15. How To Price Your Jobs With Russ, Sky & Andy

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Higher margins while improving the building experience for your clients. Hello and welcome to the Professional Builder Secrets podcast, a podcast by the association of Professional Builders for building company owners, general managers, VPs and emerging leaders. Here we discuss all things running a professional building company from sales, processes, financials, operations and marketing. Today I'm joined by co founders sky and Russ Stevens, as well as Andy Scarta, executive business coach and head coach for the association of Professional Builders. Welcome everybody. Excited to speaking to all of you today as well.

Hey Bosco.

Well, a key component to running any successful business is getting the pricing right. Plenty of good businesses fail every year because they use the wrong pricing model. So tell me, how does a building company price their jobs?

Well, there's a common practice, I think, within the industry where typically a builder will mark up their cost of sale so their materials and labor that can be directly attributed to a job. They'll calculate that as a total and they will simply add a percentage markup to that figure. And at the end of the day, they'll then hope to get to the end of the job and make a net profit. That is, they just hope they're going to cover all their fixed expenses. But the best practice for a building company is to follow what we call the pricing for profit method. And that is where you will calculate a net margin that goes onto your jobs rather than a gross margin. And that's really important because the fixed expenses for each job will vary. So you've got to understand your fixed expenses and then you need to apply that on a per job basis. And obviously the longer a job runs, the more fixed expenses need to be attributed to that job and the shorter ones will have a smaller amount. But by understanding what that figure is on a per job basis and then adding that to your cost of sales, what you're now effectively doing is adding a net profit. And the reason that's so important is because we're all in business to make a net profit rather than just a wage. And a lot of building companies that we see, they are simply simply operating at break even point. That is, the owner is drawing some earnings and there's nothing left over at the end of the year.

What's the difference between that gross profit and net profit? These are two interesting terminologies I just want to dig a little deeper there. What do you think of the differences there that really builders should pay attention to?

So the gross profit is the revenue, say the income from a job, less the cost of sales, so the materials and labor that can be directly attributed to that job. And the bit that's left over that is your gross profit. And there's two important numbers there. There is the gross profit as a dollar figure, and then there's that dollar figure as a percentage of the revenue, which then gives you your gross margin. Net profit, however, is the figure left over at the end. So after all your fixed expenses, which are expenses that can't be directly attributed to a job, they're your office costs, your marketing, your advertising, et cetera, all of those costs, including the owner's sal. All of those costs, when you deduct those from your gross profit, you then end up with a net profit. And that's the bit we're all targeting. That's the bit that gets left over at the end of the year.

You mentioned markup and margin. Do you want to just explain how those two terms are different as well?

Yeah, I'm happy to dive in here. So if we start with margin builders, margin, it's the amount of gross profit on a contract as a percentage of the selling price. Now I'm going to do my best to explain this with an example. With figures, it can get quite hard when you're just listening. So I mean, anyone listening at home, work out, like, grab a bit of paper here so you can write these figures down so it can all come together visually if you're, if you're a visual person. So basically it means that if we say we've got a job, a project, and it's costing us $400,000 to build, and you add say $100,000 profit, that becomes a $500,000 contract. So the profit on the contract, which was 100,000 DOL, 20% of the selling price. So if you're still with me there, then we need to compare it to markup. And markup is the percentage added to the cost of sales. So if our cost was $400,000, if we were to add 25%, which is $100,000, that gives us our building contract. So the builder's markup was 25% and the margin was 20%. So you probably are still following along so far. So it can seem like that's quite simple on the surface. Once it's explained. Most builders are always nodding along like, yeah, that makes Perfect sense. So what is the real problem? But there are actually two major problems that cost building companies a lot of money. Now, first, if you've got a contract that allows for 25% margin on variations, provisional sums, prime cost items, but you're only marking up those items by 25%, you're actually losing $80 of profit on every thousand dollars worth of variations. That's an 8% net margin on every transaction, which in business and running a building company, that's huge. But the second problem is a lot more sinister because most building companies financial reports make no sense month on month. We covered this in one of the original episodes. This is all because of the work in progress, accounting adjustment, which usually. And most building companies do not have this inside their accounts. So, you know, one month they're up, the next month they'. So they're just not making sense. And because the financial reports make no sense, builders tend to do quick mental calculations. So if we go back to that original example that you might have written down there, if you have that $500,000 contract, say you've done a claim and you've just claimed $100,000 on that $500,000 job, 25% of a hundred thousand dollars is 25 grand. So builders typically at this point, think, well, that's my gross profit. And it's not. That's what we need to remember, 25 markup and not the margin. So now we have a builder that thinks they made $25,000, but really they only have $20,000. And that's a massive problem when that imaginary $5,000 just gets spent. And as soon as you multiply that by, say, having five jobs on the go at any one time. Can you see, Bosco, that you can just. It's so easy to get into a real mess.

