73. The Real Cost Of Mates Rates With Andy Skarda

I don't think anybody's real mate would want to cause the builder's business to go bankrupt. The reality here is if you are finding the right client for whom the value that you offer is the solution they are looking for, you remove price from the equation. Cutting corners in the construction industry never really works well for anybody. The fact that if you take on a job that's only going to deliver 2% margin while you are building that job, it stops you building another job that you could be making 5, 6 or 10% on.

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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 from the Professional Builder Secrets podcast. Joining us today is my pal, Andy Scada, head coach for the association of Professional Builders. Andy, lovely to have you again.

Thank you. Bosco, always good to see you. Always good to talk about these incredibly interesting subjects that you come up with.

Well, I'm really excited to talk to you today about mates rates and it's something that I see constantly. I actually started seeing it a lot more in Australia. But why is the concept of mates rates so popular in the construction industry?

Well, I think we maybe need to do two things. One, just to the audience that's not from Australia, maybe just explain what mates rates is, and secondly, just to kind of dive into the fact that I think it's really popular everywhere. So really what we're talking about here is somebody getting a special price on something, and particularly a better price than what they would pay in the open market. And to be honest, I don't know whether it's really that specific to the construction industry. You know, I can think even in things like the US election campaigns, there were things like why aren't we paying $5 for a t shirt and manufacturing it in the US instead of getting it for a dollar because it's manufactured offshore. And I think it's just a natural human reaction to want to spend as little as possible on the things that we have to buy. Why is it popular? I think we all like cheap stuff that's the real reason?

Well, and again, like I said, I heard the term mates rate when I moved to Australia, but there's obviously a global CL around cheap rates. Some people call it discounts, some people call it a better deal or deals. You know, we hear a lot of this around Black Friday in the retail world. So is this another cosmetic to the word discount, really, when you hear mates rates?

Yeah, absolutely. And I mean, like you, I've lived in a few other parts of the world. I had five years in Singapore. And if there are any Singaporeans listening to this, the concept there is called lobung. Can I get a lobung? We talk about a box that fell off the back of a truck. You know, we call about, you know, people hook me up with X, Y, Z. So I think it's a pretty universal concept and it, I think it tends to go a little bit deeper than discount in most cases. You know, we almost looking for that better than discount kind of rate. You know, I think that's really where it takes us to.

So what's the overall verdict, my man? Is it a good, a bad, or sort of an in between notion to promote it in the building industry? What are your thoughts?

I think it's dangerous.

All right, tell me why.

Well, I think it's fine with a commodity. You know, if I'm buying a T shirt and it's the same T shirt and it's the same quality and everything else, and I could spend a hundred dollars on it, or I could spend $30 on it. As long as nobody is getting harmed in me spending $30 on it, why shouldn't I? In other words, if all that's happening is there's an exorbitant markup being added onto somebody else's labor for the final price, I think in that sort of commodity world, it's fine. The danger in the construction industry is that cutting corners in the construction industry never really works well for anybody. And we're not talking about a commodity here. We're talking about essentially a significant physical asset. And I just think it's dangerous to be applying T shirt type economics to something as big as what we're talking about here.

Let's dig a little deeper here because for me, I feel like that term might be overrated as well because sometimes it's potentially bastardized on commercials. You see it on TV commercials. You have a season for Black Friday sales as well. If you're not paying attention to this, how critical could this be to the overall financials for a builder?

Oh, huge. You know, and the danger, I mean again, going back to what we were talking about earlier, Black Friday in most cases is an opportunity for retailers to significantly discount slow moving stock to get it out the door. But they're never going to discount it below a price at which it's at least breaking even. The danger in what we talking about here is that it can cost a builder significantly more than just break even if he gets into this space. So that's the danger we've got to be careful of here.

So Andy, the theme of this interview is what is the real cost of mates rates to a building business? I'm going to ask you that question anyways. You've alluded to the fact that this can be a pretty dangerous situation for a builder, but what is the real cost of mates rates to a building business? How bad can this get?

