doing anything? That's crazy. But what they do, what they will do, and this to your point, might just be enough to spur action to get something going more than anything. But sometimes you could get dollars out of it. And we've been successful as that saying, man, I, I scheduled that for our in-house team to do. Now I'm gonna have to go buy it out. My rate for internal was$40, now I gotta buy it out for$80. Right. So every hour I should get$40 an hour. Do you, do you agree or disagree? Like how do I, how do I not, how is that not justified? Right? And so just a little tip and trick, like these are things to kind of combat that Cost of Doing business results and saying like, we could do something about it. We just have to kind of reframe the lens. So

Jacob:

Yep.

John:

All good stuff. We're gonna end up now with slippage. Um, one of my favorite topics. All relates to a lot of the things. Um, it's really kind of just, it's a constant moving target in our industry and everybody deals with it, but let's define what it is. Cause some, it might be some new words for people on the call. So it's a movement of hours or revenue resulting in delays of receiving answers or shift on the onsite schedule causing work to be rescheduled to a different time period. So again, if our company's logic is to sell a time period and it slips out of there, there's a price to that. We would not sell that job had we known that the date was March, not January, because our estimating team, using previous slides might've strategically sold that at a certain thing. So I challenge our teams like, who is actually tracking this? This is actually a hard thing to track. I'm not gonna lie. We are, we are even struggling with it. But there is a, uh, the things that we're doing is to combat it is saying. Even in our work order level, we're saying schedule the original contract schedule. When did they want it? They want it October of 24. I'm literally putting those, that in my work order, say they wanted this on the 20, on October of 24. If I now know that my work order's not getting released till March of 25, right now we've got a different problem on our hand that this now moved to a different thing. Same logic I just said for the install thing. Like, hey, there's, there's stacking on top of my production that I now have to work overtime to. I gotta buy out manufacturing, I gotta do all those things, right? And so, going back to the time slot thing is, is just where we need to get, we gotta stick it. And I said this earlier, I was like, it's gotta stick. It's gotta stick, it's gotta stick it. We gotta fight as a PM team to stick it in there. We are naturally okay with it moving. I wanna change our mindset to fight, to keep it where it was.

Jacob:

Something else. I think that's important here is a lot of times, because what we're talking about here is, is opportunity cost. And so slippage can be okay in the grand scheme of things if you're able to replace it with something else that also earns revenue, right? But what we're saying is, okay, we plan this work for this month, which means we're gonna earn our, we're gonna fill our bucket this much if we complete the work we scheduled And if that work moves and you're not able to replace it, you never get that opportunity back. You never get those labor hours back to earn revenue and you never get that back. Yes, that job you may complete, you'll get the same contract value later, but you did not earn the revenue, complete the work in that given time slot that you had had the capacity to do And you never get that back. And that's the real true cost of it is. Sure if you're able to swap it with something else, great, but rarely does that happen.

John:

I totally agree. Totally agree. All right, so let's go with some facts from our AWI Cost of Doing Business friend, I, my friend Dwight Schrute is, uh, is my facts guy,

Jacob:

Oh, that's, that's not Doug?

John:

It could be Doug. That's a, that's a close representation. So, um, we already stated that there's, uh, 43,000 hours roughly in the average shop, right? Or 3,600 hours a month. We're just gonna kind of break it down with that. If our revenue is 7 million and we divide it by that same number, we get rough revenue of 160,000. I'm painting with a broad brush to make a point, but challenge you to look at the slide. We already said our margin was at that$59 rate. And our indirect is 2 million. Again, somewhat irrelevant, but I put it on there just to kind of tie these things. If you wanna snapshot this slide. Let's just say that 20% of our hours move out in the month, so that is 728 hours, right? Very simple to move 20% out in a month. Like it happens more than you would imagine.

Jacob:

Hmm.

John:

If you're measuring it. Those that are like, yep, I'm at 50%, you're lucky to get 20, right? But let's just map that out with the math that we have above. It's like, man, if we have lost that much revenue, man, we've lost$116,000 that month in revenue just by that moving out if we are painting with a broad brush. Right. And that's crazy. If we do that every month over month, it'll be up to$1.4 million a year. Money that will never get back again.

Jacob:

Mm-hmm.

John:

To your point, Jacob. And we don't think about it in these terms because it just happens. It's usually the thank God that moved. I don't have to deal with it now.

Jacob:

Mm-hmm.

John:

We just don't, we just don't compute this in our heads until we see it on paper. So a lot of cool stuff there. I'm gonna go down to uh, now if we were to move the, the same 20% on the margin side. So we talked about revenue is not gonna do, now let's kind of look at the margin side. Same concept. We just lost$43,000 of margin. Again, same concept. That's gone forever. And if we were an AWI average firm that is about one half to 1% of our profit every month that's gone or accumulates to about 6% a year. Do you think the, the high profit firms are paying attention to this, right? Do you think the average firms are not? This is compounding loss that will never get that$43,000 back. You just keep multiplying that. There's a 6% delta right there to the bottom line. And that's fascinating to me. So thinking through that.

