77. Construction Financials Benchmarks With Jacob Oelofse

You want to be in a position as a company owner of a building company to make informed decisions. You want to be able to monitor and assess your performance. You want to continually improve it, and you need to consistently plan and set new goals to achieve that. I think it's all about a habit and a rhythm here. For me as an executive coach working with our guys, there's at least a minimum, once a month, overarching look at most of your your benchmark. I say if you're going to be honest with me what the situation is like now, then the path forward will be realistic.

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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 Jacob Olufser, executive coach for the association of Professional Builders. Jacob, thanks for being here again. It's been a while, but it's great to see you again.

Yes. Like we always say, I love jamming with you, so it's always fun to be back.

It's good to have you on the podcast, my man. So let's start off with what are some construction financial benchmarks and why should everyone care about them?

It's good for us to talk about this. It's an interesting topic for me and I think we need to start with financial benchmarks and what is the point behind it? And I think it's important. We need to make a reference or a standard against something as a builder. So we need to measure ourselves. And that's where this term benchmark comes along. And I think it's important a lot of builders don't give this the attention that is needed. But I do also think when we look at it from a perspective, you want to compare your performance against another company's performance. And I think that's where it comes in is, okay, so where do I even start by doing that as a builder? Because builders don't talk, so that's usually the difficult one. But I think it's important for guys to look at the benchmarks, specifically financial benchmarks. But yeah, so for me, by definition, benchmarking is the term used for a company or an organization performance. And to measure that against another performance of another company or a group of them, that a bit of a sample size.

And why should builders focus on these benchmarks today?

So I think the reason for that is, first of all, probably it would come down to understanding your company's current condition. So where am I at? Am I healthy? Am I doing well? How am I stacking up against what's happening in the industry? I'm also a bit of a competitive analysis, you know, so when, when you're in this industry, it's competitive, the clients make it competitive. The industry itself is quite competitive. But also you want to be in a position as a company owner of a building company to make informed decisions. So it comes down to, so how can I make an informed decision if I don't know what my benchmarks are? And how do I stack up against the industry benchmarks?

Why is benchmarking important to a building business? We've talked a little bit about builders focusing in this, but why is it so important to a building business now?

So I think when it comes to that, from looking at a industry, we need to also realize that the building industry is like no other. And when it comes to the benchmarks, these various elements, we actually start measuring. I come from a background way with trades. I've worked with a lot of trades as well the building industry. I've worked with retail companies, and it's one of a kind. There's no other industry like the building business that you guys are running. And the listeners are, most of them should be in the building industry. So as a building business, it's very, very different to any other one. So when you start listening to other people, giving advice, accountants, the media as well, it's sad. They're a bit misinformed because they compare us to other industries and we're not. It's completely different. So the benchmarking for a building business is very specific. So there's specific metrics we want to go deep into. And you can't let your ears go and wander to all these other things. You're not a retail business, you're not a wholesale business, you're not a manufacturer. That's usually where the confusion comes in. People treat us like manufacturers. You, you are manufacturing something, but you're manufacturing them in front of the eyes. It's not like a car that we're building. So we're very unique in the building business.

You know, you've been Coaching for a long time is the process or framework that, you know, helps you identify these benchmarks.

Oh, that's a deep question. It becomes difficult because we're so unique. But I think to approach that, we need to first go back and say by systematically comparing your performance in a specific area of your business or a well defined research of standards. So we need to find first that point of contact. So I want to make objective judgments about my performance and I want to plan the necessary improvements that required. So I need to go and find a place to start off with. Now obviously I can't go beyond this question to say, okay, what's the framework? We've got the sourcei report. Now if you don't know what the source report is, the State of the Residential Construction Industry report, we do that as an annual report. That's a good place to start because you've got to a group of builders, professional guys giving information that's part of our membership and not part of our membership. So you can compare what's happening out there. And that's the framework and that questions. I mean there's probably like 100 questions we ask which is quite detailed and that's the process and the framework we've used because there's the key metrics, but it's also the subconscious, those little things that builders don't think of even looking at in their business. So for me there's, I wouldn't say there's a step by step process, but the framework to identify that is definitely go to something like the source report, broaden your horizons a bit. What is the, your local government reporting about the building industry? But definitely compare it and verify that data, don't just take it at face value. So be sure whoever you're talking to or looking at it, it's vetted and verified. You know, that's quite important and it's.

