Why Your Favorite Project Manager Might Be Losing You Money!

🔗 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

Your most beloved project manager might be your biggest profit leak. 

In this episode, Wade Carpenter and Stephen Brown break down how relationship-driven PMs silently give away margin through scope creep, unwritten change orders, and being too nice to push back. 

You'll learn what to measure, what systems to put in place, and how to reward your PMs for protecting your bottom line, not just keeping clients happy.

⌚️ Key moments in this episode:

• 00:00 PMs Clients Love
• 01:22 Nice Guy Margin Leak
• 02:18 Stop Free Favors
• 04:10 When Trust Goes Wrong
• 05:33 Measure Profitability
• 07:53 Systems That Stick
• 09:56 Make Change Orders Easy
• 12:03 True Cost Reality
• 13:08 KPIs By Project Manager
• 14:41 Practical Fix Checklist
• 17:23 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.

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

[00:00:00] 

Wade Carpenter: What if the PM your clients love the most is the same one your profit margin fears the most? Today we're talking about how relationship-driven project managers can quietly give away margin through scope creep, unwritten change orders, and being just a little too nice for the company's own good.

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter Company CPAs, alongside Stephen Brown with McDaniel-Whitley Bonding & Insurance.

Stephen, have you ever seen a contractor brag on a PM because the clients love him, but nobody stopped to ask whether the jobs he ran actually made any money?

Stephen Brown: Yeah, absolutely. I see it all the time, and a lot of times when I go to projects with surety underwriters, we're meeting in the job trailer with the project manager. And basically what we want to know is, where you are now and where you're going when will you be finished?

The profitability part of it is something that we never talk about in a job trailer. So from my perspective, project [00:01:00] managers are generally more loved by the owners of the construction company for cranking work out, cranking it.

But at the same time, if you're a construction company, you have key customers that love your project manager or managers to an obsessive degree that they won't let you fire them, then the tail may be wagging the dog here.

Wade Carpenter: Yeah, and I've seen this in various different forms. The project manager, estimator, they got good relationships, whether the customer or the project manager having a great relationship with a sub is a great thing, especially if they'll do stuff for them. But sometimes, being too nice you gotta watch what's happening there.

That too nice dynamic, maybe they're too nice to write up a change order or a back charge, something like that. These guys, they live and die by their relationships, and they wanna protect that relationship, so they sorta absorb some of the small stuff the general contractor is having to eat.

Well, they just say "we'll take care of it," and all these little small favors [00:02:00] basically become all this unpaid, extra material, schedule disruption.

Stephen Brown: Yeah. " Hey you've got this crane here. Hey, drag this over here for me. Move this over to here for me." 

Wade Carpenter: I know you got a story about that one, but .

Stephen Brown: Yeah. It's good and it develops relationships. Most of our listeners that run your own construction company know the owners that take advantage of you.

You're real excited to do business with that owner, okay? And you want to do everything you can to make them happy and get repeat work from them.

But that owner is taking advantage of you, and they may not even realize they're taking advantage of you.

The operator's hourly time and the fuel and the use of that piece of equipment is not the project manager's concern, it's yours. You own it, not them.

What systems are in place to keep this from happening? To either say to the owner, "no, this is our procedures. We cannot do that. You know, we will not, but our company [00:03:00] will not let us do that". And let the project manager make the company the bad guy. Then the owner can always call the owner of the construction company, call you and bellyache, and you can decide whether you want to help him or not.

But it seems to me like that's a good idea as well.

Wade Carpenter: I see this in a couple different forms. I remember vividly one from almost 20 years ago that they had an estimator that they took on from, and he had great relationships and the contractor didn't know how they were doing, but he was bringing in some huge jobs. But those huge jobs were not making any money.

And that's the same thing with the project managers. On the one hand you gotta have great subs and great relationships with them, and when they do great work for you, that's when you get into profitability.

But for that owner that's not really watching and doesn't have the systems in place to know, are we making money on it, or are we just sort of looking at it overall and say, okay, this one is a million dollar job, he's gonna get X cut of bonuses that come out?