It can get as bad as possible. I've seen this go from oops, I didn't realize I was investing in my mate's house to my business is belly up now because I've done too much of this.

Right.

And the danger, Bosco really is if a builder doesn't know his numbers, doesn't actually know what's going on financially within his business. And that can be a very difficult thing for a lot of builders. There's a lot of moving parts in building one house and a lot of builders are building multiple houses at one time and, and it can be fairly complicated. And if a builder doesn't know what's going on in his financials, I've had a number of, even in our private mentoring program. So clients that are not beginners by any means, that when we've analyzed some of their past jobs, I in fact had a client. And if he's listening, he'll know exactly who he is. Because when we did an analysis of his previous year's jobs, we found that he had literally invested $50,000 into his friend's house.

Right?

He built a house, he'd done it at mates rates and because he wasn't in touch with his real numbers, when we did the analysis and looked at the actual numbers, there was 50 grand in that house that he'd actually invested. So in other words, it wasn't that he hadn't made a profit, he'd made $50,000 less. He'd actually built the house at a loss to himself. He had covered 50 grand of what had gone into that house. So there's one example, the danger, I think, and, and you know, when we keep it at the mates rates thing, it Keeps it sort of light and airy because it's your friend, it's your mate. The problem is when this starts to happen with somebody who isn't your mate, and now you end up in a situation that to get the job, you thought you'd be do something to give you that inside line, and now there is no way of recovering it, not even in relational capital down the road, this can turn really ugly. This is the stuff that lawsuits are made of.

And obviously, if you're honoring it for one mate, the chances are you're probably accumulating it over a period of time for a few mates. And that's when it starts to get really out of hand. Because four mates, five mates. Now you're compounding that 50k across different mate, and all of a sudden now you had a loss of 2, 3, $400,000. Right, there you go. Yeah, that's.

That's exactly the problem.

All right, well, we know what the dangers are. What's a better way or an alternative to mates rates? Is there an alternative for our listeners out there? What's their saving grace?

Well, I don't think anybody's real mate would want to cause, you know, the builder's business to go bankrupt. And if you're really my mate, I would think you'd want the best for me. So I'm pretty certain there's somewhere we can meet in the middle. And where would that be? There are a number of ways that a builder could supply expertise and not charge for that expertise. So we at the APB talk a lot about a sales process, including a builder being paid for concept designs and preliminary building agreements, those kind of things. A builder could choose to donate his time in those things to a friend and save their money up front. But the problem is, once we get into construction, the timber costs what the timber costs and the concrete costs what the concrete costs. The only way to discount that really is for the builder to cut his margin.

Right.

Gonna have to pay for the timber and the concrete and the tiles and the, you know, the tapware and so on. So the danger is, we back to the thing that you and I often debate as soon as you start cutting margins. And the general public has this opinion that builders make exorbit amounts of money. They don't. They handle, in some cases, large amounts of money. But the actual margins that most builders are working at are really, really tight. And what we now saying is, well, let's cut into that, which I think is dangerous. So for me, if somebody was saying to me, how can I offer my mate something that makes this better than the guy on the street would get. I'd be focusing on that pre construction design process and obviously donating my expertise to make sure that he gets the best deal possible that doesn't destroy my business.

Now you're also talking a little bit about creating value. So what are some of those value or other value areas that you can produce other than reduce pricing? Would it be sort of that consult or education or knowledge like where are some of the areas that we could tap into?

Well, that and particularly in the design stuff we talk about the fact that over 70% of architect designed homes are never built. And part of the reason for that is that the motivation often from an architect's perspective is to create something that is a monument to his design ability and meet the client's requirements and often that's not cost effective. So you know a builder who's able to get involved with one of their mates from the word, go on the design side and literally identify those areas of the build where savings can be achieved and then make suggestions on alternative building methodologies, different materials being used, knowing where to go to get the best price on that multi head shower that the guy wants to install. Those kind of things I think would definitely add value in that they wouldn't necessarily reduce the overall price of the home, but he would end up with significantly more features in that home for that same amount of money.

