The Hidden Chaos Tax Eroding Contractor Profits

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ℹ ABOUT THIS EPISODE

Feeling like you're constantly busy but barely profitable? You might be paying the hidden tax of disorganization. 

Wade and Stephen break down how chaos in your construction business silently drains profits through missed billings, rework, and cash flow surprises. 

Learn practical strategies to organize your business systems, establish financial rhythms, and build the leverage you need to move beyond the daily grind and start keeping more of what you earn.

⌚️ Key moments in this episode:

• 00:00 Busy But Broke
• 00:27 Hidden Tax Of Chaos
• 01:24 Jobsite Vs Business
• 03:58 Spouse As Bookkeeper
• 06:29 Where Profit Leaks
• 08:24 Cash Flow Pressure
• 10:10 Name The Chaos
• 13:23 Build A Business Rhythm
• 17:16 Five Steps To Fix
• 18:49 Insurance Nickel And Dimes
• 19:20 Fish Story Warning
• 20:31 Wrap Up And Next Steps

The Contractor Profit Blueprint is a complete guide that breaks down exactly how to identify where your money's going and start keeping more of it. This isn't theory. It's the same framework I use with contractors I work with every single day.

Head to profitfirstconstruction.com/blueprint to download your free copy. 

Stop working for free. Let's get you keeping what you've earned.

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

Transcript

Wade Carpenter: [00:00:00] Being busy can make a contractor feel productive, but so does a dog chasing a leaf blower. Lots of motion, questionable progress. But if you're running from job to job, chasing paperwork, fixing mistakes, answering every question, and still wondering where the money went, you may be paying the hidden tax of disorganization. And unlike Uncle Sam, this tax doesn't send a bill, it just quietly eats your profit.

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs, alongside Stephen Brown with McDaniel-Whitley Bonding & Insurance. And Stephen, we both know plenty of contractors that work all day and do paperwork all night and still struggle to make payroll, and feels like chaos sometimes.

Stephen Brown: This time of year everybody's busy. Hopefully all our listeners are very busy. They're listening to this traveling back and forth from a profitable job site, I hope. Just the day-to-day staying organized and staying sane is a struggle enough. And [00:01:00] then, you talk about the hidden things that you may not be aware of are just eking away your profit margin.

That's what we're all about at the Contractor Success Forum, watching that profit margin and keeping it. Some of the things you were thinking about, Wade, that really stand out to you that in a hidden way just tax your profit you're gonna make and just suck a little bit out of it, to where it's making a major impact.

Wade Carpenter: Yeah. A lot of people don't think about that and I also think about it in relation to growth. I know I've experienced things like that as your organization gets bigger. Especially the contractor starting off, you're trying to wear all the hats.

A contractor knows how to organize their job site, but they may not know how to organize their business, and sometimes it feels like chaos.

And if they're running around like crazy, how do we get the leverage to get out of it? That's what I'm trying to talk about a little bit today, because when I'm talking about this hidden tax, it may be costing them money and not only stress, but missed billings, wrong [00:02:00] decisions, things that cost, you know, cash flow surprises.

There's a lot of things that, being dragged into their jobs. This is just a sort of, hopefully a thought-provoking episode into how do you get out of some of that and how do you find the leverage to find the organization in your business?

I personally know a lot of contractors that are struggling with this.

So again, opening thought there was more of just-- you could probably organize your own job site and you probably know how to line up your materials and your subs and all that stuff. When it comes to running a business, it's a different ballgame from maybe what you're used to.

You know, I learned a long time ago that not everybody makes a great accountant. Some people are just not wired that way, as well as you don't really want me running your job site either. We all have different strengths and things that we've been trained to do, and you may be really good at lining your subs up and making sure they show up on Tuesday morning.

But, I think we see a lot of these things where you're [00:03:00] chasing the cash flow, the last month's profit went out the door, and you're asking where is it? Did we capture all our change orders? Did we get our billings out on time? And sometimes we don't get the bill out because something happened.