It's. You're basically touching money that doesn't belong to you, which is scary on its own.

Exactly. And that one difference, it's so easy. So a 25% margin, if you wanted to be achieving that, you need to be marking up by way more than that. It's 33 and a third percent. And we can go through all the ratios, but that is the biggest problem.

And let me guess, the accountant's not bringing this up when they're filing their taxes or they're going in and trying to look at their financial analysis. I'm assuming a lot of these things are being overlooked year in and year out when they're looking at their numbers too.

Well, what the accounts are looking at are the Actual margins, and they're just thinking they've got lower margins, they're not involved in pricing the jobs, so it just comes out in the wash so much later.

So why do so many builders get their pricing wrong and end up in this mess in the first place?

Well, I think I'll jump in on this one. It's primarily, again, a situation of they don't know what they don't know. I think most of the builders that we talk to obviously are taught how to build houses. They're not trained as accountants, they're not necessarily trained as cost accountants. And therefore, when they get into the difference, and although it's a major difference in the way it plays out to most people, margin markup, what's the difference? It's the same thing. Well, it actually isn't. And in a lot of cases, those two terminologies are used interchangeably when they are very definitely not interchangeable. So the problem, and sky has laid it out very nicely, but the thing that builders forget is that from the time you give the client that contract price, the cost of the job disappears into the ether because every dollar of profit that you earn is now a percentage of your revenue and no longer has any bearing on what the original cost of the job was. So literally from the point you hand over that contract price, you have to be talking margin markup is irrelevant from that point on. So it's really, it's education to be totally hon. It's why we exist is the reason why builders get it wrong because they just aren't trained and educated in the differences and how to apply these things properly.

And I think an interesting thing we see as well, Andy, is how many times does it happen the bigger the job, they want to trim the margin because they want to win bigger jobs. And it's the exact opposite to what they need to be doing because they need to be earning more from the bigger jobs because they're more complex, they run for longer. What that means is you need more money to cover your fixed costs.

But the worst part of that is building companies think they are earning more because it's a bigger dollar amount.

Correct.

That is the worst part. It's their focus dollars, not percentages. And I remember Andy telling, I remember you telling us about one of our builders and that was their massive aha moment. Stop focusing on dollars, focus on the percentage because you're not getting sucked in on. Yeah. How many dollars are you earning out of it? No, no, no, no, no, no. You are laser focused on the margins. You're not going to that.

Absolutely. And Russ's point earlier, I think is that very few builders track and know their fixed expenses. And therefore, when they are doing that markup on the job, they literally don't know how much they need before they even start making real profit. As Russ said earlier, we're in business to make net profit. We're not in business to make gross profit. So if you don't know what your overheads are, you don't know what your break even point is. And you don't make real profit until you get beyond that break even point where you are covering, first of all, the fixed expenses of your business. And then there's the problem that most builders undervalue themselves. They almost feel that they don't deserve those bigger amounts of money. They don't realize it's not a question of deserving, it's a question of for their business to grow and succeed. It's an absolute necessity. It's not a nice to have. They literally have to be doing this in order to be staying in business. And that's before we talk about cutting margin to get jobs, which is, I want to jump out the window. But so many builders think the way to get a job is to come in cheapest. And in simple terms, that's a race to the bottom because materials cost the same for everybody. Subcontractors, you're drawing them from the same pool. So there's three elements in the job. Materials, subcontractors, and profit. And if the first two are fixed for everybody, the only thing you've got left to cut is your margin. And when you do that, you are literally putting yourself into a downward spiral and eventually you will go out of business.

