7 Costly Mistakes Contractors Make After a Great Year!

🔗 LINKS

Visit the episode page for more details and a transcript of the show.

Sign up for group coaching to get your Cash Flow MRI

Get Profit First for Commercial Construction--OUT NOW!

Subscribe to get notified as soon as new episodes go live.

ℹ ABOUT THIS EPISODE

Having your best year ever? Don't celebrate too early! 

Wade and Stephen reveal the 7 dangerous traps that turn record-breaking years into financial disasters for contractors. 

Learn why success often hides warning signs, how to avoid the phantom profit trap, and why building reserves beats buying that lake house. 

Discover practical strategies to build sustainable profitability instead of just surviving bigger chaos. Essential listening for any contractor who wants their great year to become many great years.

⌚️ Key moments in this episode:

• 00:00 Record Year Warning
• 00:32 Why Great Years Fade
• 01:37 Home Runs and Market Luck
• 03:15 Tax Bill Trap
• 04:28 Overconfidence and Loose Bidding
• 06:05 Overhead and Equipment Hangover
• 08:19 Phantom Profit on Paper
• 09:23 Lake House Mindset
• 11:45 Discipline and Reserves
• 13:56 Post Year Questions Checklist
• 16:03 Systems Net Worth Bonding
• 17:15 Stress Test and Wrap Up

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.

Join the Profit First for Construction community!

Find all episodes and related links at ContractorSuccessForum.com.

Join the conversation on our LinkedIn page: https://www.linkedin.com/company/CarpenterCPAs
   
FIND US ONLINE
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

Wade Carpenter: [00:00:00] A contractor can have a year of record revenue, record profit, and record confidence, and still be 12 months away from a mess. Success has a funny way of hiding the warning lights. Good years don't ruin contractors, thinking every year will be that good is what gets contractors in trouble.

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs, alongside Stephen Brown with McDaniel-Whitley Bonding & Insurance. And Stephen, after a contractor's best year, are they usually stronger 12 months later, or do they ever quietly give it all back?

Stephen Brown: It seems like a downer of a subject matter to say, Wade, but you see a lot of times they'll have a really good year and the next year after that just slides. My first reaction of why it slides is probably what you mentioned: ego and having a good year, and it's like I'm taking money out now. But there's a lot of other factors involved.

So how can you keep the good years coming and have a little bit of your cake and eat it too as a [00:01:00] construction company owner? 

Wade Carpenter: Absolutely. If you find success, you want to keep that success. This episode's about building a healthy company. Once you find that success, let's not lose it. When you have these banner years, it feels like your business-- we proved it, we figured it out. 

Stephen Brown: Mm-hmm. 

Wade Carpenter: But sometimes we might mistake a hot market, or we have a lucky project mix, for some kind of permanent strength.

I think the thought for today is how can we build that into it, not fall into some of these traps we're gonna talk about?

Stephen Brown: Okay 

Wade Carpenter: Did your great year make the company stronger, or just confident, or hopefully not too confident?

That's what I was thinking. 

Stephen Brown: I think this is a great angle to go into this podcast, because there's so many moving parts to having a good year. From an accounting standpoint, there's so many moving parts to having a good year. And a lot of times you say, "Well, you know, I just had a home run of a project. All the stars lined up, you know? We were cooking with gas, just absolutely [00:02:00] ginning that work out."

And it's fabulous when that happens. You don't sit around hoping to bid projects with huge profit margins to get your home run. You get your home run by bidding your normal profit margins and doing everything right that makes all the stars line up for you.

I could give so many examples of that over the years I've seen with customers. Everybody in my line of business can, Wade, and yours too. You can analyze the accounting things that cause massive swings in the fundamental makeup of your company's management, overhead, materials, equipment, everything, that as you grow and you chase that growth, and then at the same time, all the dynamics of what made that job successful and profitable start to fade the next year, and you can't replicate it. You haven't totally understood why your revenues had gone up so much.

Now, a lot of listeners might say, "Well, you're crazy, Brown. I know exactly why revenues went up. We had a bunch of work this year. We had a lot of work going on."

And is [00:03:00] that it? Is that the only thing? Were there less or more competitors? How fast did that work need to be done? Could you execute the work profitably? Were you being really picky about your projects?

So yeah, there's a lot to this discussion, I think. 