There are inevitably gonna be things that we can't do anything about, but there's plenty of things that often get in the way just because we're not organized and we don't have any kind of buffer.

It's just like, "Hey, we're doing this at the last minute all the time," and it just feels like chaos.

You relate to that?

Stephen Brown: Yeah. You know, here's the thing, I think you made a great point. Nobody knows what they don't know, and it's stressful.

You're used to running jobs where you run them like a machine. Running the business on top of that is more difficult, unless you're just a really good student of it and a jack of all trades.

And even then, no matter how good you get, you're gonna want other people to help you. You're gonna wanna find other people take some of the things off of you. That's ideally what all of our listeners would end up [00:04:00] doing.

We've talked about this before, Wade, bringing your spouse into the business. Is that a good idea or a bad idea?

 I'm thinking about the spouses that you drag into the business that don't really want to be. And you're like, "Look, I ain't got time to do this paperwork. I got this job to do. You need to figure it out."

And then, they say, "Okay, I'm trying to figure it out. I don't like it, and I've got a family to take care of on top of all this, and my heart's not in it."

Or a situation where you don't understand how to get organized so you just stay frustrated at your spouse, at a bookkeeper that you have, anyone else that needs instruction and doesn't do things automatically the way you hope they get done.

It's frustrating, isn't it?

Wade Carpenter: Well, yeah, and I think you really hit a lot of different things right there. The premise of this was it's not just one thing. Your disorganization may be costing you a lot of money.

When I say a [00:05:00] hidden tax, we're not talking about sales tax or income tax, but, can you find the tools you need when you need it? Those kind of things.

But it does translate into running a business. And to use the spouse as a bookkeeper, so many people do the same thing or significant other, whoever.

As you said, it's not what they wanna be doing. Some of them are just not wired to be a bookkeeper. They resent it, and they've never been trained on it.

To your point where the owner says they want all this great job cost information, but they don't know how to do it either. They don't know what it's supposed to look like when it's finally done.

So again, sort of jumping ahead since you're talking about the spouse thing, how do you get that leverage? Maybe your spouse, significant other, they've got a vested interest in it, but they don't wanna be doing this if they hate the job, as well as they may not be trained to do it.

Again, I'm not trying to pick on the accountants, because you got the same thing with project managers, estimators. There's a right seat on a bus and a wrong seat on the [00:06:00] bus.

How do we find that leverage to be able to get organized?

Stephen Brown: Help me out. I'm a contractor driving around in my truck. I'm like, "Okay, guys, I hear you. How do I get started? What do I need to do?"

Wade Carpenter: It's not a question of, can my spouse throw something in QuickBooks Online to pay a bill or something like that?

They probably can. But do they know how to do it? Do they know how to deal with back charges and when architect cuts your bill and those kind of things?

It's the same kind of thing with pretty much anybody you pay in your business. These hidden taxes show up in your project manager, field supervisor not paying attention to change orders, and making sure that those kind of things are signed off their tickets are not signed off and you're not chasing your retainage.

Your pay applications are sent late. You're missing the backup on your invoices, so your contractor sends it back and you don't get paid for another 30 days.

Stephen Brown: Okay, how do we do this? How do we automate it? How do we get organized so we're [00:07:00] not taxed by things that are just sucking profit and increasing our stress?

Wade Carpenter: Well, I think we need to look at what is happening in our business. Where are we losing profit? And some of it's not gonna be as obvious as you would think.

We have things like rework or callbacks to fix something. Maybe you ordered the wrong materials and then that delays you, and you have to go get some more and end up eating time and money or maybe the plans change. Your subs are working from old plans.

One sub doesn't document the handoff to another. Those kind of things just eat into the profitability. Same kind of thing with, you got a punch list, and you do it, you just make it up because it's all in your head before, and you just do it the way you do it, but then nobody else can really follow.

Stephen Brown: There's just all sorts of hidden things in there. I think of the analogy of all the subscriptions that we don't know we have. They keep creeping up, and next thing you know, you're broke with subscriptions. It's [00:08:00] same thing. You realize you have a problem. You have to redo a job. You've messed up the material order. You have to pay expedited shipping. You have to bring in extra crew to get the job done on time.

