Started by the NAHB more than 15 years ago, 20 Clubs bring together builders and remodelers from different parts of the country to share information, learn from each other, and improve their businesses. Each group meets several times per year, and one feature of the meetings is the “911 call,” in which members can declare an emergency with their business and ask the others for advice. This article is based on transcripts from an actual 20 Club meeting that took place last year. Participants' names have been changed.
"After 30 years in this business, I have a totally dysfunctional accounting system,” Marcus admits to his 20 Club at a recent meeting. “I'm $70,000 in debt, which is a lot to me, and I have no idea where the problem is."
Marcus is a custom builder in California who found a niche in high-performance homes that could pass any green standard you tossed at them. His wife, an architect, designs them in-house. In the process of building his company, Marcus also built a national reputation as an expert in green building.
His houses are fun to build because that's the way he likes it. Some of them have fireman's poles. Some have tree-branch railings on rooftop balconies. All of them have complex solar-heating systems.
Although he has plenty of work, Marcus doesn't have an estimating system. Consequently, he’s caught in a downward spiral that sees him working longer, earning less, and feeling more and more out of touch with his bottom line. He hasn't drawn a paycheck in six months.
"If I could only get a better accounting of how my estimates match reality, I could become profitable enough to draw a paycheck again," Marcus says.
The Root of the Problem “Let's back up a bit, Marcus. You say you've got $70,000 in debt. Can you list it for us?" asks Gus, a production builder from Dallas.
The list is full of unsecured debt, and Gus points out that he can negotiate a settlement. Marcus cuts him off: “I pay my bills." Next, Gus asks about assets. Marcus doesn’t have much, but he has a house that he built, which is in jeopardy. Also, he has $200,000 in a retirement account “that my accountant advises against withdrawing because she’s not sure I won't go bankrupt," he says.
“There are guys in this room who have dealt with multimillion-dollar debt. When I look at this, it's nothing," Gus continues. "There are forms you can get, a debt schedule. You pick one up, fill it out, and possibly negotiate the debt, OK?”
Frank, a small-volume custom builder from Ohio, wants to know about the company's profitability. “As far as your current work, and future stuff you’re bringing in, do you have a sense of how much is profit and how much is overhead?”
“That's my biggest problem,” Marcus replies. “My accounting system is so screwed up I don’t know what my profitability looks like. I’m completely adrift at this point.”
In fact, his profit history over the past few years looks like this:
2010: -49% | 2011: +2% | 2012: -3% | 2013: -16%
"Marcus, you’re probably the smartest guy in this room,” asserts Frank, “but your talents are not on the numbers side of the equation. You're hurting yourself by assuming that your estimates should be based on accounting. Use your building skills to do takeoffs and to work with subcontractors. Step two is figuring out if you actually made money.”
"That's my highest priority,” Marcus admits. “Of the seven jobs on the table, which ones should I back away from because they might have problem clients or complicated engineering, and which ones should I go after whole-hog? I feel like I’m chasing the challenging jobs and letting the easy ones slide because they’re not challenging. I think I’m shooting myself in the foot. I’ve got two easy ones that are back burner, not because I am too busy, but because they’re boring. Maybe I should go after the profit because it sure wouldn't be boring to make some money."
“Why don’t you take the boring stuff and use it to pay down your debt?” Frank offers.
Then Rob, a remodeling contractor in Boston, adds, “You need to play to your strengths. If you suck at accounting, why use that method to estimate costs? If you are good at building a house, use that method. There are a lot of people sitting in this room who have different strengths and do things differently. Some have accountants do everything. Others do a lot themselves. You have to figure out an estimating system that’s right for you.”
The Numbers Game Gus takes Marcus down another numbers road, directing the questioning toward the accountant. Marcus says he spends two or three hours with his accountant each week and that she charges him $350 to $400 per month. With Marcus charging $80 per hour for his services, the time spent accounting costs him an additional $1,000 each month. Gus advises Marcus to take that same $1,000 to hire professional services, whether it’s estimating or someone to do a better job with the books.
Gus then asks Marcus about budgeting and his financial health.
“I have never done a budget,” Marcus replies.
Gus states the obvious: “That would be a really good place to start.” Then he explains that the difference between revenue and expenses is the bottom line. He says that by looking at his budget, he knows exactly where his year-end profit is going to be. Entering the numbers each month as the actuals come in is critical because it provides a monthly snapshot of profitability—it illustrates when expenses need to be cut and where the profit centers are.
Mike from Florida finally joins the conversation. “Yours is a common problem in our industry. You’ve got great talent, but you don’t know how to run a business. People see the wonderful stuff you build, and they want you to build wonderful stuff for them. You’re good at it. But because you don’t price it right, people take advantage of you.”
Someone asks about upcoming jobs and Marcus lists the names of the jobs, the rough estimates, and the probability of closing them. They have names like "Pinwheel house" and "Dr. Bob’s laboratory." Together, they total almost $2 million worth of work. If Marcus can get the estimates right and gain a 20 percent gross, it would mean $200,000 for overhead and business operations. That right there could eliminate his debt.
Gus continues toward profitability by talking about capacity. “You’re a two-person operation. Don’t kill yourself trying to bring in more jobs than you need. If the work you’ve got currently on the table solves your problem, raise your margins on anything after that. And on the small jobs, you can really raise the margins. If you don't get the job, so what? You’re busy anyway.”