Wade Carpenter: Yeah, absolutely. I learned so many lessons from 2008, '9, '10, my contractors. We're getting a good ways beyond that now, but there's some lessons I never forgot.

The assumption that I see people fall into some of these traps is the obvious trap: nobody reserved for this tax bill.

I see contractors that they struggle with cash flow and all of a sudden, things are going right with that cash flow. They end out the year with money in the bank and then they have a bad winter and they gotta come due with the taxes in April and all this profit showed up on the books but it's not safely in the bank. 

Stephen Brown: Mm-hmm. 

Wade Carpenter: So, this big tax bill can hit you after all this has happened and assuming that cash flow is always gonna stay, you know, my lessons from my [00:04:00] Profit First: put it aside and you know you've got it.

That's one trap I see.

Stephen Brown: Sure. You gotta be meeting with your CPA to talk about tax planning for the year and not wait till the end of the year. I mean, that's pretty fundamental, Wade, isn't it? I see that all the time. There's little or no communication with the CPA about tax planning. It's just bookkeeping.

Wade Carpenter: Well yeah, and it's one thing to say we made some money, it's another thing to say we kept the money. When you finally find that groove for that one year, you can sort of fall in that second trap that I see, overconfidence.

We get overconfidence, bidding and those kind of things. They start believing their own press clippings, I guess I would say. They loosen up their standards. It's like, "Hey, we're doing well." We start chasing larger work and assuming we make it up in volume.

We talk about that all the time, and I'm sorry if I beat a dead horse here, but you know, the same discipline that they created that good year, that's what contractors [00:05:00] need to remember like, let's not abandon that. That's part of my message here.

Stephen Brown: Absolutely. Don't abandon the principles that brought us to the dance in the first place. And at the same time, the taxes are a big deal, and planning for it, and planning enough for those taxes.

And like you said, a big year doesn't mean anything until everything washes out and how much actual cash do you have, after paying all your expenses, taxes, overhead, materials, suppliers? Everything is done and paid for.

But a construction company with multiple projects going on is constantly having their fiscal year, and especially for tax purposes and percentage completion accounting, there's always all these moving parts. So it's not like you can ever just close the book and say, "This is exactly what we made on the job."

But there is. You can measure every job once it's completed, right? Are you seeing contractors doing that?

Wade Carpenter: Absolutely, and you probably [00:06:00] should be. But the idea here is, what are these traps that people are falling into? We talk about the tax trap, but we think about we scaled up, we got a huge job.

I had one just this past year that got a huge job. They knew was not gonna com- but they did have to scale up, so they built capacity for this peak year. They bought trucks-- the standard thing, we're going to knock down our taxes and all that stuff, but then they were left with extra notes payable going into next year.

They bought extra software and office space, and they hired new people. All this overhead gets added in, and then when things drop back, from this one unusually strong year, if you don't realize what's happening... that's why I always go back to that Profit First teaching. It's like if you have your buckets and you know what's happening with your cash and things start happening, I guess the idea is, did we build up our overhead and our capacity for that peak year? And then it becomes dead weight for us.

Stephen Brown: Right. What [00:07:00] do you see, Wade, with contractors that are seeing certain jobs, this is gonna buy X amount of equipment? Just this one particular job will buy X amount of equipment. That mindset.

Where I was going on that was exactly what you were talking about. You buy equipment, you finance it, you get great terms for three years or five years or whatever, the cash flow of paying the equipment note is nothing while everything's going great.

As the work kind of wanes, you're still stuck with that overhead. That debt on that equipment.

Wade Carpenter: Yeah, absolutely. Problem is if you had this banner year and revenue finally normalizes, you got your cost structures still inflated, and that's what we're trying to get away from. 

Stephen Brown: Right.

Wade Carpenter: You have to have another great year to feed that machine, and that's where people start chasing revenue instead of margin.

Like, "Okay, I just need to keep that so that I can pay for my overhead," and that's when things start spiraling.

Stephen Brown: Right. I was looking at your comment about loose bidding being a [00:08:00] trap. That's the next topic. The loose bidding 'cause you want more of it, you're gonna grow your overhead.

My first thought was, as long as you're fat and happy, you're gonna bid it with higher profit margins. You're gonna be pickier on it. That may be the case for a little bit until those notes start hitting you and you don't have the work.

Is that kind of what you were meaning by that? 

Wade Carpenter: Well, there's a lot of things here to unpack.