Yeah, I mean look, at the end of the day, people in the homes are, they're not necessarily designers of builders. So I'm sure any insights given during that process could really be a good thing. It could exactly help people as well because everyone has blind spots. Right?

So yeah, we don't know what we don't know.

Yeah. Well, let's take a peek into the mentoring and coaching calls as well because your coaches yourself, you're hearing this probably quite a bit for builders going, you know, but Andy, we have to use discounts to survive. You know, it's such a trialing time right now. You know, how do you create inspiration for builders to look beyond discounts? Does it come down to the numbers?

Yeah, and I think Bosco, in our case it comes down to proof. The beauty that we have as coaches and the beauty we have as the APB is that we've got years and years of actual data from actual builders all over the globe. And because of that we've been able to come up with financial benchmarks that we know are tried, tested and applicable everywhere. And you can chat to virtually Any one of the coaches. We've, in fact, as we were talking about off air before this, we've just come back from the International Builder show in Las Vegas a little bit earlier in the year. Not to date this particular podcast, but we've had a couple of occasions where we have presented our financial benchmarks in those educational settings and had builders come to us afterwards and say, the kind of margins that you are quoting are impossible to achieve. Nobody could achieve them. In fact, we had somebody come into the private mentoring program where they stated reason for coming was to prove us wrong. And of course, we proved ourselves right. So the reality here is if you are finding the right client for whom the value that you offer is the solution they are looking for, you remove price from the equation. And if price is not there, then discount does not even come into the discussion. The danger for a builder is to stay in that space where you are quoting plans that have been given to five other builders. As I alluded to earlier, you're all buying your concrete and your materials from the same suppliers. Pretty much. You've got the same cost of labor to run with. So the cost to build that house is going to be pretty much the same for all five of you. So what do you do? You decide to cut the only thing you can cut, which is margin. And when you don't get that job, the next one, you cut a little more and you cut a little more and you cut a little more, and then that job runs over time. In other words, longer than schedule. And now you are donating and investing into that home. And if we turn this around and said, well, I'd like you to take a job where you work 60 hours a week or 90 hours a week, and you pay in for the privilege. Yeah, nobody would take that job. And yet when you cut margins in that sort of scenario, that's what you're doing. That's what you're putting your hand up for.

And to confirm, I've had plenty of builders that have been on this podcast that have said to me that they join the mentoring program because they didn't believe in the notion of the rates and margins and everything else. And they were proven wrong. A lot of them were proven wrong. So that actually is a valid story there, where people don't know what they don't know, like you said. Right.

And I mean, let's balance that for the people that are stuck in the, I have to quote plans world, there isn't another option because the driving force in that decision is priceless. So While you keep the buyer's driving decision on price, the only way to be competitive is to do it cheaper.

I just want to ask you a question there because, you know, what you're really saying is to really focus on the experience in the building process now.

Absolutely.

Should builders look at this, because you're going to get some of those builders going, well, how do we stay competitive? What's your response to that?

Well, the beauty is you're no longer competing on price and therefore this whole discount question goes away. How do you stay competitive? You are better at offering and delivering value than the next guy is. And it really comes back to having a very clear picture on what type of client, with what type of build will give me the kind of margins that make my business sustainable and able to grow, for whom I have the perfect package to solve all of their problems. At the end of the day, in the building industry, largely, we could take the word sales and throw it out the window, right? Because the most successful builders don't sell their clients anything. They help their clients realize the dream that they have for the budget that they have. That's what they're doing. And in terms of delivering value in this space, that's really where it's about. And it doesn't really start when we put the first spade in the ground. It starts at the first discussion six months before that, making sure that we understand exactly what is driving this client into making the decisions. They are helping them get the best design, the best process, et cetera, et cetera. That's really where the competition comes in. Being prepared to go that extra mile up front rather than trying to shave money out of the margin and delivering a crappy service along the way.

Now, I recently bought. I'm a bit of a nerd, as you probably know, and I recently bought a 55 inch orc monitor.