The [00:04:00] point is sometimes the best relationship project manager can become the worst relationships or worst margin project managers on your team.

Stephen Brown: Yeah, there's no doubt about that. And also, Wade as we're talking about project managers that could be quietly sinking your ship, I had a situation once where a really experienced project manager who was well-liked by this particular engineering firm hired them because they were doing a very large job with them, and they wanted to start off on the right foot.

That particular engineering firm was really promoting this one person, and they hired him. This person was literally ordering gravel, materials, using equipment for personal project.

When that owner's back was turned, everything he could do to help himself, he was doing. He was charging materials and supplies to projects that weren't going into that particular project. And the way he got caught is he just got greedy. He got a little greedy too [00:05:00] fast.

My construction company owner, luckily stopped it before it got too bad. And was able to get him arrested. But it was funny, that engineer went very cold on that owner on that project, and it was next to impossible to finish. There's that consideration.

But anyway, I just thought I'd tell you that story

Wade Carpenter: Well, Unfortunately, I wasn't gonna go there with this episode too, but we've all probably heard stories, and I've definitely heard stories where you find these kickback things and maybe they're over-inflating the subs and they're kicking back some money. But I guess the point of today is watching and knowing where you're making the money.

Do you have the cost structure in place to see where you're making money? Have you actually stopped to listen and look or otherwise okay, we increased to 5 million this year over 3 million, or whatever the number is.

This project manager can really look good externally, but if you're not watching what's happening they can quietly be damaging the company.

So [00:06:00] this is really more of a measurement problem than a people problem. Are they not writing up change orders? Are they just trying to be a nice guy? They're not getting that from the owner. I don't know. There's a lot of ways this can take place and a strong project manager, they should show up number one in both client satisfaction and in profit margin is the point here

Stephen Brown: Yeah. What could you do about it to make sure that your project managers aren't taking advantage of your company? And I feel like we're just totally disrespecting project managers in the episode. That is not the case. They're your backbone.

But at the same time what would you do, Wade, to keep that from happening? 

Wade Carpenter: Absolutely. I'm glad you said that because nobody's trying to beat up on project managers and they have a very hard job. They've got a lot of moving parts, and it's not a job that everybody can do. So a skilled one is worth their weight in gold.

And the point is, do you know? Does the owner have the [00:07:00] structure in place to where you're actually sitting down and listening and looking at the numbers to see what's actually happening and not just assuming that whether it's the project manager, whatever, or I talk about all the time, job segmentation. You have a big job and you think you're making huge money and the bid says you're gonna make 20%, but when all is said and done, you made 6%. Those kind of things.

And it takes different formats. Like I said, you got a hidden cost of unwritten change orders that weren't taken care of, or they're either not managing it or we all have this issue, but scope creep. Watching to make sure that things aren't getting beyond, what the scope talked about, and do we need to write up a change order?

Did something happen in the field that the project manager wasn't aware of? That's a communication problem, and maybe it's not their fault, but that's where I'm talking about all the things that are sort of quietly draining that profit.

Stephen Brown: Yeah. We did a podcast once just on reporting the importance from accounting standpoint of reporting things [00:08:00] accurately and timely. What can you do to speed that up? We've also talked about, systems in place that are good, that work, that you set up a system that works and you've got to not only implement it, but you've got to monitor it and make sure that it's being done. It's the company way.

In other words, this doesn't get done unless you do this throughout your corporation. There's some good things to that, and I guess some bad things to systems controlling that. I know you had kinda mentioned that earlier. What do you think?

Wade Carpenter: I think absolutely something we need to talk about with systems, but there are a lot of reasons a project manager might not wanna write it up.

They wanna say, "Okay, that's petty. We'll just, take care of it." Or sometimes, they fear conflict with their client or the general contractor. They just take care of it.

They believe these small little issues are just not worth the paperwork, or they're already overworked. I know there's a lot of moving parts there, and as you said, they may not have a good, simple system [00:09:00] for documenting these change orders in the field or training your field people to say, "Okay, that's not within scope."

