Alternative Building Techniques

Bungane Mehlomakulu from ICON spoke about their system for 3D printing wall assemblies out of a proprietary concrete mix. ICON’s videos are worth checking out if for no other reason than to stay up on the latest in building tech. Bungane’s presentation dove into how a homebuilder would set a roof assembly on the 3D printed walls or add the floor framing for a second story.

While ICON’s tech would be considered cutting edge, the straw bale wall panels shown by Jacob Deva Racusin of New Frameworks are rooted in natural building techniques from the past. Both Bungane & Jacob showed how their company’s methods can reduce the time and labor required to build a structure, thereby increasing productivity from an economics standpoint.

Each presentation was upfront on the limitations of their methods and what specific building scenarios were best fits. I found this to be a refreshing change from many presentations on alternative building techniques that I have attended.

People

Josh Edmonds of Simple Integrity in Cooperstown NY spoke about how his 30 person company does remodeling and builds new homes using 100% in house labor. Josh talked extensively about the culture at his company and how he cross trains people from different trades on doing work like insulation, drywall and concrete work in order to execute projects at a high level of quality on tight schedules. This approach to building combined with Josh being a fellow fixed price evangelist are fascinating to me and something that I hope to learn more about.

Steve DeMetrick of DeMetrick Housewrights in Wakefield RI gave an impassioned presentation on his views about homes and architecture being “for people” and how this simple fact is often lost on architects and builders. Lauren Kelly of MK Design Group in Beaufort SC gave an incredibly well detailed presentation on New Urbanism and her work and an architect and town planner. Lauren took the same “for people” thinking that Steve brought and applied it to how developments can be designed with residents and the environment in mind.

In the coming weeks Fine Homebuilding will be posting the videos from the event. When they do I will post the links to an upcoming Substack.

New People

On the financials front I got meet Brian and Nick from BuildPlus who have built a software platform for cash management on individual projects. If you are a small builder who does not need a full scale project management platform but is looking for a setup that will allow you to track all of your project transactions and produce accurate cost plus client invoices BuildPlus is worth a look. I am hoping to connect with Nick in the near future and get a full run through of what he and Brian have built.

I got to meet several people behind Hammerstone School in upstate NY including the founder Maria Klemperer-Johnson. Hammerstone School provides training for women that range from learning to maintain their home to building specific projects to training to enter the building trades. Meeting Maria and her team was a highlight of the show for me.

Finally it was humbling to meet and speak with many readers of this Substack and hear about how the topics that I have written about over the past year have effected your thinking about the business end of being a builder. I look forward to hearing from and meeting even more of you as Nails To Numbers moves into year two.

Start here

If you’ve recently found my work, these four are a good starting point. They set the frame everything else runs on: percentages aren’t money, profit is a number you plan for rather than one you find in December, and that the whole thing is just a big math problem.

• You can’t spend a percentage. — where this started

• Revenue Is Vanity. Profit Is Sanity. Cash Is King.

• Your Construction Business Is One Big Math Problem

• Simple Numbers, Real Lessons: What Greg Crabtree Taught Me About Running a Remodeling Company

The money math

These pieces are the guts of my thesis. Gross profit is what doing the work produces, GP/Day tells you how much of it you need, direct labor is the constraint that sets your capacity for producing it, DLER is how you measure your return on labor, and the billing rate for that labor is what comes out the far end of the math problem once you’ve done the work, not the number you start from.

• The Window of Gross Profit Opportunity

• Labor Efficiency Ratios Define Profitability

• A Low DLER Doesn’t Tell You Why

• How to Build a Burden Labor Rate That Tells the Truth

• The Billing Rate Is the Last Number

• The Math Behind the Last Number

• Projects Don’t Produce Net Profit—Companies Do

• Profit Is Not What’s Left Over

• Get Profitable With What You Have

• Whose Money Do You Have?

