25. The State of Residential Construction Industry With Russ Stephens

This is Professional Builder Secrets, the number one podcast to help you grow your building company safely and securely. Brought to you by the association of Professional Builders. Join us every week as we talk to industry experts and your fellow professional builders on everything you need to know to generate more leads, more sales and 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. We have another exciting episode today from the Professional Builders Secrets podcast and I'm joined today by co founder Russ Stevens for the association of Professional Builders. Thanks for being here today, Russ. How are you today?

Hey Bosco, I'm great. Thanks so much for having me on today, Russ.

I'm really excited because in conversations passing you've referenced the State of Residential Construction Industry Report, affectionately called the Searcy Report, and we get to talk about it today. So tell me a little bit about what is the report and then we'll get into how this got built.

So the State of the Residential Construction Industry Report is an annual report and we look at advertising, marketing, sales, operations and financials and we go really deep into the the businesses of residential home builders.

Did you feel like you needed to provide this to home builders? I mean, what, what's the real benefit here for the home builders?

Yeah, well, we looked around and there's lots of industry insights out there. There's reports covering construction trends, but they're all state based or some are national. But nothing that went really deep into the business side of a residential building company. And there was nothing that compared different countries either. And of course the association of Professional Builders was in a great position to be a provider or an aggregator of that information really, because 15,000 builders in five countries and access to tens of thousands more on social media and through our JV partners as well.

How did you come to find that there was a gap and when were you thinking about it? I'm trying to think about the time when you went from concept to going, let's put this together, right? If you take me back through the time, at what point in the journey did you find out that there was a massive gap here?

Well, I think over the years we've always done regular surveys of our database to really try and understand the pulse of the industry really and what's going on. And of course when your raz is up on surveys, you see different things going on on and yeah, I think I saw a report. It wasn't necessarily for construction, but it was the state of marketing. I thought, this is what we really need, you know, the state of the residential construction industry. Something that. That really goes deep and really gives builders an insight. Because I think builders feel so alone, don't they? Yeah. When we talk to them, they. They're always questioning, are they doing the right thing? You know, what margin should they be working on, how much should they be spending on advertising? And. And it's all very well, I think, having these out there saying, you know, do this, do that, really, without think to back it up. But what builders really want to know is what are other builders doing? What are the successful builders doing? And I think that's what the sourcei report gives them. It gives them the insights into what other successful professional home builders are doing.

Take me through your emotion when you decided to go ahead with this. You know, what you're trying to do is actually create an authority point and build a trust barometer with so many different parties involved and it's a massive undertaking. Looking at this from the outside, were you excited, nervous? Were you anxious? Were you sort of like, I'm just going to be brave and we're going to go, go ahead and do this. What were you thinking when you were doing this?

Yeah, it's one of those things, isn't it? You kind of get excited by the idea and the potential outcome and then the reality kind of hits of just how much work this is going to bring to the team, really, and the pressure it's going to place on the team and you kind of think, is it going to be worth it? But yeah, I think that the whole team were really excited about the idea of collating all this information and then making it available for builders. We knew it was going to be a valuable asset and it was going to be something that we could continue to produce for years to come. So, yeah, it was a mixture of emotions, I guess, bit of nervousness as well, because what if no one fills it in? Yeah, excitement.

Yeah, you're absolutely right. And I mean, we'll poke a little bit deeper into, you know, what goes into building the report. But, you know, you talked about the fact that you observed a gap in the industry and at the time you were noticing that there was information, but there was a lot of information needed. Let's go deeper into that. What do you feel the industry was lacking at the time when the concept of sourcing came to life?

Benchmarks. Yeah, definitely benchmarks. It's something that our coaches spend a lot of time explaining or sharing, I should say day with builders and then helping them to get to those benchmarks and surpass them. Because there are just too many myths out there. There's myths regarding pricing, there's myths regarding advertising. Those myths are damaging because they're holding builders back. Builders are not applying the margins that they need to be applying or deserve to be applying to their jobs because of the perception out there that builders don't work on those large margins. And the fact is the successful ones, ones, the professional ones do. So I think sharing the benchmarks really does give builders the confidence to apply those same standards and pricing models to their own businesses.

Do you feel like you also wanted to change the narrative? Because it sounds like because they didn't have the benchmarks or they didn't know the benchmarks, there was a lack of awareness about what you're measuring or how are you doing it. But more importantly, it's a pretty dangerous narrative to sit on thinking you're doing all the right things and then you realize you're actually not charging enough or you're not charging the amount that you should be charging.