A good accounting system would let you see, okay, this was my estimated profit, and this is how this particular situation's gonna affect that profit.

And when you could get that feedback immediately it sure helps you stop the bleeding at least, doesn't it?

Wade Carpenter: I think the whole thing comes back to what causes this for a contractor? And the one thing we talk about all the time is this cash flow pressure.

We gotta get our bills paid before the money comes in. Our payroll is hitting before we collect our draws. Tax man doesn't wanna wait. You max out your line of credit, I mean, not to... I always come back to the Profit First and-- some of those principles that- 

Stephen Brown: Getting ready to do that myself. It's a accounting system that lets you manage for the unforeseen. At least it lets you categorize the things that you know you're gonna have [00:09:00] an expense for, and put it in the right category of where you're prepared for these things.

You're a contractor, you're juggling a bunch of balls up in the air, and you're just adding one more ball and one more ball, and you've gotta keep all going at the same time. This stops you from having to do that. It's very clearly communicates where that money needs to be so you don't have these sudden surprises.

And then when the small things happen, they stand out a lot more because the big things are already handled in the right account.

Wade Carpenter: That's absolutely right. A lot of times the bad decisions do come from bad numbers.

Talking about the spouse doing your work, I'm saving money there, but is it really costing you money? Because you don't really have somebody that knows what it's supposed to look like, and takes care of it like you should, and it does become chaos.

Back to the bad numbers, if you think you're making money on a type of job when it really didn't, or you're estimating using old numbers, those bad numbers [00:10:00] can come back to bite you. I talk all the time about overhead, and that's why the Profit First thing makes so much sense.

I feel like I'm throwing out a thousand different things at you, but-- 

Stephen Brown: No, you're not. This is great information, Wade. 

Wade Carpenter: Well, just to pivot a little bit, everybody that's ever run a business knows there's only so much mental bandwidth you have.

As the owner, you carry everything in your head. You're all constant interruptions. You're asking all these questions. You don't have this clear dashboard.

We talk about all this stuff. You don't trust the reports you get from your accountant or your bookkeeper or whatever, and it feels like you're reinventing the wheel every single time.

Every single decision feels like you're starting from scratch. And so that's where I'm hoping to give some thoughts here about how do you leverage that? How do you start moving beyond?

Stephen Brown: Okay.

Wade Carpenter: Because I mean, your brain really is not designed to be a filing cabinet of the project management and the payroll and the estimating. It's just too much, and you end up like you said, a marriage counselor too [00:11:00] can also get into.

But, my thoughts on this to move beyond it, number one, I think you really need to name the chaos. Before you fix it, you gotta identify what the problem is.

Sometimes an outside person, asking the question like, "Where do we lose most time?" Or, "Where do we lose the most money?"

" What kind of jobs are having to get redone?"

" What can you personally keep in your head versus what's really information that's hard to find?"

"Can we document that?"

I know in the office, if you're hunting around for a piece of paper, you can spend an hour doing something. Is time better spent?

Stephen Brown: Yeah. And when you know you can't find something, you procrastinate doing it because you can't find it. You're stressed that it's gonna be a headache before you even get started.

Wade Carpenter: Yeah. Looking at what reports don't we trust? What job numbers are always late or even when we do get them, are they right? Whether it's your bookkeeper, your office person, whatever, where do they get stuck? 

Stephen Brown: You're right, Wade. That's a [00:12:00] great point. You gotta identify the problem, and you gotta ask the right questions, especially the people that are providing you that information.

If you own a construction company, it doesn't stop. But you can manage it where it's less stressful.

Wade Carpenter: Yeah. What I would suggest is that a contractor really has two different organizations. They're running that job site. That's one operating system that have your schedules and your subs and drawings and change orders and communicating in the field and all that stuff, and that really is one full bucket.