And it sounds like many people are doing this subconsciously as well, because they're not aware of this as well.

Exactly. Inadvertently doing it.

Yeah.

And they're busy. I think this is the problem. The piece that really we get heartbroken over is the builders that come to us burnt out, exhausted, emotionally a wreck, because they are working 980 hours a week and earning less than what they pay their apprentices. And it starts with this question we're talking about today.

How do builders stay on top of their fixed costs? I'm going to assume that fixed costs and fixed expenditure are sort of the same term here. But how do they stay on top of this?

Yeah, you're right. It's the same term. And I mean, the way to stay on top of it is, first of all, you've got to create a budget, a realistic budget. Based on what's happened in the past and where you're heading with your company in the future. So the budget will reflect your growth plan. And once you've got that budget, you then create a plan, so a 12 month plan and you break it down into quarters and months and then you can look at that plan. And this is where you're going to a bit of a loop. Because once you've done that plan, you might realize that the budget will need adjusting. Maybe the figures, the ratios aren't coming out where you need them to be. So you might need to go back in and then readjust the budget and re look at the plan. Once you've done that, you've got a final plan. Now it's time to measure. We'll execute measure and react. So it's very important that that budget, that business plan, doesn't get tucked in a drawer and forgotten. You've got to be looking at this in detail every month, comparing the actuals to what's actually happened and react. Update your business plan, update your budgets. Are we going to realistically hit the revenue target which is effectively going to cover our fixed expenses and give us the net profit we need? Now, in terms of the profit and loss, I would urge builders to make sure they've got easy online access. Software nowadays is just so accessible, whether you're using Xero or QuickBooks or MYOB. But I would jump in our profit and loss and look at it every day. A lot of people are not going to be as obsessed as me, but if you're not looking at every day, you've got to be looking at at least weekly and comparing those actuals to the budget. And then probably just one tip for staying on top of the fixed costs, I'd probably say every quarter, go through your fixed expenses in detail and question every expense. You know, just zero based thinking, do we really need this expense?

Well, and I think that's a great point, Russ. I mean, it's one of those things that in our private mentoring program, we actually get the builders to come up with what we refer to as the core fixed expenses. In other words, those expenses that are going to be there in the business every single month come what may. And then to understand that in some months and therefore some quarters, you're going to have things that are seasonal. They're going to come in either quarterly or annually or half annually. I'm thinking of vehicle registrations and insurance premiums and those kinds of things. But to be aware of what those are, because in that way you're actually conscious of what the basic number should be. And you're also aware of the fact that there may be fluctuations in the month or the quarter that you're in and that allows you to keep track of, are we in line with what we're expecting these things to look like?

How do builders increase margins and still stay in demand?

I love that question, because when we always talk about builders should be increasing their margins, it's like the first thing everyone comes back with, well, if I just increase my margins, I can't win the jobs, can I? And plain and simple, no, of course you can't, because you can't just increase all of your prices. You know, certainly if they're quite low margins to then hit the industry benchmarks, that could be quite a swing. You can't just do that overnight and expect everyone to still sign up with you because you instantly can show that value. No, you actually need to demonstrate a lot more value. And you know how and why, how you can do that. It's actually going to be through better marketing. We've talked about this previously. Marketing has a direct correlation into your margins. So if you can actually invest into a proper, detailed, regular and valuable content marketing strategy, that that's how you can influence your margins. And the reason why is quite simply because you are attracting a better quality lead. You are going to be attracting that kind of consumer that wants to pay a premium to go to a professional building company that can handle everything for them and deliver a wonderful client experience. And the way you show that isn't by talking about yourself constantly and just saying, you know, come build with us, and doing very, you know, B minus kind of marketing. No, it's a proper content marketing strategy. We're talking about help, helpful, regular content articles, getting in front of the camera, sharing some tips about designing a dream home. Talk about how to design a home that fits your unique lifestyle. Some things you may want to include in your kitchen design or whatever it may be, get helpful and make sure that you are visible everywhere. You are putting this on your website, you are publishing these videos online on Facebook, on Instagram and on YouTube. Make sure you are showing up and posting regularly on those platforms. And of course, make sure you are following up everybody professionally and regularly, regularly in the background, via email, and that you've got a very, very good, detailed and systemized sales process so you can get back to people promptly. You follow up, you are taking people through a systematic approach to getting them into some concept designs. Then you're, you know, refining those Designs, then you're doing a preliminary building agreement before getting into a contract. That is how you win high margin contracts.