Yeah. And I think what the source report does is it, it gives us proof, proof behind the information that we're currently sharing with builders, you know, proof as to how advertising impacts margins, proof that charging for quotes leads to a higher conversion rate. So there's a lot of strategies that we take our members through and ye hats off to our members because they go ahead, they apply these and they get success. But there's always a percentage of builders, maybe the, the older guys, a little bit more cynical, they're a little bit more battle weary, I would say, from years in the trenches, you know, fighting a very tough battle. There's a little bit of skepticism there and, and I think the saucy report gives them that proof, that confidence that, yes, this is the right path and you know, others have followed that path and here's the proof they're getting the results.

What I love as well is that the data is, you can't change or sway the data. It never lies. Right. At the end of the day, the data is there for you to absorb and accept the truth.

I've got to tell you about that. The data. After collecting the data, we are extremely fortunate to have a very talented marketing coordinator on our team, Peter Miller. And yeah, Peter is obsessive about data. She will not allow one line of data to go into this report unless she is 100% certain it is accurate. So it's great to have people like that on your team because yeah, if you're producing this kind of information, the last thing you'd want is for it to be inaccurate in any way. You know, to have some rubbish data kind of skew in the facts. But yeah, we have absolute confidence in everything we put out there because we know how diligent Peter is.

Well, let's get dive into some of this data and you know, let's. I'm sure you have some snapshots, but what were some of the biggest takeaways, takeaways or insights that came from that first report? You know what blew you away when you started to look at that report too?

Well, yeah, well, we've just completed our second report now and I think what's really interesting is comparing the data to the first report. So yeah, we did our first state of the residential construction industry survey at the back end of 2020 and published that report last year, 2021. So this year when we repeated the process, we were look at trends and that for me has been where some of the biggest insights and takeaways have come from. Because some of the things that stand out we've seen. The adoption of project management software in 2021 has been huge. You know, it almost doubled in terms of the percentage of builders that responded to the Sourcei survey. We had around a third of builders in 2020 were using dedicated project management software, which we know is absolutely crucial for a professional builder to use in, to deliver their jobs, professionally, communicate, et cetera. And we saw that number double in the last 12 months to almost 2/3. That was just fantastic.

And is that because of the times, because a lot of businesses are now working hybrid scenarios or remote and you almost need a digital infrastructure in your business, in almost every vertical out there. Do you feel like that's just the sense of the times moving ahead, that everyone is now moving towards a digital adoption?

I think so. I think it must be because yeah, there's no question there is a trend towards bigger adoption. But to go from a third to two thirds in just 12 months to double, there has to be more behind that. And I agree with yeah, what you're saying there. I, I think the whole Covid thing forcing people to work remotely, it also gave people builders some opportunity during lockdowns to actually look at their building companies and work on them. So that opened up the opportunity to maybe jump into taking on a new software, which is a big commitment for a builder. So yeah, in adversity, opportunity comes out of adversity, doesn't it? And it's the builders that have spotted that opportunity and taken advantage that are going to now reap the rewards for sure.

And one of the conversations I had with you when I first got to meet you was I learned very quickly the difference between markups and margins and costings as well. What were some of the insights around that? I'm just curious because that's such. It was so fascinating when I learned the difference. But, you know, what did you observe through the trends and the reporting as well?

Yeah, again, when we, when we look at the trends and again, this, this was quite a surprise, I would say to me, because we've really seen the number of builders that truly understand markup and margin that has shot up. This was a new question for 20, the back end of 2021. So for the 2022 report. So we didn go as in depth because what we've found over the years and, and this isn't a slight on builders, because this is business in general. Business owners in general. Most. Well, I wouldn't say most, but a lot of business owners do not truly understand the difference between markup and margin. You know, it's, it's confusing. It's even more confusing in construction industry because those terms are used interchangeably. So, you know, not many people truly understand the difference. But what we've seen in the last 12 is a big increase in the people that truly understand it because we asked the question, you know, do you know the difference between markup and margin? And then in the following question, we actually asked the question which disclosed if they did truly understand it. And we found that 80% of the builders that responded said they understood the difference. But then 80% of those respondents answered the question correctly to demonstrate that they clearly did understand. Now, that is a lot higher than we typically come across when we're dealing with with new builders joining apb, where we, we actually take them through this because it's one of the first things that we, we kind of explain and teach builders because it does affect. Does affect their overall profitability, understanding that. And that number is way lower so than 80%. So what I would say is I think that clearly demonstrates the quality of the builders that took part in the survey as well, which is really important because, yeah, this is all about a survey of professional build. Great to see that the builders that took part truly knew what they were talking about when they answered all these questions.