But then you have all the problems of operating the business itself. The accounting, job costs, cash flow, maybe some legal issues. You're working all that stuff. Running the business versus actually doing what the business does.

Stephen Brown: Right.

Wade Carpenter: And the owner, if you're running your own business, sometimes you gotta remember that being good at one doesn't automatically mean you're gonna be good at the other.

I know some incredible people in this industry and I don't mean to say that as an insult, but... it's [00:13:00] reality.

We can't all be everything to everybody. If you got a great superintendent, that doesn't mean you are gonna be the great controller.

Stephen Brown: Well, even if you have the world's best team behind you too, you've got to steer the ship, and you've got to let them know what they need to do for their job, and you've got to give them assignments to do, and you need to reward them for being creative and helping you solve problems. There's so many moving parts.

Wade Carpenter: Yeah. And just to move beyond that, as far as how do you get control of some of this stuff? I would call it building like system... well, you have to do the systems, but a rhythm to go around the system.

When do we do things like weekly billing review or receivables review or a monthly-- your WIP, you need to have it at a certain time other, put it on the calendar. Monthly cash flow review.

Whether it's a quarterly tax planning or just end of the year, even if you do it once a year. Waiting till January 1 is too late to do anything about taxes. I [00:14:00] say that all the time.

Another example is of Profit First. We have a set way of doing that. You're supposed to do it on a certain cadence or a certain rhythm. You accumulate all your money and then you put it in the right buckets, it goes in, and then the money goes out, and that controls the cash flow chaos.

That's where I would say, establishing rhythms when you do things in your business, not just, "hey, when did they finally reconcile the bank?"

Just like, "hey, we need to get it done by the 10th of the month or 15th of... Whatever it is."

Stephen Brown: Sometimes you feel like running a business that you're just running around stomping fires. Some small fires, some big fires, but you're just constantly running around doing that.

And I guess what I'm hearing you say is besides running the job, setting up the right accounts or buckets for the money to go in helps you manage your cash flow.

What other considerations do you think a contractor to have in place to make sure they're not bleeding small amounts of [00:15:00] profits?

Wade Carpenter: There's a lot to think about here, and I know I keep coming back to the same thing, which I still believe thoroughly in, and I practice myself, Profit First.

If you don't have something like Profit First in place, if you're using your checkbook as a dashboard, then that's naturally gonna... I mean, we say it all the time: cash comes in really quick and you feel like you're on top of the world, and it could be gone tomorrow. All that stuff goes out and you don't know.

Having some control over that, separating your job expenses from what your overhead and knowing exactly what that is.

I feel like I preach that all the time, and I'm sorry if I just keep going back to that. 

Stephen Brown: No, you're not at all. Wade, I may have told you once a story about one of my contractors I was talking to. This was 40 years ago, and I asked him how his business was doing, and he pulled a big old wad of cash out, and he goes, "Well, how do you think? What do you think?"

And I said, "Man, that's awesome. I know you're just kicking ass out there, but have you paid all your bills?"

"Well, hell yeah, I paid my [00:16:00] bills."

Okay. Well, you know, I should have kept my mouth shut about that. But you're right. That's not how you keep from managing.

That might be fine if you've got one job at a time and everything's cash and carry.

I can't imagine, but that story tells you how simple things can be, and that's not reality. And so you don't have to be scared of embracing what you do to do it right. It's not hard. You just have to get started, don't you?

Wade Carpenter: Like I said, just trying to find where those gaps are in your business, whether it's deciding on what should be delegated, what should be outsourced. Whether it's estimating, accounting, whatever, if you don't have clarity on it, I mean, I go back to that same thing and I probably told it a thousand times, but the first year or two, I was pretty tight.

I went out on my own, and I printed my own business card and I was thinking I was saving money and like, what a stupid thing to do.

But it just one of those things that's like same thing with, okay, well, QuickBooks will do it all [00:17:00] and there's no reason my bookkeeper, my wife can't do that.