Interesting because typically when you think about benchmarks, you're only thinking about your data. But there's also that other industry data that the source of report provides that gives you industry benchmarks as well.

That's the thing, and I think that's where a lot of guys fail is they have a barbecue, talk to their friends and their friends are doing well and they're charging 10%. So that's the benchmark. 10% based on what? Where did they get that 10% from? So I think it's good to have a broad spectrum and, and that's why I mentioned the source report. It's not in isolation, it's quite broad.

So what you're also saying is that they shouldn't be having, inviting their friends over for barbecues to talk shop. They should just be about everything else.

Talk shop. After you've gone through the source report, there's a good conversation.

Fair enough, fair enough. How can building companies benefit from an effective financial benchmark framework? You've talked a little bit about sourcing this, but let's talk about, you know, what are some of those benefits out there?

I think to go back to that other discussion we had regarding informed decision making, and I think the benefits here is when I'm making decisions or I'm making a new direction for my business, I need to make a bit of a change. It comes about monitoring and assessing my performance on a regular basis. So that's the first thing is that is when it starts for you as a building company owner to say, okay, wait a minute, I need to monitor and assess. Am I performing as best as I could and if not, what's the gap there? But it also, that leads to continuous improvement. Because if I start identifying the gaps where I'm not performing well, so how can I start improving that? So it's this mindset of I must continually improve my business day in, day out and periodically look at it. And that leads to the next step is planning and goal setting. So the moment I know what to monitor, what to assess and what to improve, now I need to plan this out. We're talking shop at the barbecue. So that's not the way you're going to do this planning and goal setting. I need to be clear and say these are the specific benchmarks I'm measuring my building company against. This is the gap. How long would it take me to get there? What resources do I need? What is the specific goal I've got in mind? And, and there's a couple of that will surface. And as you sift through your data and your benchmarks, comparing it to industry benchmarks, where you realize, wow, to achieve that specific part, it's going to take me 18 months to get there. It's not a walk in the park, three week fix up, silver bullet, I'm done and dusted. You need to plan that quite in detail probably over the next one to three years. So it's quite a detailed process. But that's the benefits. You want to be able to monitor and assess your performance, you want to continually improve it and you need to consistently plan and set new goals to achieve that.

Now this might be a hard question to ask, but what are some of those Financial metrics or benchmarks that a building company should track. I mean, I'm sure that's an open ended question.

Yeah, I think that is, it's, there's probably a million metrics and a million things we can start measuring. If you now go to all the smart guys out there, the accountants and the financial guys and marketing gurus and everybody's going to have the important one. And I think the important thing for our industry is keep it simple, start with the basics. And for me it always comes to this conversation in my private sessions with the clients is what is my gross profit? What is my net profit? So it's those margin benchmarks that's always the starting point. It's sometimes the most interesting conversation but for some builders is probably the most scariest conversation they're going to have with someone because now they need to be open and honest and say, well I plan to make X. Did I actually achieve that goal number one? So that's probably the starting point when look, there's a couple of important ones we can, we can jump into. But I would keep it simple there. I need to know my gross profit margin and I need to know my net profit margin. But then measure it against the benchmarks. Now we know at APB there's a 10 net profit benchmark minimum if you're building new homes. Gross Profit percentage of 25%. But I want to add something here. True 10%, a true 25%, not a thumb suck. Because a lot of guys when you ask him, oh no, I'm making 25% and I start digging into that, then you realize, oh well, that's actually more realistic. 16, 17%. So you need to be confident that you're actually doing what you say you're doing.

Right. What are some tools or resources today that can help you store and analyze these metrics? Because obviously now you're talking about archiving data as well because you're doing a comparison. Maybe a year, year comparison or quarter by quarter comparison. Are there any safe tools that builders can rely? Are they systems that app look at?

