Don't Crash Your Construction Business: Use FP&A to Navigate

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ℹ ABOUT THIS EPISODE

Most contractors are flying blind, relying on gut feel and looking backward at old numbers. Wade and Stephen dive into Financial Planning & Analysis (FP&A) - your business headlights that help you see the road ahead instead of crashing. 

Learn how to build forward-looking dashboards that track cash flow, crew capacity, equipment utilization, and pipeline health. Discover why construction businesses need different metrics than other industries and how FP&A can strengthen your bonding program.

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⌚️ Key moments in this episode:

• 00:32 What is FP&A?
• 00:50 The Importance of Financial Dashboards
• 01:45 Real-Time Data and Predictive Analysis
• 02:18 Traditional vs. Modern Dashboards
• 03:03 Holistic Business Operations
• 04:04 The Role of Cash Flow and HR
• 06:00 Sales, Marketing, and Business Development
• 08:51 Operations and Equipment Utilization
• 10:48 IT Systems and Automation
• 12:16 Procurement and Supply Chain Management
• 13:04 Unique Challenges in Construction
• 16:27 Key Takeaways and Conclusion

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

[00:00:00] 
Wade Carpenter: Most contractors are flying blind. No gauges, no map, just gut feel. The ones that do look at the numbers? Most are staring in the rear view mirror, studying what already happened. Just like in your car, you can't steer your business forward by looking backwards. Today we're talking about FP&A: your headlights on a dark road ahead, and if you don't know what that is, stick around and we're gonna get into it.
This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs, alongside Stephen Brown with McDaniel Whitley Bonding and Insurance. And Stephen, the big question. What is FP&A? Have you ever heard the acronym that we throw around? 
Stephen Brown: I dunno, Wade. When I saw your outline I had to google it. I didn't know what it was. But I think it has something to do with predicting and analyzing your numbers?
 
Wade Carpenter: Right. Basically it's Financial Planning and Analysis. I started taking a little deeper look at some of these things, simply because I've been working with some of my CFO level clients, and we started looking at [00:01:00] dashboards and creating dashboards. AI and some of the systems today are getting better to where we can actually get a little more real time numbers. From the cost codes and all that stuff, that's still a problem for contractors, but a lot of these systems are getting better. And if we can get the inputs, then how can we start looking forward?
And so just to give you an overview of where I'm going with this today, a lot of stuff that me and you talk about are more like a financial dashboard. Basically FP&A, Financial Planning and Analysis, is trying to take a look at number one going forward, but also all aspects of a business. And like I said, most contractors really don't have any kind of control over that at all. But if they do, they're looking backwards.
So anything you wanna unpack on that before we dive in a little more detail?
Stephen Brown: Absolutely, Wade. I mean, you've got me excited about this topic because, I'll tell you why bonding companies look about bonding the future. They don't look at the past. They use financial ratios to track where you are with other construction [00:02:00] firms. Debt to net worth type, just the most simple ratios.
Sure, that's part of it. But if you can develop a dashboard that shows you where you're going and that you can manage that in real time, I think you'd open up a lot of doors with your bonding program for one thing. But what exactly does that look like? 
Wade Carpenter: Well, I think we need to step back for a minute and just talk about what traditional dashboards are. At least in my mind, you're already sort of keying in on it. It was like, okay, what are operating ratios, liquidity, investing ratios, those kind of things? The leverage those kind of things that are traditional finance.
But as I was working through some of these things with my CFO clients, we have that traditional type dashboard. We may also have some things like obviously, cashflow is king. Looking at it like, okay, what's been happening in the past? But that's not really predicting what's going in the future.
And then there's the other side of it is like getting in the detail of the jobs, or how are we doing on the jobs? Looking back, where did we make profit? Is this niche our sweet spot that we talk about all the time?
[00:03:00] And so again, that's looking backwards. A business isn't just about the finance. It's one of the key parts of it and I think me and you would probably say maybe the most important part of it, maybe that's selfish, I don't know. But you have other parts of it like the sales part, you have the marketing. You may have your IT services, the operations, procurement, all these other things that fly into running a good solid business. And as we've said many times, a construction business owner is wearing a bunch of different hats.
So again, what have we been doing? If we've got any kind of thing at all, we're really looking at the past. And what is it that we can learn from what we've done from looking in the rear view mirror to tell us where we're headed?
Stephen Brown: That's a huge question. How can we take the information from the past and help us predict where we're going in the future? So like you said, FP&A is the headlights that help you see down the road to see which direction you're going. What is the best direction to go?
Wade Carpenter: Yeah, I mean, this is where we'd like to [00:04:00] be and get a lot of our contractors. A lot of times they're just trying to get a handle on where they are. When you can get past that-- and again, the technology is getting better and better on this.
The way I think about it, a finance dashboard may be like thinking of the same car analogy. How much gas did we burn last trip? Versus okay, how much gas or cash in this case, how far until we're gonna be empty? What do we need to continue? From the HR standpoint, do we have the crew? How many of our crew quit last quarter? Are we gonna have enough people to staff what we need this coming quarter, be cause we've got a big job. Those kind of things.
Stephen Brown: I mean, I'm thinking about a dashboard on a car, since we use that analogy, and I'm thinking about the check engine light. Your engine's overheating, it's about to red line, it's gonna blow.
Wade Carpenter: Yeah, well we don't want that obviously. But I guess what I'm trying to do today is think more holistically about your operations. Like okay, in the past maybe we looked at how many jobs finished late versus what's our pipeline going forward, and what are we going to do so that those jobs [00:05:00] that finished late are not gonna recur next time?
And if we can look forward, maybe we're gonna spot some of those potholes that keeps blowing a tire on our car here.
 