The beauty of this is its simplicity as well, because it's all supply and demand. That's all we're talking about here. We're talking about generating more demand for your services. And when you do that, not only can you grow your building company, but this is how you increase margins. Very, very simple stuff.

Yeah. The bigger the line, the longer people are willing to wait and they're willing to pay more.

And I think sky, the point that you made, that you've got to improve the number of people you help on an ongoing basis, that content marketing side where you educating and delivering valuable content that helps people get into the home that they want, within the bud that they want. I heard this wonderful metaphor for dollar bills are actually people giving you certificates of appreciation. And essentially if you make people appreciate what you do more, they'll give you more certificates. It's as easy as that.

I love that.

That's a great analogy as well. What is the recommended business model for builders moving forward now that they know a little bit more about the financial awareness of these terms?

Well, I think it's a great question because what we find with a lot of builders, when they come to us in the, they are trying to be all things to all people. And that age old story of jack of all trades, master of none. The problem is if you spread yourself too thinly, it's almost impossible to run a business at a level that makes it ongoingly profitable. So the first thing we always say to people is they must determine their niche or niche, depending on whether they're in the northern hemisphere or the Southern hemisphere. Predominantly, what that really means is we want them to identify a particular part of the market that they can dominate, that they become the go to person for that particular geographical region, that kind of home at that kind of price point. Because as soon as they do that, to go back to what sky said earlier, they're not trying to market themselves as professionals in every kind of building, to every kind of person, they are now starting to become that specialist. And the wonderful analogy is obviously out of the medical world, you go to the gp, what does he do? He gives you a referral to a specialist. The specialist commands significantly more money per hour than what the GP does because he has specialized in a particular realm of the medical field. It's exactly the same principle here. And one of the other ways that you can add that additional value that sky mentioned earlier is to go into the design and build side of things. Not just the build side, because for a lot of people, the frustration in building a home comes from the fact that they get it designed and drawn up by an architect and they're given a price guide, which they then take to a builder, and they find that that price guard is nowhere near the real cost of building that home. If the builder is involved from the beginning of the process and actually works with that client on the design side to make sure that it fits their budget, obviously, once again, we're adding value. We're actually helping those clients to get to the home that they want to get to. And then, of course, there's the big one, and that is fixed price contracting, literally globally, across the world. The single biggest fear that most people have when they go to build or remodel or renovate a home is, I heard it was going to be this price, and by the time it was finished, it was double. We've got to get to a point where builders are professional in terms of their estimating and adding relevant margins to make sure that everybody is covered. If they can do that properly, they can then offer a fixed price contract and minimize the risk to themselves and particularly to the buyer, which then obviously makes them even more attractive. Yeah.

To add to that, the difference is transforming from being a commodity, isn't it? If you're being a commodity, quoting other people's plans, you can increase your margins pretty quickly the second you take over the design process. Because if you're a commodity, you're competing against, what, maybe half a dozen to a dozen other builders that these clients shopped around these plans to. To get quotes on. How are you competing on value? You're not. You're competing on price because they don't. They don't know you from the next builder. They're just shipping out these plans to anyone. What are they going to choose? Of course, the cheapest price. So if we can transform from being a commodity, just like you said, Andy, into a design and build company instantly, you can increase your margins a few percent that way. And then it's everything else you just mentioned.

It sounds like what you're asking our builders to do is to build a successful pricing strategy more than anything else. Right now. I'm just curious, what does that look like? And does that pricing create a consistency in growth? How does that growth look like for builders moving forward?

Yeah, well, I think to be successful, you've got to be working towards and then exceeding the industry benchmarks. And like sky says, margins are linked to marketing. That's key within a pricing. We tend to look at pricing, think about pricing. It's all about the numbers.

Now.