It also probably reflects on the fact that you are also becoming a content authority because you know, there's this content for people who are members, there's content for people that work with your coaching program. But over the last few years, the association of Professional Builders has become that content and media hub for everything around building a professional construction industry as well. So I think it also reflects on the quality of content that you guys are putting out organically as well.

Yeah, we put a lot of information out there. There's a, there's a lot of builders that follow us for a year or two or even three years before joining the association of Professional Builders. And part of that reason is because the amount of information we put out there. We host free webinars. Yeah, we obviously we've got the Professional Builders Secrets podcast which you're listening to now. There's articles, so there's a lot of information to consume. But obviously, you know, you. It's great consuming that information. But to get the real gold, the downloadable templates, the calculators, etc. And of course, most importantly, the one on one coaching, you need to become a part of the association to access those kind of resources.

Do you feel that builders also are a little bit more financially aware on their daily costings or fixed costings as well?

Russ?

Now in the comparison between the two.

Years, yeah, that was something else that we saw a massive improvement on. One of the numbers was that we asked was about fixed costs per job per day. And this is about understanding your fixed expenses, which is not your cost of sale. So it's those expenses that can't be directly attributed to a job, like your office rent, maybe an estimator in the office, this contract administrator, et cetera, all those fixed expenses and then understanding how they apply to each and every job and then understanding how much that figure is on a per job per day basis. Because when you understand that, you understand the cost of a one week delay and that's been incredibly important this past 12 months with the supply chain issues we've had causing weeks of delays that has impacted the bottom line for. Well, I was going to say most builders, it's every builder really, it's had an impact on the bottom line. So understanding that is crucial. And a real encouraging stat that came out of the Sourcei report for 2022 was around about 50% of builders now understand their fixed cost per job per day and that was up from that was a 50% increase on the previous year's survey.

Any insights around marketing, advertising, sales?

Yes, something we've always said, and I'm sure you've heard us say this over and over again. I know we've said it on these podcasts. Margins are linked to marketing. Yeah, we say this over and over again. And that's all to do with the supply and demand formula. The more demand you generate, it gives you opportunity to not only grow your building company, but to increase your margins. And when you have more demand than you have supply, that makes it really easy to increase your margins. And the only way to do that is through advertising. Advertising and marketing. And what we've been able to prove with some of the data in the sourcing report, just by looking at different questions and combining the answers. And this is again where I got. I got to take my hat off to Peter because she does a fantastic job of answering my questions when I look through the data. Well, what about this? And how about if we overlay these two questions, you know, what's. And she goes away and creates the pivot tables so that I'm not making assumptions and looking at hard facts. And one thing that we were able to prove is that margins are linked to marketing. Because the builders that were spending 1% or less on advertising, those guys had the lowest margins. Yeah, they. What you invest in advertising, obviously, as long as you do it correctly, that comes back in the form of margin. The extra margin that you can charge consumers, it more than covers what you spend on advertising. And that's something we've been beating the drum on for years now at the association of Professional Builders.

And what do you feel is keeping builders up at night for the new builders out there? Do they struggle with infrastructure? It what stresses them out right now?

Right now, what we're seeing the most frequently mentioned challenges, margins and systems. And the reality is, is it's always been margins and systems. It's been margins and systems ever since the association of Professional builders started in 2014. However, what has changed is the perception, because prior to 2021, the perceived problem was marketing and sales. It was always, I need more leads. You know, why do you need more leads? Because if I had more leads, I'd have more sales. If I had more sales, that would solve my cash flow problem and I'd be profitable. That would kind of solve everything. And that was why builders generally reached out to the association of Professional Builders, because they wanted to understand how they could market their business better and how they could convert more of those leads into sales. However, when we sat down with these builders, we always started by looking at their business model, looking at their margins, and looking at their systems. And it was always a case of, we have to fix your margins first. We cannot scale an unprofitable business. And I think the big myth is that, yeah, I'm working on low margins, but if I had more sales, the business would be a lot more profitable. And the reality is it won't. If anything, it goes the other direction because of the effect of owner's influence. Building companies only really start benefiting from the economies of scale once you pass the $6 million mark. Before that, they actually go the other direction. So you must get your margins correctly first. So I guess to answer your question, the reality is we've always focused on margins and systems first with builders. But the perceived problem over this last 12 months has been marketing and margins and systems over marketing and sales. For builders.

What's really refreshing as well is the fact that even though we're living in a time of uncertainty and lockdowns and all these different things and supply chain issues, people, the construction people are actually just getting on with it. You know, they're sitting there going, we know that these are the challenges, we know these are the problems, but we want to get our systems right to accommodate for everything. Which is very. Which is very optimistic and refreshing to hear as well.