• Why Billings Are Not Revenue

Forecasting and throughput

Knowing your numbers after the fact is bookkeeping. Knowing them early enough to steer is forecasting, and that is the difference between a company that reacts and one that decides. Volume per week and the work in progress accounting (WIP) are the two main tools covered in this section. VPW turns your own history into a production rate you can schedule against, and WIP tells you whether the money you’ve billed is money you’ve actually earned.

• Throughput: The Intersection of Profit and Duration

• How to Calculate and Refine Volume per Week

• Using VPW in Forecasting: Turning History Into Foresight

• How to Build a WIP Spreadsheet

• How Your Sales Cycle Influences WIP

• The Forecast Is Not the Future

• Forecasting Is a Leadership Practice

• Measuring Progress...

• The Mid-Year Look

Budgets, estimates, and the sale

A budget is what you know and it gets smarter every time a job closes out. The posts here are about closing the gap between the number you sold and the number you got in the end, including the sales conversations where that gap usually opens up in the first place.

• The Budget That Learns

• A Budget Represents What You Know

• The “Simple Job” Lie

• What the Market Will Bear vs. What It Costs

• You’re Not Selling A Percentage

• Know Your Market. Know Your Business. Know Your Path.

• Busy and Broke...

• There Is No Apples To Apples

Systems and production

Every number in the sections above is produced by somebody in the field doing something in a particular order. That’s what this group is about; the road you design, the road you maintain, and the friction that shows up when the two don’t match. Month-end accounting doesn’t start in the office. It starts with what your lead carpenter wrote down in a daily log on Tuesday.

• Designing the Road

• Maintaining the Road

• Process Thinkers vs. Systems Thinkers

• The Paradox of Good Operations

• Where Friction Actually Comes From

• Warranty Is Inevitable

• Month-End Accounting Starts in the Field

• One Job. One Economic Reality.

• The Books Beneath the Books

People and leadership

This is the section I didn’t know how I would thread into a newsletter about construction finance. But I strongly believe that labor is the profitability constraint for a small contractor. If you do not have the people you cannot produce the work and this means the people swinging the hammers are your true capital, and how you lead them is a financial decision whether you like it or not. Open-book management is the clearest version of the argument, people make better decisions when you let them see the numbers.

• Culture Is What You Do

• Your People Are Your Capital

• Open-Book Management: How B-Players Become A-Players and A-Players Become Leaders

• The Wage Earner Mindset

• Everybody Wants to Win.

• Two Minds, One Company

• Growing and Honing at the Same Time

• The Continuum...

A note on Simple Numbers

Greg Crabtree has been a huge influence on me and my success in understanding the business side of construction. Labor efficiency ratios, treating owner’s compensation as a real cost rather than whatever’s left, the insistence that profit is a planned number, all of that is from Greg’s Simple Numbers books. If you want that thread specifically, start with Simple Numbers, Real Lessons, then Labor Efficiency Ratios Define Profitability, then Profit Is Not What’s Left Over.

I want to thank everyone who has taken an interest in my writing. I enjoy hearing from everyone; how you apply it, your questions, your critiques and your ideas. It continues to be a great joy hearing from all of you.

—Ian

Many readers wrote back with the same question. Ok, I built the number and I know where it came from but the client still printed my proposal and a competitors, put them side by side on the table and asked why mine was $9000 more.

Lets start with what’s on the table. Two documents, from two companies, with different overhead, different crews, different subs, and different definitions of the word “included”. They both end in a dollar figure, and that is the only thing about them that your client compares. They do not take into account the differences in what each company brings to the project until they take the low bidder and wonder why they have to let the tile guy in every morning and clean up after him.

They aren’t being cheap

Like Michael Jordan in The Last Dance this behavior from clients is easy to take personally. Get a group of builders together and it will not long before they start to recount all of the slights foisted upon them, just as #23 did while enjoying a bourbon on camera for Netflix.

But this isn’t really about you. Your client is doing this because every other purchase of their adult life was engineered to allow it.

A car has a trim level and a window sticker. A house has an MLS listing, square footage, and three comps on the same block. A mattress has a model number you can price at four stores. Buyers have been trained by every market they’ve ever shopped in that a like-for-like comparison exists somewhere, and that finding it is the careful buyer’s job.