It starts way before then with creating the demand. And in terms of a magic number, there isn't one particular magic number. We do talk about a minimum, minimum double digit net profit margin for builders, but that can go as high as 15%, sometimes even higher. And I know there's probably builders falling off their seat laughing at the moment when we talk about 10, 15% net margins, because that means marking up your jobs in the first place by 33% to 55%. But we've seen it done. We've got the numbers, we've seen this been executed successfully by a lot of residential builders. And it all comes down to supply and demand again, which can really be reflective of what's happening in the global economy and even your local economy. Because when you have low competition in your area and a good reputation and a lot of demand, that's the time you've got to be making the most of that situation. Building up your reserves by heading towards a 15% plus net profit. And when that happens, sooner or later you'll find more competition will start arriving on your doorstep, and then your net margins will get pushed down. But of a lot, at least you've got somewhere to go. But you never really want to go below 10. That's pretty much the operating benchmark, really, for a successful building company between 10 and 15% net.

And just to underline that it's important to anybody listening, we're talking net margin after all of your overheads and fixed expenses have been covered, because that's the critical piece.

Yeah, we don't want anyone thinking, oh, yeah, I mark my jobs up by 15%, I'm heading up. No, if you're marking up by 15%, you're probably breaking even at best. But more likely, it's a markup losing money.

Well, this ties it all the way back to exactly what you're talking about in the beginning, Russ. We're talking about our formula of pricing for profit is all about net. When we talk to so many builders and we talk about their margins, margins, anytime a builder talks about their own margins, all they're talking about is gross, which, again, you can mark up your costs of sales, your materials and your labor to get a gross markup. But when we talk pricing for profit, we want to ensure you get a net profit inside every single project so that there's a net profit at the end of the day in your entire company.

Yeah, And I think the important thing, Russ, in terms of what you mentioned earlier, is that we are very fortunate that we work with builders all over the world in every element of the residential construction industry, at every size and at every level of business development. So when we talk about we have builders that are achieving 25% gross margins, 10 to 15% net margins, that's not a particular type of builder. That is literally in most cases, that's the minimum that we are striving for. There are guys that are achieving more than that in various parts of the world, in various parts of the building industry. So it's absolutely achievable.

And I think to add to that, if we go back to something you were saying before, Andy, I think there was the reluctance to increase those margins, to charge that because you don't feel like you're deserving. I don't think we've had one member who has increased their margins and regretted it.

But you tell me no, absolutely not. Absolutely not. And I think the point you're raising there, which is important, is this. If what you are going to do as a builder is go off to being the busiest builder in your city, well, that's up to you. But I think most builders that think this through logically would rather be the most financially successful builder in their city. And so many guys come to us, us with their plan to grow their business is to double the number of jobs that they're doing at a ridiculously low margin because what they've realized is they're only making $2 on a $1 million contract. And if they want to make $20,000, they must do 20,000 contracts. The compound effect of moving your net margin and obviously your gross margin up by 1, 2, 3, 5 points, the effect that that has on working less and earning more is phenomenal to see. And when builders, when they get that, their lives change forever.

Remember our comparison, Andy, for the clients, I think builder A versus Builder B, we had a little example, traditional pricing versus new pricing, which is price. And we launched builder A versus Builder B to all of our private clients. And I remember you just saying builder A and builder B are famous among the builders now. And it just compared a three year growth of doing new exact same projects, investing actually slightly more in marketing on builder B who is using pricing model. So their fixed expenses went up, but they were doing the same amount of projects every year, trying to grow and just, they were just pricing different. Literally. Builder A, who was using the old module, started to lose money. And the worst part is they probably didn't realize it, but builder B, we were doing so conservative, weren't we? We were going like tiny net margins, made money every single year. And that, I think, is the kicker. Like, if you're pricing wrong now, that's painful. But wait until you grow because that's when it gets really painful.

Yeah.

I'm just curious. What is the percentage of builders that come to the association of Professional Builders thinking they've got their numbers figured out and their margins and their markups, and then they have this shocking revelation that they've been doing it it wrong all along? Is there a percentage or a number?