Yeah, I think residential home builders have made us proud to be in this industry over the last 18 months. The way these guys have stepped up to take the challenge head on. The biggest challenge that we've faced in this industry in living memory with supply chain crisis, with rising costs, rising prices of materials, labor shortages, and all working on fixed price contracts in a lot of cases as well, getting continually squeezed, continually having to reschedule. It has been an incredible challenge. And of course, the big myth outside the industry is that builders are making a fortune. What do they have to complain about? Anyone in industry knows that the reality is very different. And like you say, I am so impressed seeing the way so many builders have stepped up in this last 18 months and used the time, the downtime that's been forced on them to actually work on their businesses and improve them. It's been fantastic to see.

I was actually at an event that you had put on for builders in Brisbane, and I remember watching different builders from different walks of life come together and connect on similar struggles, connect on similar problems. And they were just happy to be around each other and not. They weren't there to compete, they were just there to share each other's common struggles and learn from each other. And it was a well put event. You had so much information, you created that connection as well, and it was really inspiring. To see Russ, because at the end of the day, it really brought that notion of we're all in this together, we're all going through the same problems as well.

Yeah, I love these live events that we do and it's. It's been a shame there just hasn't been enough of them during COVID But we're looking forward to getting out on the road again and most importantly, bringing builders together. We love mixing with builders and meeting them in person, but it's like you say, it's great to see builders networking and just sharing war stories with each other because they find so much support in that. And obviously we've been plugging the gap online with the members Facebook group. We see great interaction between builders within the association of Professional Builders Facebook group where they constantly ask each other questions and support each other. But yeah, meeting in person is fantastic. And I think the great thing about these events is in our mind, builders are true professionals. They're right up there with architects, lawyers, accountants. They are professionals on the same level. And the problem is they don't always get treated with the respect they deserve simply because they did their formative years on site, whereas other professionals did their formative years in university. And because of that, for some reason, people tend to look down on builders to a certain degree and that's not right. You know, these guys have huge experience, huge intelligence, so much expertise to offer. Yeah, they deserve to be treated as professionals. And that's what we do at our live events. You know, we treat builders as true professionals. So we always meet in nice hotels, we put on a nice evening for both our members and our non members and. And it's how it should be in this industry.

Yeah, it was great to watch come to life. I was really impressed at how everything just was there for them and it was just a resource for them. And to see the smiles on their face and to see the breakthroughs just by having conversations was really inspiring. Do you feel that the stigma is evolving with associations like yours where it's really geared towards changing the professionalism and the perception of the industry and how the media and how people perceive builders moving forward? Do you feel that in the next few years people are going to look at builders with a different sense of appreciation and light?

100%. I think there is a very big lag factor, unfortunately, because as we see in the data, builders are getting a lot more professional at a very rapid pace. I don't believe the perception from the public is moving as fast as the reality. So. So there will be A time when that change there will be a tipping point when they do become viewed as professionals. But right now it's just great to see that they are truly becoming more professional in the way they operate.

Let's talk a little bit about the SOURCEI report. I was sitting here last night thinking how much time and insights and people and resources was put into this because I've seen the first report and I was blown away. I went through the pages and all the different entities and you've got it nicely broken down into financial, sales, advertising, marketing, operations. Take me through the process of what goes into creating a report of this magnitude.

It's massive. Yeah. First of all there's a review of the questions because there's around about 100 questions which is a massive ask of builders. And I've got to take this opportunity to thank every builder that's ever participated in one of our Sourci surveys because we do appreciate this is a big, big, big commitment of time to, to go through and answer those in depth questions. But the benefit for the builders that do is it acts like a self diagnostic tool because it really prompts some objective thinking about what may be missing in their own businesses. But so once we've we've got the, the questions we then embark on three months of data collection, data gathering. So we promote to our own database of 15 0. We promote on social media where we have a huge following. We work with our industry partners like buildertrend, buildxact, Builder Price, Exact Accounting and CB USA who work with us to promote it to their builders as well to make sure that we get as many builders participating as possible so that the data that we are going to be producing is accurate. And then once we go through that data collection stage it really is a case of then tidying up the data. And this is where Peter Muller comes in and does a fantastic job of making sure all the data that's included is valid. I'll be looking at the data as well, prompting more questions where Peter will be going away and producing more pivot tables with answers that either verify or pose even more questions to a hypothesis among have about something happening. We'll then create a commentary as to what we see from the data so that someone can then read through. They can see the data but they can also they get a good summary. We share the data with our partners as well so they can provide their own commentary and then finally we go to print and distribute and you know.