Then they try to buy a construction project and they reach for the only tool in their toolbox. It’s not a character flaw or a negotiating tactic. It’s a competent buyer running a competent method in the one market where it doesn’t return an answer. When all you have is a hammer every problem looks like a nail.

And we built the market that way

Lets be real about what we hand people. Allowances that substitutes dollar figures for missed decision deadlines. Lump sums that obscure the methodology. “Labor and materials” lines that say nothing about how long any of it takes. Overhead sprinkled into the cost of goods so the gross profit margin looks smaller than it is, the electrician who bid $10K showing up on the estimate at $15K from my previous article.

Some of that is ingrained habit or learned behavior. But some of it is defensive, because we learn early in our careers that an itemized number is a number somebody can argue with. This all leads to a document where the total price and the markup percentage are the only two numbers that can be compared to anything. So those are what get compared. We have made price the only legible thing about us, then got frustrated when people shopped on price.

Checkable, not comparable

You will never make your proposal line up against another builder’s. You don’t control that document. Comparability takes two cooperating parties. Verifiability takes one.

You can be the only proposal on that table where every number is transparent.

The sub’s own proposal. When I say the electrician is $15K, it’s because he is charging me $15K, and if you want to see the document I’ll show it to you. Ask your trade partner first. That number is his, not yours. And when they tell you that they know an electrician who is cheaper it is an invitation to speak about your vetting process and how your trade partners are what allow you to manage risk, keep the job on schedule and keep your margin as low as possible.

A scope of work written in a what’s in and what’s out format. Every allowance is a place where two proposals disagree with each other. Say which of yours are real prices and which are placeholders, and say why. Provide a plan for how that number becomes real.

Duration in calendar days, with a completion date you’ll stand behind. There’s a good chance the other builder hasn’t priced the time at all. An answer to “when will this be done” is the thing your client wants most and is least equipped to compare.

The gross profit margin fee described as time and attention rather than a slice of the goods.

A clear change order format, what it costs, how many days it adds, and what your completion date becomes.

Transparency isn’t a pricing model. Fixed price, cost plus, T&M, design-build, design-bid-build. All of it can be run the same way.

Non-negotiable

Some clients will take the sub proposals and try to buy them direct. Some read your line items as a menu and start crossing things off. Some hear “here is where the number comes from” as “here is where the number could go.”

Two things keep that from getting away from you. Transparent is not the same as negotiable. You are showing where a number came from not asking for an opinion on it and it is hard to say that out loud in a pleasant voice. The client who weaponizes your transparency was going to do it eventually. You found out in the second meeting instead of during the drywall.

We as an industry taught buyers that price is the only comparable thing about us and they believed us. You aren’t going to fix that from the seat of your truck. What you can do is be the one proposal in the pile that answers a question when somebody asks it, and let a client learn over the course of a single meeting that there’s a better question than which one is cheaper. Most of them have never been offered one.

Like many of us this builder does not consider himself a salesman. His preference is to be honest and sometimes that means that he’ll hand over a competitor’s phone number if he thinks that’s the better fit. But when the markup question comes, he feels like he’s been asked to defend his numbers against an unknown.

He can’t defend his numbers. None of us can. That’s the problem with this familiar client question and the reason the answer has to start somewhere else.

The percentage is unverifiable, and everyone knows it

Start with what’s actually being compared. You know what your 20% covers because you built it. You have no idea what the other guy’s 18% covers, and neither does your client. Your competitor might run a leaner operation. Or some of his overhead & profit is mixed into his cost of goods where nobody can see it. His electrician who bid $10,000 but shows up on the estimate at $15,000 carrying $5,000 of your competitor’s overhead & profit.

While I can’t prove that about any particular competitor, I can tell a client exactly what I’m doing.

When I tell you the electrician is $15,000, it’s because he’s charging me $15,000. He isn’t charging me ten with five thousand of my overhead & profit buried in his number. And if you want to see his proposal, I’ll show it to you.