Okay.

And there's a story here. So it was fairly expensive and, you know, I upgraded and I loved it because I could have five to six different workstations open up at the same time. Yeah, the person that got me this, you know, through the experience, said, listen, I've got this ergonomic chair and if you are going to get this, I highly recommend the ergonomic setup. And we do this for you at no cost. Didn't use the word discount, didn't use the word free. He said, we'll set up the ergonomic so that you don't have any neck problems when you're working out of this thing. He ended up getting two transactions from Me, because I was at that age where I was looking at my back and my posture and everything else and I was like, you know, that was a pretty smart move. I went in with one entity and he talked about another entity. What are some of those terminologies that are valued that should replace mates rates in the future? You talked a little bit about the design process. You talked a little bit about an architect's vision and industry knowledge. What are some of the terms that you're seeing in today's market for the people that you are not going down that whole makes rates park?

Yeah, it's a combination of all those things that you've just touched on. It's a builder with decades of experience knowing intuitively this type of design is going to be more expensive than this type of design. And the difference between them in the final analysis, in other words, in the lifestyle that they will deliver is so minimal that to spend an extra $50,000 to have that versus this, you're going to be disappointed. You know, and I mean we have members and mentoring program members that get frustrated because they say people don't want to listen to us. And what happens often in those kind of scenarios is that that client will go away and go to another builder and six months later contact our member and say, I wish I'd listened to you. The problem with this industry, as I said, go back to where we started. This is not a commodity. This is a big deal that we're putting together here. You can't just undo it and start again. You four months into a build and it goes pear shaped. You stuck pretty much with the outcome. And most professional builders would be very hesitant to step into a 60% completed mess and try and fix it. And it would probably end up costing significantly more anyway.

Right, right.

It's a long way of saying it, but I think the real focus is on a professional builder who invests the time up front to make sure that the design is cost effective for what that client wants and then executes the build according to whatever that is efficiently and on time and on budget. Put those two things together. Discount unnecessary, it's automatic. It's built into the process.

Now what do you say about the cynics or critics that say that there's a future of hardship and competitiveness and we're going into this sort of uncertain potential recession globally. What are your thoughts around it? Because I would think that you'd still want to protect your margins going into these hard times.

Even more so. And what I think a lot of builders Forget about or maybe ignore is opportunity cost. The fact that if you take on a job that's only going to deliver 2% margin while you are building that job, it stops you building another job that you could be making 5, 6 or 10% on. So there's this double whammy again because it's not a commodity because it's going to tie up your resources and your capacity for 6, 8, 9, 10, 12 months. We need to be very, very careful that we taking on the right jobs for the right reasons. So again, coming back to is there going to be competition? Absolutely there is. But professional builders are going to be competing on the things that matter. And at the end of the day, I think you and I have discussed Tiger Kings and the fact that in my opinion that program is the biggest waste of time that there is on the face of the earth. If I had the choice of spending six months building a house that I was going to lose on, I'd rather watch Tiger Kings for six months. And I think that's a fate worse than death actually. But the point I'm trying to make is being busy for the sake of busy is being busy is not a good option for a professional builder. A professional builder wants to make sure that he's investing his time and effort into something that's going to give him an adequate return. And if he's doing that, there's no financial hardship.

Yeah, and one can also say that the more you discount, the more desperate you show your hand attaining business. Which then the wrong message to anyone out there.

I think you've spoken to my friend Ryan Stannard.

Yes, I have.

Ryan shares this wonderful story about in his early days as a builder he would quote four jobs, win one and then get this cold feeling of dread in the pit of his stomach because he thought he left something out. As in for him to win the job he must have forgotten to cost something. And when he told me that story, it was with a group of other builders around him and I expected them all to frown and point at him and laugh and they didn't. They all nodded. And that's scary. That's where the hardship is going to come when you've already shaved everything to the bone and then it takes longer. Now you're into dangerous territory and shout.