Yeah, I think there's a couple. I think we can't be ignorant in the market is probably a dozen tools that we can mention off a list of construction softwares, your accounting softwares and all of that. But I cannot pass by this comment to say the WIPA calculator and the, the work in progress accounting adjustment. You should be familiar with that term if you've been listening to our podcast. And if you look at it into that I'm Talking net profit and gross profit. It lives inside of that calculator and that's a consistent monthly activity you do. But then there's the next one is the pricing for profit calculator. So even if you go to your accounting software, you go to your construction software, the details inside of the wipa, the pricing for profit, they live inside there. That's where you're going to get that information from. But also the old age profit and loss, I mean a lot of guys, they generate a profit and loss every hopefully more than once a year. Do they even look at it? Because that's such a powerful source of information. Do you take an hour to sit down with your accountant? Do you take an hour to sit down with your business part? And just what is my profit and loss telling me? It's a simple tool that's there but we don't use it. And again going back to the work in progress, accounting adjustment and the profit and loss and the how we generate that is, it's that information is there. I just don't think the guys see it. They don't use those easy accessible tools that are usually you're already paying for it. You don't have to go and get all the fancy extra tools. Becoming part of the membership like the apb, that becomes the standard wipa, pricing for profit. That's the minimum stuff we expect you to be able to understand and do on a regular basis.

How does APB work with its members and clients to benchmark these metrics effectively? Obviously you have the coaching program, but take us through some of your processes when you're working with your clients.

It's like I mentioned, we use the basic tools, wipa, pricing for profit. We've got some other tools, construction slot planning and revenue forecasts. But I think it's the magic of bringing those things together. So there's workshops, we do business planning workshops which is very, very effective, where we really get into the, the nuts and bolts of it. Yes, like you mentioned, there's the membership and coaching program that we follow, but I just think it's also open discussions. I think a lot of times we just need to open up that forum, attending a bit of a workshop, coming together. And as with our members at the apb, we drill down to that business planning workshop because that touches on what I said earlier is if I'm going to monitor, if I'm going to control what I'm doing, I'm going to assess my performance, I need to do goal setting, I need to do planning, that's Critical to do it, but it's also getting a rhythm. Here is when we work with our members and the clients that we've got, we actually go a bit deeper and say, okay, what is your rhythm that you're creating? What is the sequence of? How often should I be measuring myself against the benchmarks? How often as an APB member, should I be going into specific conversations like completing the source report? Am I doing it every year and measuring my past year performance into this year's performance? Now there's something we go quite deep into is we use targets. So we looked at last year's performance. What are we aiming to achieve this year? And on a quarterly basis we actually measure what are we achieving against the target for this year. So it's a lot of goal setting and targets for the next at least 12 months. Obviously. Hopefully we can do it a bit longer than that because then it becomes a bit of a more realistic picture.

How can you tell when your clients are performing or underperforming as well as the business? Is it typically in the financial side of things?

Look, that's probably one of the key parts, but I think there's other ways to measure it as well that you want to compare yourself to other professional builders. And that's why I mentioned that sourcing report, because we know a lot of our members completed and other professional builders also actually participate in it. So that's the first part you want to compare yourself there. But then we also want to look at what's happening in the industry. And now the biggest thing is everybody goes straight to am I making money? Am I making my margins? Which I did as well in today's interviews. That's the first point. But then there's these little subconscious things that are happening. What is the client? What is the market telling us about? How are we performing? Now, we might think it's only to do with how many leads do I create. But what about your lead conversion? What about your image? What about how a potential new staff member looks at your business? So it's all these little elements of the business. Your HR function, your marketing, even the construction process. What do the neighbors say about you when you're building there? I mean, there's so many metrics we can start measuring and how to manage those metrics. But for me, it's coming back to your question is how can you tell when you're performing or underperforming in your business is by setting a clear rhythm of when to check and you have to start collecting the data. Now, this is A big question. I don't have any data because I didn't gather this data. The best time to start is today. Start putting in the details you've got because surely you've got at least some information for the last 12 months. You know how many people you've spoken to. Even if it's a thumb suck to start with. That's your little benchmark you started with. Then you can compare it against industry benchmark, which you can get in the sourcing report. So you have to start doing it. This delay, delay, delay is not going to help you in the future in any case. You have to start with what you have and then just build on it.