Jacob:

And I think that's what's interesting here is because I, I think you're right. I think what one of the biggest things that high profit firms do better is they manage this. They know their numbers and they're managing slippage and they're managing, we know what our capacity is, we know what we sold. We are actually gonna do everything we can to get that done. Because when slippage happens, what usually people don't do is they don't reduce their direct costs or their indirect costs to reflect that, and so you're still spending the same on overhead. You're still spending the same on labour a lot of times. A lot of times you're paying people to sweep or clean or work slower but you're losing revenue, and so all of that is coming right out of your margin, coming right outta your profit.

John:

Totally agree. And what I didn't put on the slide and the reason I did put indirect on there, I didn't take indirect to an hour because it's somewhat unfair. But let's just take it for straight up direct cost.

Jacob:

Mm-hmm.

John:

That 728 hours, let's say they go back to our$20 an hour, that's another$14,000 that's gonna get added to the indirect side. Making this problem compounding worse. Not only did we lose 43,000 in margin,

Jacob:

Mm-hmm.

John:

added 14,000 to indirect. Crazy,

Jacob:

Yep.

John:

This is where it's different. So let's talk about the year then.'cause we've kind of been painting with a kind of an annual brush to some degree. Let's just say we only performed 34,000 or 35,000 of our 43,000 hours a year, right? Same logic. At the same one 60 we fell short of our goal. That's that 1.4 number. This is kind of a summary slide, if you will. We fell short of our, our revenue by 1.4 million and it just moved out of the back end of the year. Right? Month over month might still stay in the year, but if that 20% moves out of the year. Guess what's gonna happen then? Like 20% of our total, and this is what I'm painting with, not not from December to January, let's say it all moves out. We've lost, uh, sorry, we've only gained$2 million of margin when I think our target was 2.6, right? So that's$600,000 of margin that we've lost. Here's where I pull in the indirect. If we do this and we now we have to take those 8,736 hours that we didn't perform right, but we still worked at, I went to$25 an hour. That's another$220,000 that we have to add to indirect making our total indirect cost 2.2 million. And you can see right up at the top there, my margin's only two. So going back to episode one, math is math. I've just lost$200,000 this year just alone by having 20% of my hour slip out of the year, you cannot recover that. No matter what you do, you cannot recover that. So pretty fascinating.

Jacob:

Yeah. And I think that this rounds out very well. You know what I, I mentioned multiple times. Why, how can you justify one, spending the time to, to have these numbers? You have to. And two Is it allows you to see these things in very easily diagnose. Where are we losing money? What do we need to do to make more, and how do we become a, a high profit firm? And how do we reach our goals, for the business as a whole?

John:

Yep. Totally agree. So those are my thoughts. I got plenty more, I guess we'll have to wait till next year. Right, Jacob? um. um.

Jacob:

can go through this analysis for 2025 Cost of Doing Business. But no, I think this is amazing. I, I know as a, uh, if you've made it this far, thank you so much for listening. And I think that I'm excited to see, uh, and hear how many people, um, get a lot of value outta this because I think it put, puts it into terms everybody can understand,

John:

Mm-hmm.

Jacob:

this is really the language of what we do, whether we realize it or not. But this is the, the survival of our industry, the survival of this, what you said, the people that are good people, um, in this industry that make what we do. Uh, happen. I think it just dependent on doing this as well And so this is invaluable information that, you're giving away for free and I appreciate you coming on doing that. Um, like I said, we, you've got your contact information there. We'll link all this, um, in the show notes if your lifts, and you can go down and have John's email, have his LinkedIn and a little bit more about him to ask him lots of more questions Also give us some feedback about what was valuable and what we could dive more deeper into next time I have John on because, I think if you listen to this and you have questions that either we didn't clarify that you'd like us to dive deeper in, that's extremely valuable for us, for, um, for when we have him back on. So,

John:

Yeah. I

Jacob:

uh.

John:

nothing more than a q and a session, if you would, because that would be awesome to get some listener feedback and be like, man, I, you're talking crazy on this. Let's talk through it. And there's some things that people that know me, uh, I am crazy. I think Chris Brooks called me, uh, a wood nerd a few weeks ago on the podcast, so I'll call him one back at this point. But, uh, but those are fun conversations to have as long as you

Jacob:

Yeah,

John:

you're looking for or asking like, and I'd love to have these discussions all day.

Jacob:

Or if you want to push back on anything we talked about, same thing. You know, I think that dialogue is important and, uh, uh, that's what we're here for. So, John, thank you so much for, for taking time out too, and, um, and it's always a great, uh, to have you on and talk with you. I'm excited to see how this one, uh, exceeds your past episode very rapidly.

John:

I appreciate it, buddy. Thank you very much.

Jacob:

Thanks, John.

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