Stephen Brown: it seems to me like what you're saying is that you are really keeping good track of your Work In Progress. You're studying that and you're seeing from your backlog if you're analyzing your cash flow properly.
Wade Carpenter: Right. Well, again, it's not all about the cash flow. As we've said, if you're driving a dump truck at night looking only in the rear view mirror, you're gonna have a wreck. And so, that's what we're trying to avoid with the Financial Planning & Analysis.
Look at the whole job site. Obviously, the cash is that fuel gauge. Do we have enough cash to get us through this big job? What if we don't have any work? Are we gonna run outta cash? Can we keep our crew employed? Do we have cash in the bank for one month, two months, three months, or are we gonna be outta business if we don't get a check? These are the kind of things we're taking a look at. Any thoughts on that?
Stephen Brown: Well, it's everything Wade. That's everything to your project. And I love this whole idea, FP&A [00:06:00] dashboard. What other type of areas would this FP&A kind of encompass?
Wade Carpenter: Well, it could be depending on your situation, and no two contractors are alike. But say you're a heavy equipment guy, you may think about your capital expenditure planning, you know, when to replace things or worn out.
From any standpoint, we also need to think about sales and business development. What does your pipeline look like? Do we have, a stack of bids? Or are we out of work? Do we have backlog to cover our overhead going into next quarter?
From a sales standpoint, are we keeping that pipeline full? I had one particular client that lost a big GC. They had all their eggs in one GC's basket, I guess I would say. And it devastated them, because they had a great relationship with them. But then somebody came along and said, I'll do it cheaper. I guess it wasn't that good of a relationship.
Stephen Brown: Yeah, I like you, but what have you done for me lately?
Wade Carpenter: Yeah. But it also leads into things like the marketing, like I said, the leads. Is the phone ringing? What does it cost per lead? And if you [00:07:00] know what that conversion is and you can say, okay out of every 10 tire kickers that I talk to, how many turn into jobs? And what's the average size of your job?
So if you start looking from that standpoint, yeah we can fill the funnel, but do we have enough leads? So do we need to end up paying more for whether you're advertising or getting out there and bidding more? And then, you know, finding the work?
Stephen Brown: Yeah and bidding projects costs money. When you get ' em or not, it costs money. And so many contractors that I run to just don't plan for that at all.
Wade Carpenter: Yeah.
Stephen Brown: So yeah, that cost of marketing and seeing how effective it is. I had a customer of mine, asked me recently, of all the bid bonds that I've asked you for, Brown, what kind of hit ratio are you seeing? And so I took all the bid bonds they asked me for, plus all the performance of payment bonds for the projects they were rewarded and I gave him a percent. And he said, how does that stack up to other contractors?
I said, well, it's different among different contractors, but your hit ratio is high. And he [00:08:00] wanted to know, is it the best of all your contractors? I had to answer him. It appears to be among the best. Now we also have customers that have bid two projects and gotten two projects. So, that's not necessarily a effective measuring tool. 
Wade Carpenter: I love that thought and where they were going with that. I think that's a great insight to look at. What's my hit ratio? But I also counseled somebody in my space recently. And if you think about hey, if I win every single bid, are you always perpetually the low bidder? Do you really even want to have a hundred percent hit ratio? I mean, from the standpoint of, hey we're putting the effort into the bid, yeah. But are you leaving money on the table? So that was just my first thought on that. because number one, it is very insightful, but are they looking at the wrong thing? Is my thought.
Stephen Brown: Yeah, good point. So what about FP&A and your operations? Like crew scheduling, forecasting how much labor you're gonna need, how you utilize your equipment, and the time value of getting your project [00:09:00] completed?
Wade Carpenter: Yeah. We talk about crew scheduling. I mean, it's about football season here. Drafting your football roster. Do you have too many linebackers, but maybe not a quarterback or a backup quarterback? How are we using our people? Not just our people, but what about our equipment utilization?
Do we have an excavator sitting on site that's idle and it's basically money that's rusting away? And so I guess with that I just think about are we able to schedule things around rain delays? Or things like pushing payroll out there without actually really making progress on the job. Does that resonate on the operation side?
Stephen Brown: Oh, absolutely it does. And I loved your football analogy too. Your favorite football team better have a backup quarterback that's decent. If your whole season depends on that one quarterback and keeping them safe then that's not a good business plan.
Also, I loved your comment about the utilization of your equipment because that's one thing that's so frustrating to contractors. How do I actually measure and predict whether I'm utilizing my equipment the [00:10:00] most profitable possible way? That's part of FP&A. That can be on your dashboard. It should be on your dashboard.