Now, the theme of today's conversation is around financial benchmarks. Keywords being financial, are benchmarks always financial? You did talk about all these different types of metrics and I know that the sourcing report has different types of sales and marketing data as well. Can benchmarks be in other formats?

Oh, definitely. I think it's the financial one is obviously the most important because that's almost like bottom line conversations. And, and in reality, most of your benchmarks eventually end up at a financial point because there's a ratio or there's a dollar amount or a percentage of some way. But let's look at it. Let's go a simple example. Everybody knows sales. So the way we can benchmark is does your sales process deliver the results comparable to global standards? So is it the same timeline? Does it take the same amount of weeks or months to convert a lead? Do you handle your objections the same way another building company, or do you do it better? So that's an easy way because everybody does sales. And the first question is, do you even have a sales process? Do we start there? So that's the benchmark. It's so simple. Do I have a process, yes or no? If my answer is no, I'm not measuring a minimum standard. If I have one, what's the next level? Another good example, and I think we've spoken about this in a couple of episodes before, it's about people. So is your recruitment process that you have as good as it could be? So when we go and investigate that is, oh, well, now there is a benchmark, is what's my staff turnover rate and how does that compare to the average industry benchmark? So if the average builder employs two people a year and only loses one, how do I measure up to that? Okay, that's not an actual benchmark, it's just for the example. But if we start measuring that yes. Eventually it comes to a financial benchmark, but that's quite a high level benchmark. You know, is my staff turnover rate good or bad? You know, why is that? I've got a good onboarding process. How long is my onboarding process? So it's definitely not just financial. You can go. It's like a bit of a spider web analogy. You can go very deep into benchmarking. So it's very, very interesting.

And how often should you review metrics for benchmarks? You talked a little bit about, you know, you're hoping that builders look at their P L at least once a year, but how often do you recommend metrics and benchmarks to be looked at?

Yeah. So hopefully I didn't touch a nerve there with some of the builders to say they're only looking at it once a year. But I've seen it. I've seen guys that don't even look at it at all. They just trust the accountant. But I think it's all about a habit and a rhythm here. There is obviously lead and lag indicators you need to check weekly, monthly, quarterly, yearly. But for me as an executive coach working with our guys, these are at least a minimum once a month, overarching. Look at most of your benchmarks and that comes down to financials. That's a definite must, once a month. But then like your HR process, that might not be every month, but that might be twice a year. So it's a bit of a rhythm. But when it comes to financial metrics, no less than once a month. And in the beginning, it wouldn't harm you to look at it a bit more frequently, just to get to know the numbers a bit more. But we must also be realistic here. We're in the building industry, so a lot of things take some time to give us the results. And that's where patience comes in. If I'm measuring my activity monthly, suddenly I've got a quarter to measure, Suddenly I've got two quarters to method. Now, over time, I've got 12 months to measure and then I can do year on year measuring. But the consistent monthly, I think that's the best rhythm that I've seen. And it just gives you enough data to measure a bit. Because after a week, not much has changed. After two weeks, not so much. But month to month, if I've got 10 projects on the ground, or 15 projects, or even two projects, a lot can change in 30 days on that specific building site. So that would be my advice. Minimum once a month, but it would be a little Bit dependent on at what stage of evolution is your building company. If you have been in the business for 10, 20 years, you should be doing it at least once a month. If you're not, maybe once a quarter on some metrics, but everything else at least once a month.

What are some of the trends that you're seeing around benchmarking today? Obviously you're around this a lot more often with the coaching side of things, but are there any trends that we should be paying attention to?