And honestly, as I said, sometimes they get rewarded for keeping people happy more than protecting that margin for the company.

Stephen Brown: That's a really good point. You always want to make on a federal job, you want to make your contracting officer look good at all costs that helps you in the future. It's a two-way street. You're helping each other.

But the same thing with an owner you want to get that project done on time and on budget and with no liens or issues on your workmanship, and that depends so much on the project manager.

From a constraint, you have to look at time too. Time is money on a project, and you're taking time to do anything else that takes you away from the focus of getting that project finished costs you money. There's just no doubt about it. 

Wade Carpenter: That's exactly the point. Their job is to go ahead and try to get it done and for it to [00:10:00] take extra time at night or whatever to write something up if they don't have time during the day. You gotta make it quick and painless as possible to get that change order pulled together.

If they gotta do a whole lot of work to get it all together and what I would say developing that system, is going back and after you finish a job, making a list of, okay we added something to the scope, we never got paid for it. It may be too late for that job, but walking through with the field personnel the owner just happened to be walking through and asked me to do this, and so I just figured I'd do it.

Well, It's training your team. It's telling them what to do. I know we had that one episode long time back where they were advocating taking pictures at every job site every single day, and I've seen a lot of that documentation.

But that's where a lot of times we're building systems for contractors that like getting receipts or purchase orders, making it stupid simple, just "Hey, sir, here it is on my phone. I can put it in."

And [00:11:00] again, maybe somebody on the back end's doing it for them, but this is what happened on the job every day, so that gets turned in and so it gets captured faster. Those are just some ideas,

But you gotta take those ideas of where you got the failure.

This is my opinion. Take those ideas where the failures occurred and learn from it and then design the system around it

Stephen Brown: No, I like that comment about keep it crazy stupid simple. Just so simple that it's easier to do as a system than not to do. Not like you're gonna be punished if you don't do it this way, but this is the easiest way to get your job done. I think that's great advice

Wade Carpenter: And again, some of these things that we've started putting in place, it's like some, a little simple form field that on their phone, if they can do it right then and there versus forgetting what it was a week later or getting that receipt to the office, those kind of things.

If you could just do a little thing on their phone that's "This is what happened," and then maybe the office people determine whether that's a scope [00:12:00] change. I don't know.

Stephen Brown: Yeah, that makes perfect sense. This all goes back into also, Wade how much we talk about the cost of doing business, the true cost of doing business that a lot of project managers just don't concern themselves with. They don't run the company. They don't deal with overhead. They don't deal with insurance. They don't deal with depreciation.

All these moving parts seem so small that can add up. And I can't tell you how many times you see on a work in progress report, a small category of jobs that are lumped together, and it'll be like $200,000 or $100,000 worth of total job, miscellaneous small jobs, and it's lost 30%.

And people will say that's just the cost of doing business. We're just doing favors for owners." Or they'll say, "We don't make money on small jobs."

But same with you, you don't make money on very small customers unless you can help them quickly and efficiently.

I [00:13:00] don't make money on small customers unless I can make money quickly and efficiently. And it's the same with construction companies. Any thoughts on that?

Wade Carpenter: I think it's more of what should they measure? And every contractor's gonna be different and depending on, what your trade is. But in general, if you've got project managers, you definitely want to measure your gross margin by project manager, not just top level.

You may want to look at things like change orders written up, approved versus, missed change orders.

Number and dollar value of unbilled change orders. Some kind of measure of customer satisfaction. I don't know. There's a bunch of different things we should probably be measuring, but that's whether you're teaching one PM or the whole team, this is how we do it here.

And sometimes the ones that are the best examples or the worst examples, sometimes those are the best teaching moments. I don't know

Stephen Brown: it seems like there's a key difference between job superintendents and project managers. Job superintendents are all business, and project managers are all about sales and [00:14:00] relationships on top of running the project superintendents

Wade Carpenter: Yeah. Again, I think it all goes back to leadership and having the conversation. Sometimes they're difficult conversations, but number one, tracking it and framing it as "Hey, we're protecting the company, the team," and maybe they're great with clients.