Out to Ryan, I've had him on the podcast, he's got a great story and I've seen him in the last few years, just his business has progressed and progressed and he credits the mentoring program and the support of App for a lot of his growth as well in the last few years. But that's a classic example of someone that's had to say, you know what, enough's enough and we're going to do it the right way. Right? So shout out to our friend Ryan there, what are some of those trends that you're seeing in the market when it comes to creating value today? You know, you come across so many builders that are in so many different stages, stages of their business journey. Where do you see the future of builders that are actually applying the systems and actually applying your mentoring and coaching. Where do you think they're going to put their value, I guess in moving forward?

Well, you know, very few builders that come to us need help building homes. In fact, the bulk of the guys that come to us are often multi award winning builders. I had a recent discussion, in fact with a potential client who grilled me about my building experience and really didn't even want to carry on with the conversation if I wasn't a builder. And I just asked him the question, do you need help building houses? And he sort of stopped for a second and frowned and he said, well, no. I said, well then how would it help you if I had building experience? What do you need help with? And he said, well, it's everything else. And I said, now there I can help you with those other things. So I really don't think it's going to be. And we don't for a second pretend that we could teach a builder how to build a house. Don't give me a hammer and a bag of nails. That's a, that's a dangerous thing to do. But the value that I'm talking about really comes in the entire client experience. So the builder who is able to professionalize their sales process, for example, that in their marketing is delivering high value content that really helps people coming into the building process to understand what's important and what's not. Who has a design team that understands where cost comes from and can make suggestions about the most cost efficient way to achieve what the client wants? Those are really the guys that are starting to make the traction. And the strange part is in virtually every case, as they start to offer that kind of value and they start to understand their numbers and run their entire business more efficiently, their margins automatically improve. And let's go back to where we started. So I'm a builder and I've got a mate that wants me to build him a house. Can I cut him some slack? Not if every job I've got on my books is cut to the bone. No, I can't. But if I was going to make 5% or 10% out of the job, and I decide to say in your case, because you're my mate on this one job, I'll make 8% instead of 10%, I can do that if the rest of my business is financially sound. And I'm confident that I know that I now have some leeway to go if you absolutely desperately need to discount if that makes the two of you feel better. But I really believe that the main focus in this kind of discussion should be let me make the entire experience of value to you. Let it be something positive that you will do over and over again. And in that way, I can actually give you far more than you would get if I managed to save you $10,000 and parts of your house fell down six months later.

Now, how does the APB help its members offer great value when it comes to pricing and quoting the right way and stuff? What are some of the systems or tools that you use outside of the mentoring program? Because obviously the ment more that elite coaching as well and you sort of help design that. But I'm sure you have other resources to help them to understand whether they even pricing the right way because you've got the sourcing report as well. Right. So tell me a little bit about, about what are some of those resources?

We deliberately move the focus in most of the building industry, the focus is on gross profit. And we think that that's too short sighted. And in fact, that's what gets a lot of builders into trouble, is they aren't taking into account the fact that while they are building that house for six months, they are paying rent, they're paying insurances, they're putting fuel in vehicles, et cetera, et cetera. There's a whole bunch of overheads that need to be taken care of as well. And if those are not taken care of, then you can't deliver the kind of service on site that clients are looking for. So we kind of turn around, we call it our pricing for profit system. And really what it's doing is making sure that the focus moves to net profit for the business on every job, rather than simply delivering a gross markup or margin kind of on the top end without taking those fixed expenses into account. So there's a fundamental shift there in terms of how jobs get costed and what the true cost of the job is. And once we've established the true cost, then we can look at adding real margin to that kind of thing. So that's one side. The other side of it is making sure that you understand the rest of your numbers. Is your business actually profitable? What sort of gross and net margins are you achieving? How do those compare with the rest of the world, et cetera, et cetera.

And do builders need to also be picky with the type of buyers they deal with? Are you also saying like, hey, if you're going to be sophisticated in your approach, perhaps you should also say no to certain buyers as well?