Transparency is the move. You don’t win the percentage argument by having a smaller percentage. You win it by being the only person at the table whose number can be opened up and checked. If you have the courage and the level of organization to put your numbers on the table a defensible 20% beats an unverifiable 18%.

I’ll admit, some potential clients won’t care. They’ll go straight to the total and the markup and nothing you can do will sway them. But I consider this a win! Someone who is laser focused on price alone is not an ideal client, and finding that out early is a good outcome. I like to call these “the best project we never got”.

What they’re actually buying

This is the part that took us years to figure out and it’s what has made these conversations easier.

The fee/markup/margin isn’t a percentage of the cost of goods. It’s the price of a given amount of my company’s time and attention. It’s my overhead, my people, my scheduling, my relationships with the trades, my paying and checking and chasing the 100-200 individual transactions that encompass a project. Someone has to do all of that. A percentage is just the simplest way to express on paper.

Knowing your numbers and being able to express them this way to a client is a game changer

We often have clients who have done projects before and believe they know construction. They’ll wanted to procure all their own finishes and fixtures, and they want to know what that will take off the price.

The answer is probably nothing. You can absolutely do your own procurement. It doesn’t reduce our margin, because our margin was never a function of your project’s cost of goods. It’s a function of our capacity and in fact your desire to do your own procurement will require you to buy more of it.

When my team does the buying, I know my lumberyard’s delivery window. I know my cabinet shop’s shop-drawing turnaround, their load date, and the fact that a Thursday ship date means Wednesday delivery because their trucks don’t run on weekends. I can put all of that into a schedule and hand you a completion date I’ll stand behind. If you take the buying away from me, I lose control of when material shows up, which means I lose the ability to schedule your job and the next job, which means what you actually wanted from me; a reliable start and end date, and total price that is not a teaser is gone. I cannot give you a discount when you are causing me more work.

Put a number on the day

You can’t have that conversation based on a percentage. You can have it on a rate.

Say the total your business needs to generate this year; your pay, your taxes, your benefits, your whole overhead, comes to a gross profit of $450 a day. That’s the number I’d want to know before I ever quote anything. It’s built the same way the billing rate was in an earlier piece: cost first, rate last. Note the denominator is calendar days of duration, not days you swing a hammer. The job occupies the calendar whether or not anybody’s on site.

Using this math, a six-month project is roughly 180 days, and 180 days at $450 is $81,000. That’s your fee. Not 20% of something. It is $81,000 because that’s what six months of your company’s capacity costs.

When you start to price projects this way you may well end up in exactly the same place as your discount competitor, but the difference is that they got there by relying on blanket percentages and you got there by doing the math.

Percentage pricing survives because on an average job it’s roughly right. But the two methods come apart the moment the job stops being average.

This is what makes pricing change orders correctly so critical. A well written CO tells the client three things; here’s what it costs, here’s how many days it adds, and here’s your new completion date. Absolutely we’ll run power and blocking for the TVs. Here’s the price and it adds two weeks so your finish date will move from the 14th to the 28th. If the client understands they’re buying your capacity by the day your margin is an invoice line.

The real point

I believe that this is how you sell a project that provides for your company’s financial needs. Not by defending a percentage but by knowing the cost of your capacity. This lets you tell a client who is not a fit “I understand exactly what you want to do, and if that’s how you want to do it, I’m not your guy”. You can only say that when you know what your day is worth.

Ask that builder how they came up with $85, or whatever their rate might be, and you’ll often get the same answer. It’s what the market will bear.

I’ve been hearing that a lot lately from frustrated contractors, some who are readers of this newsletter. It’s become a de facto answer used when someone asks about your rate. It sounds like a disciplined view of a market we’ve studied and carefully priced ourselves into. I view it as the opposite. “What the market will bear” is what you say when you have outsourced the most important decision in your business to strangers who are guessing right along with you.