And again, this is not about beating up a project manager, but I guess I'm looking for like practical things that maybe they can do to implement.

As we said, measuring is number one, and if you don't have a system in place, maybe you need to work on the system, like to measure it first.

But, I don't know if you wanna throw some of these practical fixes out before I throw my list out, 

Stephen Brown: No, please go ahead and maybe we can talk about them as we go

Wade Carpenter: With a written change order policy we first start with. I think we talk about that all the time 

Stephen Brown: that's so fundamental in my eyes of problems that I've seen, since I've been in this business all these years over and over again.

Unwritten change orders is the bane of every construction company's existence 

Wade Carpenter: I guess the [00:15:00] next one I would say is sort of really defining what needs to be documented and what needs to be done every day.

Even if you are not gonna bill it or throw in that change order right immediately, sometimes these little cumulative changes, documenting them, then that gives you the ammunition to come back later and say, "Okay, you guys could do this and this is just too much. It's beyond the scope."

But if you can document it, and so clearly defining for what your team says, this is what has to be documented on every job Agree? 

Stephen Brown: Agree.

Wade Carpenter: Ideally, I would say we need to review our project manager job margin every month. Hopefully you're looking at WIP and that kind of stuff a lot more often, but at least monthly going through that with your project managers or at least sharing it with them so that they know, number one, they're being watched.

Stephen Brown: That can also go in with kind of a review of not only letting them know what's expected of them, but how are you doing? What do you need from us?

It's amazing how many folks do not regularly sit down and meet with [00:16:00] their project managers. Everybody's busy.

But maybe setting a routine from that where everyone can count on that is a good idea

Wade Carpenter: Like I said, when your team meetings, your project meetings, whatever. What is the things that prompt a change order? Is it every time the owner walks through or something like that, they come up, those kind of things, just training the team. Sometimes they don't know what to say, I would say.

 so training your project managers how to deal with that. I know that sounds incredibly stupid, but even if you have to give them a script and it's okay, maybe you're gonna put it off on the owner, but say, "I'm gonna have to discuss that," but whatever the main language might be. 

Stephen Brown: Yeah. Make it a source of joy when that owner shows up on the project instead of dread, " Oh Lord, what do they want now? What are they gonna complain about?" And also set that relationship with the owner and the project manager before the project starts. We've talked about that before, but so many times projects just don't get started on the right foot

Wade Carpenter: Absolutely. 

Stephen Brown: Okay 

Wade Carpenter: I guess the last one I would say is just [00:17:00] rewarding your project managers not for what the total dollar value they got done, work they got completed that year, but, how well they did, the profitability, the happy clients. Maybe having a couple of different measures of how they get bonuses and again, as I said, this is not intended to beat up a project manager. The great ones are the worth their weight in gold

Stephen Brown: Good point, Wade 

Wade Carpenter: I guess to wrap this up, unless you had any other closing thoughts, these best project manager are not just the ones that clients love. They are the ones who deliver the job on time as best they can, protect that relationship, and preserves those margins.

One of the biggest lessons here is if your numbers can't tell you which project manager is making you money, and which ones are actually costing you money, then maybe you should be doing something a little different 

Stephen Brown: Absolutely. And also, maybe the best project managers aren't driven by how much you're paying them currently. Are they gonna bolt on you the second someone offers them more money? Are they gonna bolt on you [00:18:00] mid-project? Are they type of the people that want to buy into your company and be a part of it?

Of course, everybody's looking to hire people like that. But it's a dog-eat-dog when someone needs a good project manager and they're willing to pay through the nose to get that person.

As a project manager, you have to look after your family first, right? So are you providing for that as well?

So these are all great points, Wade. Thank you

Wade Carpenter: I know some of these are obviously common sense, but too often we don't pay attention to these little things that may be costing us money, and we wonder why we're not able to take more home at the end of the year.

So with that if you got any thoughts on that or comments ways you've seen that in your company, we'd love to hear it in the comments below.

Please share, subscribe. It always helps the channel out. We really do appreciate it, and we will see you on the next show.