And I think about what I call the phantom profit. You probably see this maybe more than I do. You got some percentage of completion accounting and they've showed that they've created a whole bunch of income on paper, and they look good at the end of the year, but maybe they didn't have their bidding really down, and they missed that cost to complete.

So that percentage of completion accounting, if they're using the wrong factors, it can fool you. And I hate to throw it on the bonding, but you tell them like, "Okay, now you can bid a job up to another, 5 million," or whatever the number is.

Just because you can bid that, should you bid that? I think that's a topic [00:09:00] of another episode that I'd like to do sometime soon.

Anyway, I just call it Phantom Profit. You can look rich on the P&L and still be cash-starved in real life. Does that make sense? 

Stephen Brown: Yeah, well, you're gonna spend money that is only on paper if you're not careful. It's not real profit.

Wade Carpenter: Just because you can bid more it's sort of like a binge and you have a hangover. I don't know. Listen, I mean, we got this great year. We hire up all this equipment. We take distributions, we get used to buying... bought ourselves a lake house or something.

Construction is cyclical. You may have a tighter market, the work slows down, and we don't want the business collapsing because, that good year was, I don't wanna call it fake, but it's because the owner treated it like that's the new normal.

There's a difference between one good year and when you can systematize it and continually repeat it. That's when you're really successful.

That's what I want people to remember: building that healthy company instead of like, [00:10:00] "Okay, let's go all in." The best companies are built over time. When they get that sustainable level of profitability, that's where I'm going with this.

Stephen Brown: That's great. I think it'd be very successful doing a podcast on how to write off your lake house. I mean, who doesn't want a lake house? I'm all for lake houses.

You remember back in the '80s, Wade, there was some tax loophole where every contractor in the world had a lake house. They had their employee retreats there and stuff like that.

Anyway, the cove my sister's cabin is, is entirely almost made up of old contractor lake houses from the day.

But anyway, that's a great point. We want every one of our listeners to have a lake house and a really nice boat, anything else that brings them joy. That whole mentality that you get when you have that record year, you take the same goals you have for the things that you want and you just put them aside in a bucket like you do everything else, and you reach it that way from an informed way instead of "I can do it, [00:11:00] so I'm gonna do it" way. You're gonna be so glad you did it.

We kind of joke about it. I don't want our listeners to be bummed out by our topic being negative. You can get whatever you want out of your construction company, but be prepared. Don't put your head in the sand and say, "I'm gonna do it." And that's what I see so much with so many contractors.

"Well, I'm gonna do it, and it's my company and I'm gonna do what I want when I want." That's kind of an immature way of looking at it but still everybody does it.

Wade Carpenter: Well, I think that's a great way to put it. I thought about some things like, okay, these things that I wanted as a teenager, I was like, you know, immature. I was like, well, I had to have a car and I had to spend money on wheels and all--

Stephen Brown: Oh, yeah. It had to be loud too.

Wade Carpenter: But the goal here is don't let this one good year fool you. When you put the reserves in, that's where you get a little older and wiser, hopefully wiser, I don't know. But, the better the year, the more disciplined the cash system needs to be. So putting these reserves in place [00:12:00] for profit and tax.

I had one just actually yesterday, I don't even wanna talk about the numbers, but they floated eight months for this GC, and they had the cash in the bank to do it. It put a hurt on them, but they had it.

To me, that's success, that they survived it and now they're on the other side of it. And it does me good to see contractors that can do that. And others that have this-- I hate to say teenage mindset, like, I want this and when you're starved for cash-- you're smiling, I see, but you know, I mean, you know what I'm saying.

You want things and you haven't been able to get it, and then all of a sudden it looks like it's there, and the idea is, just don't go overboard, right? 

Stephen Brown: Yeah. Absolutely. And I can't tell you all the times that somebody in my office is talking to someone who's giving someone bad news or news they don't wanna hear about something because they were undisciplined and immature in a lot of decision-making [00:13:00] process- and don't listen to any advice at all. Just chew their butts out, up and down, and then leave them.

As a bond agent, as an insurance agent, we've invested a whole lot of time in not only getting your account, but giving you good advice and greasing the tread so you get everything you need and you're protected. Then you've just had it.

"I'm tired of listening to people telling me something I don't wanna hear," attitude. But it's almost like that can-do attitude of "I'm gonna build something and I can create this," sometimes lends itself to just an immaturity in discipline, and it's sad.