Obviously, like working with the builders quite closely. I mean, I talk to them daily, I see clients in my private mentoring sessions and I work with the members as well. So building companies and owners and even their staff and their team, they don't verify what they look at. They usually make a bit of the assumptions. Especially when I talk to them. The sentence would start like this, oh, I heard. Then I'm like, okay, well that already for me is a red flag. Where did you get it from? Who are you listening to? Do they have the facts? Do they even have the data or the, the numbers to back it up? And the scary thing as well is people go out there and they don't really know what they're talking about. And now you listen to them. And we're in this world of digital information and short videos on YouTube and things that we listen to. It's very important for me to bring it down to the basics. First of all, am I looking at things from a benchmark perspective as the owner of a company or am I just winging it? And we need to keep in mind that the benchmarks that we've got there, and that comes from the definition of a benchmark, is the minimum you should be achieving. This trend I've been picking up, the guys think that's the ceiling. If we at the APB say you need to have 25%, oh, okay, that's if I get there, I'm safe. That's what we say is the minimum acceptable standard. You need to surpass that benchmark because then you mean you're better than the benchmark. It's almost like running a bit of a race. You can't just try and beat 11 seconds because the average is 11 seconds. You're not going to win the gold medal. You need to run nine point something to get the gold medal. So you need to be better then, so that I think that's the trends I'm picking up the conception of, oh, I can just get the information anyway. Big. No, no. And the second thing is obviously the benchmark Is there as the minimum acceptable standard you need to actually be better. And a lot of guys don't see it that way. They just say, oh, I'll get a 10 and I'm safe. It's not that easy.

Now, you talked a lot about the systems, obviously, that APB has, and I've, as a podcast host, I've interviewed different guests around the different systems, both on the builder front and on the coaching front. But do you see any technological advancements in either holistic dashboards, AI driven metrics? What are some of the things that are going to make benchmarking more efficient in the market, or what's coming in the pipeline?

Oh, I think the industry has changed though, for even the last ten years, quite dramatically. The life of spreadsheets and notebooks and those things were there. And that I think is if you're still doing that, I think then you're in the right place. You need to investigate to upgrade that notebook system very quickly. And I think it's important for us start with the question first, is what am I trying to measure here? A lot of times you already have these dashboards, these systems, you're already using them. Simple example, your accounting software. Simple example is your construction software. It's already there. But when I interact with guys, they don't even use 50% of that tool that they've got available. So they always go for the next shiny thing that's available, but they're not even using 10% of that current system that they've got. So I've seen a big, big uptake. Especially your construction softwares. There's a lot of guys doing your sales and marketing that's got wonderful insights with their dashboard of conversion rates. And that's advanced quite dramatically where I can bring my Google, Facebook, all of these things into one place. So everything is there and the builders think they need to be the expert. You don't have to understand the dashboard completely. You just need to know what to look for and instruct your team or your outsourced part of it to say, I want to see these numbers and this is the benchmarks I want to see. So think of this when you look at your construction software, accounting software, when we start to combine these things, that's where the APB tools become even more powerful. Because now we take that data, which you already have, put it in some of our tools, and now it starts to tell you a story, right? And that's the important thing is what's the story? So is the story a good story? Is it A horror story? Is it a thriller, Is it a comedy? What am I looking at here? And the moment we start going deeper into that, a lot of guys tell me, oh, but that's just another tool or another dashboard I need to look at. And then I said, but now we need to really be honest with ourselves is what's the story you're trying to tell?

Right?

And if you're not willing to put in that little bit of a work, coming back to the habits, the rituals, checking it once a month, I always ask him, open your calendar and show me when you're checking it. And then like, what do you mean? It's like, I want to see the two hour block you've blocked out every Monday, Wednesday, Friday, whenever you do it, to check the benchmarks, to check the data, they don't have it. So it's these little things that actually make the difference. The technology is there, the advancements have been there. I just think a lot of guys are either ignorant, they don't want to adopt, so they say, no, no, my notebook work works, or my Excel spreadsheet works. There's nothing wrong with it, but there's something out there that's much quicker, much better, much faster. Right. So. And I think that there was a couple of guys you've interviewed on the podcast which have shown us these other.

Options, Explore those options and can you tell us of a story of any of your clients or one of your members or people that you're mentoring as well that are getting the benchmarking right? You know, any big wins that started.