I've had the pleasure of actually interviewing the CEO of Build a Trend and I've also had, you know, Ryan from CB USA as well. These are massive partners, these are industry known partners with their own massive network of builders as well. And what, what's really impressive is that this is not just an Australian insight, this is, this is a global insight coming from different parts of the pond. Yeah.

And it's very, very interesting as well because too many times we hear the, my building company's different because I'm in a small town or, you know, I'm in Brisbane and then it's I'm in Queensland and it's, I'm in Australia and. And yet when we look at the data and we analyze it by country, we can see that in most cases, not all, but in most cases the data is very, very similar. And this is what we've always known. It's why we teach the same process to builders in the US as Canada, as New Zealand, the UK and Australia, because we know it works and we know, most importantly, it works in all those countries. And I think the data that comes out, the sourcei report backs that.

And I would say one of those similarities would probably be everyone's facing the same supply chain issues. Right. There might be different types of supply chain issues, but they're all facing it in different parts of the world.

Yeah, 100%. Yeah. We see sometimes it's a bit more extreme. I think timber comes to mind where it increased 100, 150% but in the US it went up 300%. But the bottom line is the challenge is still the same. An increase is going to destroy your margin. Yeah.

And it's interesting because when we interviewed previous builders, it really had. They had to rely on their systems, on how they ordered, how they bulk ordered or how they had to prepare and work around it, you know, try to manage the situation. They can't change the situation, but they have to prepare for it in many ways too.

Yeah, yeah, completely. And one of the things that was great to see was how many builders have referenced construction slots and the construction slot training and templates that we provide our members with and has been pivotal in helping them to plan over the last 18 months.

Now, when we look at all these changes, where do you think the industry is evolving to from the insights you've gathered? Because there's a lot of insights there. But looking at the data, where do you feel is the compass pointing to moving forward?

It's definitely pointing towards a more professional industry. We still look forward to the day where these unprofitable building companies that are allowed to continue Operating year after year, while technically trading insolvently, yet they still get their licenses renewed. We still look forward to the day where those companies won't be allowed to trade at a loss because that will really help this industry take a giant stride forward. Because at the moment, professional builders are facing unfair competition from companies that are not making money and that is putting pressure on their whole pricing model. So the sooner we can remove those building companies from the industry, we can raise the level for the remaining building companies, the professional building companies that are.

Left for the people, the DNA of the people that actually made up the source of the report. Did you find that there was more people on the second report because there was more partnerships and newer people? What was that ratio like and do you have plans to do more these.

It was very similar, but we targeted larger building companies. The, the build the, the profile of a building company for the association of Professional Builders is a new home builder or a remodeler. For remodelers there they're typically doing jobs $100,000 or more. And, and obviously the, yeah, the new home builders, yeah, they could range from a million to 100 million. But what we consciously did was not include data from the smaller builders that don't fall into that category. So there might be handymen, guys doing decks, very small renovations, bathrooms and kitchens, etc. So we removed that data to keep the information even more accurate and relevant really, because if it gets skewed with some very small operators, the data starts to be, become meaningless. So overall numbers, to answer your question, were similar, but the data was a lot more accurate, I would say.

And is this going to become an annual process now, moving forward?

Yes, this is, this is here to stay. This is part of the association of Professional Builders now. We, we look forward to it. It's, it feels like no sooner do we, we complete one year and, and focus on getting it out there in the marketplace than we are preparing. So it's, it's. Yeah, it's become kind of an ongoing project for us.

Well, I've seen a little bit about the sourcing report online, but for the new builders out there, how can they access the report and how can they get involved in being part of the future reports as well?

The easiest way is to go to our website. So if you just Google the Association of Professional Builders and, and there you'll be able to download a free PDF. I think we can probably put a link on this podcast episode as well, Bosco, where the guys will be able to download a free PDF. We also have a limited number of hard copies that are being given away. All we ask is that you cover postage and package. Yeah, postage and packaging. But depending on when you are actually listening to this, those copies may have all gone. But yeah, but you will certainly be able to download the free PDF.

Russ, it's been a pleasure speaking today. I love seeing yours and Sky's vision come to life. And thank you for taking us behind the scenes to really give us an insight on how this particular report came to life.

Thanks so much for having me, Bosco. I really enjoy chatting with you.

Cheers.

Thank you for listening. Remember to subscribe to Professional Builder Secrets on your favorite podcast platform and leave a review. To learn more about how the systems at the association of Professional Builders can help you grow your building company, visit associationofprofessionalbuilders.com See you next time.