Wade Carpenter: Right. Well, there's several different ways we can look at this, more of a holistic. I mean your HR, your people, just like your crew, do you have bench strength? You wanna strike a balance between, okay i'm overpaying for labor that's sitting around, but also, I've sort of learned this in my business. If I don't plan ahead and have capacity on my team and train them up ahead, you have no bench. So you're not able to move to that next level.
It's a balancing act of the cash flow, and again I'll start preaching Profit First, so I don't wanna go down that road, but you know when you can actually put a bucket aside and say, this is where I want to have extra so that I can eventually move this off of me or start delegating some of this stuff. 
Stephen Brown: That's a good point. And you still have to measure all this with the IT systems that you have in place, right? I'm thinking something that you mentioned, software. You don't have to buy the [00:11:00] software like in the old days and download it on your computer. You can pay a monthly fee to use that system, there's cloud storage and everything else.
Wade Carpenter: Yeah and just with IT and all that stuff that is something that you need to sort of, I mean, there's still a lot of contractors I see out there that don't use a computer. Or I've seen some that still turn in handwritten invoices and those kind of things.
But you think about the cost of the time that it takes you to do that and can you actually get to that next level? All this AI automation, what is the return on investment?
From the IT and the systems, there's a balance. I sort of rail against some of these add-ons, the QuickBooks or whatever, that people never get in place. They pay a monthly subscription for two years before they like, hey, we haven't gotten anything out of this. What are we going to do? Are we gonna actually get training on it and get it right?
Stephen Brown: I'm the poster child of that right here. 
Wade Carpenter: But I mean--
Stephen Brown: No, you're right. There is a cost to overhead just there's a cost to bid projects. That there's a cost to bid projects.
Wade Carpenter: Yeah and with the IT, a lot of [00:12:00] times, especially with AI, are you still using hand tools versus now, we got power tools that can do this stuff, and do it faster and less fatigue, and that power tool pays for itself. Looking at some of these systems, A lot of times, it's amazing the productivity gains you can get.
Stephen Brown: It is Wade, and your next point was how FP&A might help you monitor the procurement process.
Wade Carpenter: Well, there's a lot of thoughts there, especially if you're dealing with in particular materials or whatever, the volatility. Lumber prices would be the easy. you know, can we predict these things? AI can actually go out there and research these things and we can actually schedule, just in ChatGPT, you can schedule something to look at it every single day and send you a report, email your report. Okay, what is the commodities that we deal with? Is the prices what's it predicting? So you're not really just building this house on quicksand. The supply chain can obviously wreck things for you.
The procurement side too. Do you have reliable vendors? If you're going with the cheapest sub in town, that doesn't [00:13:00] show up when you need them, well have you saved anything?
Stephen Brown: Yeah, that's right. And you know what I love about this topic so much is what you set up to end this podcast, which was a true understanding of the difference between running a construction company versus other types of businesses. It's unique, it's different. That's why being a construction specialist seems to work for us.
It's almost like a different animal than other businesses. And you have to look at your FP&A dashboard and say, what is it that makes my business unique that I have to track? And we talked about a lot of that.
Wade Carpenter: Yeah, and I think that's a great point. What is different about construction versus some other industries? Like, you know, you have project based revenue and you eat what you kill. You don't really have a lot of recurring things. You have WIP accounting, you have retainage, you have cash flow gaps. Obviously what you do, the bonding, compliance, that kind of stuff. And that's sort of like Stephen's your hall pass to get to that next big job, right?
So, the [00:14:00] labor, you depending on crews, material volatility, the weather, if those are that are heavy on the capital expenditures. There's a lot of things we don't see in some of these other industries. So, you know, designing an FP&A dashboard, you gotta take some of these things into account a little different than you would a traditional business.
Stephen Brown: Like what?
Wade Carpenter: Well, retail, maybe they can be seasonal around Christmas or something like that, but usually you gotta steady drip of sales. Where construction, that can be feast or famine, flood or drought.
When you have a Software As A Service, that's more okay, you got recurring revenue. And again, construction a lot of times is once and done.
One of my favorite books that I've talked about over the years is The Goal. It talks about manufacturing, The Constraint Theory, and I've loved that, but what a manufacturing does have a lot more moving parts than a lot of other things. But it's a controlled assembly line basically.