Mike wants to know what kind of contracts Marcus uses, but he already knows the answer: fixed price with allowances, and that’s a problem. If the estimates are weak, fixed-price contracts are just going to dig him deeper in the hole. “You’re good at sales,” Mike says. “I think you should move to cost-plus to protect yourself.”
Marcus confides to the group that he grew up wealthy, around old money, and that he doesn’t like working for wealthy people. His customers have a fixed amount of money, he explains, and if the project goes over the price, the bank won’t give them more. But cost-plus could make sense for crazy jobs, like Dr. Bob’s lab, because Marcus has no idea what it’s going to cost. “And Dr. Bob has $200,000 sitting in the bank before construction loans.”
“The key,” according to Mike, “is trying to design something that will match their budget. Everyone has trouble with that.”
Marcus responds that he's worried the jobs will disappear. There has to be a lot of honesty and a lot of hard work at the beginning to get the designs to fit the budget. And people’s ideas almost always exceed their bank accounts. “Educate them as to where they are, and let them do the soul searching,” Rob insists.
Frank takes a tough-love approach. “We talked about estimating a few years ago. And here you are in this room again, with this problem.” He is noticeably irritated with Marcus for not learning to estimate. He insists that it's simply a matter of filling in the blanks, but he worries that Marcus has invented a whole new system. “Your projects have the same basic pieces as everyone else’s—grading, foundations, framing, electrical, drywall, insulation.”
Looking to the Future Marcus is at a critical point with five estimates coming up that will either help him dig out or dig deeper. Frank tells him to pick five people in the group and send an estimate to each. “We can’t figure your labor, but we can look and say, ‘How are you doing your electrical for 3 percent of the job when ours always runs 10 percent?” He advises to let the group help make sure that Marcus makes some money.
Joseph tells Marcus that he needs someone to hold his feet to the fire. His accountant is not holding him accountable. “I agree with Frank, you need to get a new accountant.” Gus directs him to his local Home Builders Association as a good place to start his search.
Walter, who almost didn't come to this meeting because he's been in the room with Marcus before and doesn't think Marcus will change his behavior, finally chimes in: “Marcus, let me ask you a big-picture question: How old are you and what do you want to do for the next 10 years?”
The new turn in conversation catches Marcus off-guard and clearly strikes a nerve. “I am 57, and I really can’t imagine not building homes. But I would like to work less and be more comfortable financially.”
“Do you know how much money you want to retire with?”
“At this point, I don’t really see a path to where I could retire. My only idea is that I’ll just keep working until…"
“Until you can’t?” interrupts Joseph. “You sit here with $70,000 in debt and all of this revenue potential. If you get your estimates right, squeeze a few more profits from the jobs, and negotiate with your suppliers, you can get out of this thing real quick and be very happy doing the stuff you like to do. It’s not that hard.”
Gus reminds Marcus that the offer he made previously to let his office manager take a day to organize Marcus' books still stands. “But you’ve got to take the first step and get your books cleaned up.”
Moving forward with estimating, Frank lays out a path: “Get as many hard numbers as you can. Get a price from the roofer and a price from the siding guy and a price from the trim carpenter. Even if you do the trim yourself, get a price from another trim guy.” In fact, Frank advises two numbers for each cost category to bring credibility to the estimates and in case Marcus gets hurt and can’t complete the work. Mike takes it a step further telling Marcus to sub out the work for a while to keep it simple. That way he will know exactly what each phase will cost. If he adds 15 percent to that, he’ll know what he should be bringing in. If it doesn’t pan out that way, “you’ve got to find out why. And your new accountant will help you do that,” Mike says.
“If you want to hit your long term goals,” Walter adds, “you need to start making your move now. You’re not going get any healthier as you get older. Your passion has been costing you a lot of money. You need to protect yourself from now on.”
Moving Forward “Marcus, what were you hoping to get out of this 911 deal?” Frank asks.
“The first step,” Marcus responds.
“Did you get that?”
“Fire my accountant.”
“That’s good, but one thing you need to realize,” Frank warns, “is that soon you’re going to be back in the thick of things, and it will hard to focus on the list of ideas from this meeting. Would it help for you to break this down and say what you’re going to do when, and report back to the group?”
“I’ve got to set some deadlines for these changes,” Marcus says. “And I need to get my books right before I send out the estimates on these next jobs. I also need to decide that some of these contracts should be cost plus. I will commit to sending updates to all of you every two weeks for the next four months.”
“I wouldn’t try to do too much right away,” Rob warns. “You should read the list twice a day, but don’t try to do anything yet. If someone is volunteering to help you, do one item per week. Then don’t estimate a thing until one of us looks at it. Those things are going to equate to more profits, better margins, and no more accounting mistakes.”
“The debt is there,” Mike says, “but as long as people are getting paid and they know they’re going to get paid, they’ll be cool.”
“I wish I could be your partner,” Rob adds. “I’d come out there, help you straighten this out and make a lot of money. You’ve got a lot of stuff coming…”
“So this is a perfect example of what this club is about,” Gus concludes.
“It really is,” Marcus agrees. “Truly. Thank you all.”
Kevin Ireton is the former editor-in-chief of Fine Homebuilding magazine. These days, he works as a writer and remodeler in Connecticut.
Learn more about markets featured in this article: Boston, MA.