I'll have a crack at it if you like. In terms of the guys that we work with in the private mentoring program, I would say it could easily be as high as 85 to 90. Easily. And again, I'll go back to what we said at the outset. That's not because they're not intelligent. It's just they've never been trained. They've never been shown the implication of some of the decisions they're making or not making. And what is even more noteworthy is when you show that 90%, it really works. You literally see the tension lift out of them. That aha moment on, ah, that's why every job I work my backside off on, I lose money on. And they see it in black and white, which is an absolutely fantastic revelation.

Or just immediately, oh, there's my couple percent or my few percent, because it was that markup and margin difference that was quick as showing it like that. And it was done.

Vanishing cash, isn't it? So where it went goes back to.

That old saying, when you know better, you do better, I guess. Do you have builders coming to you going, let's just take on more clients to solve this problem. Is that a common question that you guys get too?

Totally. I mean, Andy just said it before, like, all right, so I'm making X amount of net profit on, you know, 10 projects. I'm just going to do 20 projects next year. That's how I will grow. And it's because. Well, a couple of things, yes, that could logically make sense, but not in the real world, because your fixed expenses go up exponentially, I suppose I should say, compared to that. But. But also, revenue is sexy. We all chase revenue. We suddenly have a big building company, you know, the more revenue we have, and we suddenly have a big company that we can get proud of. But there's actually a really great, fascinating book. You know, you may or may not have read it. It's called Profit First. It's by Mike Michalowicz. I'm going to say his last name is. It's a very simple yet profound book. It's helped so many people. And essentially he's talking about profit first. I'll park that idea for a second. Something he raises in the book book, and he talks about this quite extensively, is not comparing companies on revenue means nothing. That's just how much you're taking into the business. Instead, it's actually comparing them really, I'm going to oversimplify this. On their gross profit. He actually has a little bit more to that formula to make the gross profit. But honestly, in terms of a building company, let's go gross profit. So it's the revenue minus the materials and labor, the gross profit figure. That's what Russ explained just before. That's really what you should be judging a building company on and comparing them, because it's no use comparing a building company's revenue. So the size of the building company, because, I mean, we're building homes. If you, you can, you can hit $5 million with one job, you know, if you're building, you know, quite amazing homes, or you can do a lot of little projects to hit that amount. So that's, that's semi irrelevant. Let's compare a builder who makes a million dollars a year in gross profit compared to the $10 million a year gross profit. They are very different companies. So about that. And then you're actually able to talk about margins. And then we want to know what your fixed expenses are, certainly as a percentage of your revenue. Then we can work out what your net margin is. So that's a super long answer, but I wish we could just take on more clients. And then that solves all of our problems and our margins go up. But your fixed expenses go up exponentially when you start to grow, because suddenly that's a lot more staff. You're investing a lot more in marketing. Suddenly you need more software and systems. So those fixed expenses never stop. And if we keep chasing that revenue, literally growing broke.

And I see this a lot on the information coming through from builders on our database, asking them about where they want to go. And it's always about growing the building company with no regard to actually growing the margins. I imagine you see this in a lot of detail, Andy, as well, when they come through to mentoring.

Yeah.

And in fact, I think in terms of Bosco's original question, does taking on more clients solve the problem? I think it actually exacerbates the problem. Problem because we talking and we're deliberately simplifying it down to let's talk about a single job and easy numbers when you've now got multiple jobs at different stages. I think we spoke about this in the work in progress accounting adjustment, building businesses. Finances can get very complex and if you don't have this under control and you don't understand the basic principles and all you do is try and add more load to that, it's just going to fail quicker.

Unfortunately it's 100% why we have our saying that we probably sound like a broken record, but at APB we will grow building companies, but safely and securely. We will never grow an unprofitable building company because we talked about this a few episodes ago or maybe in one of the original ones. But Russ and I went to an event with a very, very well known renowned business coach, generalist, great at marketing and on stage they were boasting about working with a building company and their systems are so good they were able to scale up and grow because growth is sexy. They grew the revenue. They really took on more clients. They did so well, but they grew it so well and so fast that the building company totally failed. And so we are not chasing that. We're not here to chase the revenue. Let's chase better margins and profit so that we can be very safe and secure as we grow.