But is that spouse costing you money? Is that estimator costing you money because they don't-- or are you trying to do it all and you can't get the work out and you miss a bid or are you missing other things because you're trying to do too much?

At this point, how do we get out of it? I was just gonna run through a few quick thoughts on that. 

Stephen Brown: Yeah, please do.

Wade Carpenter: Step one, find the leaks. Go through your business and just maybe have somebody else come through it. Do you have payroll surprises? Are you running out of cash flow certain times of the year?

Step two, clean up your numbers one way or another. Make sure your accounts reconcile. I've had several contractors come to me, they haven't reconciled or even when they have a bookkeeper, they haven't reconciled their book properly in years or ever. And it's sad to see. If you can get on top of your old receivables and payables and really know where you're at goes a long way.

Step three, I would say we talked about that rhythm where every week we're [00:18:00] gonna look at what's our cash position? What receivables do we have coming in the door? What payables are gonna have to go out? A monthly cadence, looking at our balance sheet or quarterly. What have we done this quarter? What should we do, focus on this coming quarter?

Number four, get those people in the right seats on the bus. Not everybody is trained to be good at estimating just because they know what's going on in the field.

And number five, using outside help or whatever if you're trying to do it all yourself and you don't have things organized and you could free yourself up to go make more money.

Those are just my quick thoughts on this. Personally, I know many of them do that don't understand, but they don't lean on their bond agent, or asking the right questions like, "Okay, what would I do right? What am I doing wrong?"

I know you've been a great counselor for many of the clients out there and I think people discount that way too much. 

Stephen Brown: Well, thanks, Wade, and from you as well. Certain expenses that seem out of line to you. I see them all the [00:19:00] time in insurance. If you're not taking the time with your insurance agent to sit down with them and go over your coverages, and especially if you have an agent that handles your bonds, they need to know what insurance you have as well, so you're protected.

But you need to know it's the small things in insurance that add up to costs. Little things that you can tweak here and there to save a little bit of money that might be nickel-and-diming you or making your insurance poor. That's a great point.

Wade, before we leave, we're podcasting this episode from my office and above my head that that fish I caught with a really great contractor and he could do anything. Hardest working person you ever met. Absolutely could not run a business and would not admit that he couldn't run the business end of things.

And all these things that would happen were just not his fault. He just thought, "Well, I'll work harder." And he went into bankruptcy because of it.

Stubborn about where the [00:20:00] profit's going. And because you get angry, you get scared, you get frustrated about things you don't know, and that keeps stressing you. And it's just a natural reaction to stick your head in the sand and go, "Well, I can go work harder. Things will take care of themselves." No. That's not it.

So I just wanted to get that out. I'm happy we had that time together and caught that fish, but every time I look at it, I get sad, it just makes me more driven for us to do this podcast and hope and pray that people listen to it and get some good ideas from it because we don't want any of our listeners to go out of business. We want you to thrive.

Wade Carpenter: Yeah. Well, I know you told me that story of that fish too, and there's more to it, but I think that's a great thought to wrap this up here because I do see too many contractors just running themselves ragged and maybe just thinking about a different way of the way you've been doing things.

Is it the right way? Where are you going wrong in if you're not taking home enough money [00:21:00] or, it's like constantly owing the IRS and you aren't planning for it. It can be tough to deal with.

And so, just think about what could you do in your life to get some leverage and get out of the chaos.

I can tell you from personal experience that when you start your business, I know it's tough. But once you get there and you got a team behind you, it's amazing to see what kind of business you can build. And I've seen some contractors build some great businesses.

Stephen Brown: There you go.

Wade Carpenter: So with that, I appreciate it. If you're all listening to us this long, we appreciate you sticking to the end here. I hope you got some thoughts, and if you got some other comments about what we talked about today, we'd love to see them below. Or if you've got some thoughts for our future episodes, drop them in, and we will see if that's something we can add to in our library here that we're running over five years now.

Thank you for listening. We do this every single week. If you would consider like, share, subscribe, it always helps us out, and we will see you on the next show. [00:22:00] Thanks.