Off this year, I'll keep it anonymous. I don't want to put them on the spot. They'll know who they are when I talk about them. There's a couple of guys I'm working with that's doing such, oh, they're getting the targets, they're hitting the goals so well. And, and it's consistency, I think that gives it to them. But there's specifically one client I was working with, husband and wife team, doing such a good job. And when they started with apb, they actually jumped into the mentoring very soon as well. And they're like, we have to build 15 homes to make this profit, to make that number, to make that percentage. And then we just started basic, where are you now? We did an assessment of what's happening at this point and then we started to look at it and say, wait a second, you don't need to build so many homes. You actually can build far less. Your quality will be better. You've got time to improve your systems. You've got actually time to exceed the benchmarks. And they're now at a point where they, okay, how do we want to scale this business? Took time, don't get me wrong, it's not a three week process we went through, it's a couple of months we've been working on it. They putting in the long and hard hours, but the beauty of it is their perception of what they think they needed to do and how much they needed to do in revenue, in number of builds versus what they actually needed. But now that goes quite deep. Now it goes to processes, it goes to systems, it goes to rituals and habits. So very, very, very good story with me. But what happened is the stress was down, the profits went up. They could actually see, okay, what are they aiming to hit because there's a benchmark I want to get better than 10%. But we had to start with, okay, so how much are you making now? And they were not off the mark. They were probably like 6 and a half, 7% net profit, genuine, which is not bad. But they were. When we started to readjust a few things, they realized there's a bit of work to get to that 10%. It's not going to be a walk in the park, but they're hitting it. But probably at the end of this year they're going to surpass that quite easily.

I could talk to you for hours, my man, on different topics, but I guess I'll end this wonderful interview with this final question. And it's really around setting reality checks. What goes into the mindset as a coach to work with the clients to get them to set these realistic benchmarks and how do you not let them down but inspire them to be very realistic with their performance?

I think it touches a little bit on the example I used is we always start with a now. So the first is, and by no means I'm degrading a doctor or a specialist, but I treat them like a patient. I say if you, if you're going to be honest with me what the situation is like now, then the path forward will be realistic. So then we go into it and say, okay, you're making 2% net profit, the benchmark is a minimum 10% and we're looking at their workflow, we're looking at what they're currently doing and what's on the ground. As a builder, how many projects have you got coming in the pipeline and wrapping up and handing over? Then we set the clear target for the next probably 12 to 18 months to say it's a healthy, safe environment to go from 2 to 5% first and then gradually from 5, you can easily then go to 8 or 9 or 10%. So it's just starting with where we now and then we go to a position where you can say, okay, now that you're monitoring your benchmarks, it's realistic goals and it's specific to your resources. A lot of guys are a bigger team, they've got more resources, they've got some retained profits they can use and they've got a line of credit or finance that sometimes you don't even need until we've done the planning. I think it's the big simple answer is that you start with where are we now and what is the gap between it and then what I always add, the question is so how long would it take us with the resources that you've got? And I think that's where a lot of guys, they compare themselves to what they see out there without first looking inside is the builder next door. It's almost like the Joneses. The Joneses can buy the new Porsche but you don't know how much debt they've got. So it's don't go and do the same mistake and just say okay, we can scale our company in 12 months or in three years. It comes down to we need to go very specific and say what is the APB God available for me to learn a little bit from it? Let's learn and then go and implement and how long would it take you to implement? So that's the biggest thing is the timeline we need to attach there as well. You can't just wish it well, you need to actually say this is where I am, this is where I want to go. And realistically how long will it take me to get there?

Jacob, any final words for our listeners out there?

I think just be calm, just be cool and level headed when it comes to benchmarks. Most of the time that I've experienced is the guys, when they see the benchmark they say, oh that's not achievable for my business. Business, it's definitely achievable. If you go look at the sourcing report, you'll see guys year on year improving from this year to that year. It's just the simple things like knowing about software. I saw that was a big update. Guys not using construction software. Now there's a lot more people using it. It's just accepting the reality and then working out a plan to get it that just think be level headed in everything you do with your benchmarks.

Yeah, I think for me the biggest takeaway is for the listeners out there that aren't benchmarking start today. Right. I think there's never other greater day than start from today. So anyways, thank you for your time, your energy and your insights, my man, and we look forward to jamming with you again in the future.

Thanks a lot. Cheers.

Cheers.

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