It's what the APB is all about, isn't it? Fundamentally we have people coming to us that want to grow their business building companies, but we never attempt to scale an unprofitable building company. We always start with the financials which then leads us to fix the margins first and put that company in a position where it can be scaled.

What are the industry standards of benchmarks that builders should be striving for? Do they vary based on geographical location?

I don't think they vary based on geographical location, but there may be slight differences within, in, let's call it the kind of building that the builder is doing. So we would expect to see slight variations in gross profit on for example, somebody building new homes versus somebody doing renovations or remodeling of homes. And generally we'd expect the gross profit on the remodeling jobs to be higher. And the reason for that is quite simply you're taking a far bigger risk when you're building a new house, let's call it from scratch, and you're in control. You've got a blank canvas. You have far greater control over how that project is going to run and what the Eventual outcome is going to be when you take the drywall of 120-year-old building. You have no idea. Not only is grandma buried behind that wall, but there's all kinds of other snakes and dragons and things waiting for you. So that would be the first one is that gross profit obviously must be something that you're very well aware of. But in terms of the business as a whole, as Russ and Sky both said, net profit is actually where it's at in terms of making that you are in that double digit level and staying there consistently. That's really the key. You don't want this kind of up and down feast and famine kind of world. You want to be hitting those margins and then delivering the projects at those kind of margins. We do look at things like the relationship between your fixed expenses and your revenue as a percentage because that really plays a large part in what's left over after you've covered all of those overheads. We look at what your advertising and marketing spend is and how that then translates through into how many contracts that's delivering rates per contract. But eventually all of this, the only reason to really go into business is so that you as the owner have the opportunity to benefit from the outcome of the business. We talk a lot about starting with the end goal in mind. And if I was going to kind of leave one nugget for builders, the day should come somewhere in their future where they either want to hand the business over as a legacy or they want to sell it. There may well be a time in their lives where they no longer work in the business, but their sole income from the business is the net profit. In which case it makes a lot of sense to be building that now. So that at the point that that happens in the future, there's actually something that they can work with.

And I think that fixed cost ratio is a really interesting percentage as well, because we've analyzed hundreds of of building companies and we found that the benchmark is round about the 15% mark. And what's interesting is the companies that are below that mark, typically they have a lower gross profit margin as well. And the reason for that is, the reason they got their fixed cost ratio so low is because they're scrimping on the advertising and marketing, which should be around about 3% of their revenue. So they kind of think they're saving money on the advertising and marketing and it's reducing their fixed costs, but it's always at the expense of their gross margin. And that comes back to the same principles. It's supply and demand. If you're not generating the demand, then your margins get hammered and that's kind of where it comes out.

Wow. Well, this has been a very insightful interview. And as always, Sky, Russ and Andy, you always leave our listeners better than you found them. And I hope that we can all start to apply some of this knowledge in our day to day applications. Any final words from any of here?

I think the reality is the biggest thing that builders need to do is to understand that fundamental difference that sky explained earlier. Get to understand the difference between markup and margin and then make sure you're looking after your fixed expenses. Those would be the two keys.

Yeah, I'd probably agree with that. I think fixed expenses, this is something in our experience, not enough builders. I would say most business owners in general, but specifically building company owners, they're not going into their accounts regularly and actually reviewing their fixed expenses. We call this cutting the fat. Russ mentioned do it, you know, quarterly. You probably will have to do it monthly for a period of time if you've never done this. But go through line by line, all of your fixed expenses and just be very objective. Do you need this? Do you still use that software? Because no joke, when we walk members through this and they're doing it for the first few months, they find software they thought they canceled. They're not using it for months. So get a hold and get a handle on your fixed expenses would be my biggest tip.

Yeah, definitely. Know your numbers. Because I think what we do see is when you know your numbers in business, that leads to a mindset change and you start to value yourself. You value your time and you get a bit angry because you realize that you've been building houses for no profit, you know, to benefit people that are.

Already quite wealthy and you don't want to be bitter. That's the thing. That's not, it's not a nice emotion. So if we can get through that as quickly as possible, then we can move into, you know, being optimistic and actually making that profit.

Well, on behalf of our listeners today, thank you so much for joining us. We really appreciate your time and your insights.

Amazing.

Always a pleasure. Thanks, Busco.

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