Construction, every single job is basically a prototype. We're doing something different every single time.
I think about hotel [00:15:00] industries, stuff like that. They've got fixed cost and so basically they're looking at occupancy, how many people can we get in or whatever.
Where in construction we're playing some kind of backlog roulette. How much do we have in the pipeline? Construction is this unique beast. You got the backlog, the WIP, retainage, bonding. All these things sort of factor into it.
Stephen Brown: Yeah, absolutely. And you've always loved using like restaurant analogies with construction. I don't know what your fascination behind that is, but the last part you used the dessert is the change order. But anyway in your book you use a restaurant to teach some key principles to a contractor about the construction industry.
Wade Carpenter: Well, yeah. I have nothing against restaurants other than the fact that I learned a long time ago, the average failure rate of restaurant is like 15% survive the first two years. This is not an industry you want to be in, even though everybody thinks they're gonna get rich. I'm sorry, I'm not trying to rag on that industry, but.
Stephen Brown: No. I mean that's just a good point. You said earlier you eat what you kill, and I've always heard [00:16:00] the expression that you have to kill what you eat. In other words, you don't have a recurring stream of revenue every single day, that's what you have to depend upon. It's the same with construction and construction projects.
You might say, well, I can load up enough work to get me through the next six months or a year, but you're really thinking about loading enough work for overhead and expenses, and you gotta be thinking about enough work to generate the proper amount of cash flow and profits as well.
What are some key takeaways that you want our listeners to know about these dashboards and the FP&A?
Wade Carpenter: Like I said, I don't even know that we really unpacked this enough. Maybe we can do some more things on this in the future. FP&A, Financial Planning and Analysis is more like forward looking. For a cash flow forecast, checking to see if you got gas in the tank before you go off on a long haul, those kind of things.
Playing these what if scenarios, that's what technology is getting better and better, where you can design your own models out there. What if we scale up to this? What's gonna happen to our overhead? Are we [00:17:00] really going to be able to make it up on that margin?
The thing I talk about all the time is, I guess that's a pet peeve of mine. It's hey, we just gonna make it up, grow to that next level.
But getting back to your key takeaways, let's sort of close this one and maybe come back to it another day. But basically the traditional dashboard is that rear view mirror and we're taking the FP&A that's turning the headlights on and we got a map, a GPS. We know where we're going. At least we're taking a look ahead.
So construction really is a harder terrain. And there's probably a lot more potholes than a lot of these other industries, I would say. And you got bigger trucks to steer a lot of times, because a lot of cash in, a lot of cash out.
The contractors that only look backwards, one rain delay or one bad change order or something. One slip away from a crash. Do you know if you're there? Do you know if you have anything in reserve?
I look at FP&A is forward looking and more of a survival tool, and I'm hoping contractors will think of this is what we need to be doing instead of just a luxury that we'd love to [00:18:00] have.
Stephen Brown: Okay. That's a great introduction and I do think we ought to do another podcast on nuts and bolts of implementing, of what that looks like and why it's so important. Because what I like so much about this podcast, Wade, is when we started, I interrupted and made a comment about a check engine light, and you were clearly distressed that I went in that direction be cause we were talking about making sure your tank is full.
So yeah, I love that analogy. I mean, that is an optimistic way of looking at running your construction company. And the more you can explain how you're looking into the future and how you're managing it, I can just tell you it's absolutely gonna help your bond program, no doubt about it.
And the ability to communicate that to a bond agent: here is what we are doing. Then everybody wants to be on board with that sort of scenario, don't they?
Wade Carpenter: They do. And I have seen that too, working with bonding companies as well as banks. If you come in there with a half baked scenario to a bank, like some numbers that think you're gonna make $10 million next year in profit when you scraping by this year, that's not gonna happen. But [00:19:00] anyway, that's a another pet peeve.
But if nothing else today, I hope we made you think about some things. Sorry, we threw out yet another acronym today, FP&A. But if nothing else, it's a study that is pretty interesting to think more of hey, what can we do to steer the ship?
Stephen Brown: Future Planning and Analysis.
Wade Carpenter: Yep. Stephen, I appreciate you unpacking this. If our listeners have any thoughts, comments, questions about that, we'd love to see them in the comments below. We do this every single week and we appreciate it. If you would consider like, share, or subscribe, it always helps us out and we will see you on the next show. Thank you.