But like you said, Wade, it's so comforting when you see someone that gets it and then they're doing it right. They have everything they want. They're doing what they want in life. They're providing for their families. They want a lake house, they're getting a lake house. But their priorities are focused and not emotional.

Wade Carpenter: Well, I think that's great. I actually just wanted to sort of walk through and get your thoughts on what should a contractor [00:14:00] ask after they've had a record year? Let me throw these out and you just give me your thoughts on it one at a time. 

Stephen Brown: Okay. All right.

Wade Carpenter: The first question I would say after you have a good year: is that profit repeatable, or was it just an unusual year? Thoughts on that? 

Stephen Brown: Yeah. That's like the number one question it seems to me. What elements were in place for that record year? Was it just a whole lot of work? If you're doing government work, was it a release of a bunch of funding?

I know like commercial roofing contractors, when the government funds school builds that include reroofing, those school districts they wait for that funding to occur before they reroof their buildings. They're leaking like a sieve on everybody, but they're waiting until the government funding pays to reroof those schools.

So that's a banner year. And you gotta really make hay there on those record years because you can demand your own price because there's so few contractors able to get that work done.

So there's just a whole lot of elements I see going on that could be a record [00:15:00] year. The economy, the boom. The age of the buildings. How many buildings were built right after World War II that we're still using? How many buildings do we need? How do they need to be reconfigured?

What about the huge data centers, energy infrastructure that is the hot thing right now? Are you ready for that? What about when Amazon and all these warehouse distribution needed all these concrete tilt-up warehouse space?

So yeah, there's the economic drive and incentive there that can really boost your company.

What else are you thinking about? 

Wade Carpenter: You put some great things out there.

 The next one I would say is, did we improve our systems or just survive a bigger chaos to get there?

And then, did we permanently grow this overhead faster than recurring gross margin? 'Cause I've seen all the time where contractors put themselves deeper in debt because of that.

The last question is, are we financially stronger? 12 months from when we started, are we healthier [00:16:00] than we were? Thoughts on that? 

Stephen Brown: Yeah. Just define healthier. Healthier means that you're better at doing business, that your working capital, your current assets minus your current liabilities, is strong enough to support your bond program and your cash flow needs, and that the net worth of your company is growing.

What does that truly mean? The net worth you take the income from the prior year, and that goes into your net worth this year, right? So you gotta measure that as well.

Is that where you going with that? 

Wade Carpenter: Well, yeah, that's part of it too. It goes into that net worth, but did you take all that income out and distribute and then, you know, that kind of stuff.

Stephen Brown: And you say, "Well, you know, I took it out of here, but I've got it over here, so what's the problem, bonding company?" Well, the problem is we're bonding your company, not you personally. That's what people just don't seem to get. Okay.

You mentioned something else about your systems keeping up.

Was it just absolute mayhem this record year you had, or were [00:17:00] your systems keeping up? And then when and how are you investing in your systems to maintain that type of growth?

Wade Carpenter: Yeah, I think that's a great point and that's another episode I'd love to do very soon. Can we take the time to build this and get out of this chaos? Some practical takeaways I've got.

Number one, great years shouldn't be treated like permission to just go crazy without looking at what's happening.

You should treat it like a stress test. You had a great year. Is that an opportunity to build your reserves? Is it a chance to strengthen the foundation? And so, the goal is not to have record years, it's to have many record years. That's what I'm thinking.

Stephen Brown: Right. I am too. First thing when you talk about that too, popping into my mind, it's debt. What kind of debt do you have and how are you managing it in this record year? Are you managing it wisely for the future years? Debt and taxes, those are two bummers, aren't they? 

Wade Carpenter: Absolutely. And again, as you said, this was not supposed to [00:18:00] be a downer episode. It's more like, hey, let's be practical about that. 

Stephen Brown: Mm-hmm. 

Wade Carpenter: Get out of my teenage mindset and stop worrying about what my wheels are on my car.

So anyway, I appreciate your thoughts on this and if you're listening, if you've got any questions or thoughts, comments about your banner year and/or experiences where you've seen how that can be ripped out from under you, we'd love to hear it in the comments below.

We appreciate it if you've listened this far. It'd be great if you'd like, share, subscribe. All that always helps us out. We do this every single week and we will see you on the next show.