Well, not only to certain buyers, but to certain jobs as well and mates? Absolutely. I've got a couple of clients who've built for family members and friends where when they've told me what they're planning to do, I've said to them, how important is it to you that your relationship is still whole at the end of this process? Because sometimes that's what you've got to decide. Do I want this person to still be my mate at the end of this or not? And to be brutally honest, I know that that's unusual for me, but just to kind of go into that space for a second or if you want that friendship or that relationship with the family member to stay whole, it is incumbent upon you to make sure that you treat them as well as and in the same way as you would any other client. So that we starting point, the second point is don't move into the type of job that you're not good at. If your sweet spot is building $500,000 custom home, three bed, two bathroom, single story, and your mate comes along and says, hey, I've got a $5 million home, it's 16 stories with a lift on the edge of a cliff overlooking the sea. Be careful. It's not just being discerning about the buyer, but it's also being discerning about staying in your lane, doing. You know, we talk about dominating a niche, being really good at one thing, becoming the go to person for that thing. The second piece to this is don't move outside of that thing because one, you're not experienced. And probably what that's going to do is through the entire process, including costing it, it's going to mean that you exposing yourself to unnecessary risk and potentially losing a friend.

Yeah. And at the end of the day, sometimes those decisions, like you said, have to be made. They have to say no in those scenarios. And I'm going to throw a question for you. I just thought about this recently because I've interviewed you a few times and one of the things that you have a gift at is you're almost a forensic accountant when it comes to looking at people's books. You know, one of the things that all your coaches tell me is that people usually over embellish or say things without facts. And the one thing that really designs a coach's craft is to look at the numbers and really find things. So here's a scenario. You have a person that you know or have a feeling that they're either offering way too many discounts or, you know, quite high discounts out there. You onboard them, you're starting to look at their books. What's the first thing you're looking at from a metric perspective? Where do you go? Is it the P Ls, is it the pricing? Where do you go to find the forensics to know that, hey, this discount is really high?

Well, we probably wouldn't start with the discount, but we'd go and look at what the business as a whole was making. So profit. I mean, at the end of the day, any business is reason for existence is profit. I said this in a coaching call yesterday. Even not for profit businesses, their goal is as much profit as possible because the only difference is they don't distribute it to the owner of the business. They use it to fund whatever service they provide to the community. So in fact, in their case, profit is probably an even bigger motivator than in a normal business. But really, everything you do in your business is reflected in your financials. And I would start at the profit end of the equation and work my way back. Because if we're not making profit, it's only from one of two things. Our expenses are too high, our revenue is too low. Or what is often the hybrid of those two, is we not providing for enough margin. There isn't enough profit in the job to deliver net profit at the end of the day. Which is why our pricing for profit model deliberately goes to that point rather than stopping at the gross profit level. So let me also now mark colors to the past. At the end of my school and university career, I'm not sure that my accounting teachers would have agreed with you that I'm anything like a forensic accountant. But what I've been able to do because I'm not an accountant, is I've had to learn how to convert those numbers into a story. What story are these numbers telling me about this business? And largely that's what all of our coaches are able to do to know where to go and look. And it really is, when you know where to look, it's pretty obvious what needs to be done. And really that's one of the biggest reasons that we find for professional builders coming into the private mentoring program is because it's not just about knowing what needs to be done. What is critical is knowing the sequence, the optimal sequence in which to do things to get the biggest bang for your buck. Because you battling and battling and battling for nine months to get something right where you could spend six months with a coach and it's completely solved. That's the greatest investment you can make. Instead of you investing all of that time and money and making all of those mistakes, get with somebody who knows how to do it, pay them to show you or to do it for you, and that'll obviously short circuit the process for you.

Andy what I love about our interviews is just when you think you know the answers, the questions change. I think. I think you've talked a little bit about mates rates, you've covered the client experience, you covered value. You've covered so many different aspects about running a business in this interview. So I'm really glad that we had some time to jam again and I look forward to bringing your wisdom back again.

Bosco, it's always a pleasure. Thank you for having me.

Cheers.

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