Market rate is not a fact. It’s the average of what other builders, who may or may not even have the same business model as you, are charging. Or worse, are perceived to be charging by the market. Few in that chain did the math or bothered to check the work. Like taking a measurement off a wall that you never checked for plumb, and then wondering why your cabinet layout doesn’t work.

I ran my own shop that way. I priced jobs, took feedback from the market and adjusted my rate until I got work. It became a wage with paperwork, and the wage kept shrinking because I’d never did the work to understand what it really cost me to open the doors.

I believe that we ask a better question than “what will the market bear”. “Am I charging appropriatley” reframes the question and helps you explain in a sales conversation with a client where the price comes from. But you can’t explain the difference between gouging and charging appropriatley until you know what it costs you to be in business.

Do we really think the plumber charges $250 because plumbing is three times harder than carpentry? None of the plumbers that I have worked with feel that way. They charge $250 because at some point the plumbing trade did the math on trucks, insurance, licensing, training, callbacks, and the non-billable hours. As I laid out in The Billing Rate is the Last Number $250 is what came out the other end. The number is math a plumber can defend line by line. The rate should never be a number we feel the need to apologize for.

I believe that when we know our costs and use these real numbers to drive the rate we stop guessing. The market stops being the authority and our own books become the authority. Once you’ve built your rate from your own costs, “what the market will bear” stops being a strategy and starts sounding a way to avoid the realities of being in business. One of my mentors from Remodelers Advantage is fond of saying “once you know your numbers you will never be the low cost provider”.

None of this means you get to charge whatever you want. The market is real. If your true cost to operate lands you at a rate your market genuinely won’t pay, that’s information too. Hard information and worth knowing early on. But that’s a different conversation than the one most of us are having. Most of us aren’t pricing against our costs and losing.

Before you settle on a rate because that’s what the guy down the road charges, find out what your hour actually costs. Not what the market will bear but what your business needs to survive. One of those numbers doesn’t belong to you. The other one keeps your doors open.

The cost layout that I described previously works when you’re one person, and it works because when you’re one person your wage and your profit are the same pile of money. Add a second person and the game changes. Now there’s a wage that isn’t yours, an overhead that isn’t a guess, and a profit that has to come from somewhere other than your own paycheck.

Hiding inside the methodology from my previous article are two numbers that will be familiar to everyone who has read the majority of my work. GP/Day and DLER. And neither of these ratios changes shape when the company grows.

GP/Day set the pace.

Your business has to produce a certain amount of gross profit defined as the money left after the cost of the work itself has been covered. The money that pays overhead and ideally leaves behind some net profit. This is not an hourly idea but a yearly one, and the calendar year is what turns it into a number that can guide your business. Take the gross profit the company has to clear in a year per your company budget and divide it by the days you have to clear it in. What comes out is gross profit per day, the pace the business has to hold to achieve your budgeted goal.

At my company, the target is around a million dollars of gross profit against a full calendar year, or $2,740 a day. On average we run about four jobs at a time, so each one has to carry roughly $685 a day of that pace to keep us whole. That’s our number, built from our overhead and our crew. Yours will land somewhere else, possibly more possibly less. This isn’t just a number, it is a rate of production. Like feet of wall framed in a day.

DLER is the ratio.

The pace tells you how much gross profit you need, but it doesn’t tell you how to price an hour of labor to get it. For that you need to know what each dollar of labor has to return because in a company that builds and manages its own work, labor is the constraint. And the constraint is what caps how much gross profit you can earn. Yes you can scale gross profit by selling more trade partner work or fancier tile, but I would rather stake my success on my in house labor that on the hope that a client will choose $100/sqft tile over an off the rack subway tile.

The formula I use is direct wages (no benefits or payroll taxes included), plus your operating expenses, plus the profit you’re aiming at, all divided by your direct wages. Run our budget through it and it lands near 3.5. For every dollar I pay a carpenter to swing a hammer, the company needs about three and a half dollars of gross profit to come back.

This is where the rate falls out, because a ratio is a multiplier. Take a lead carpenter’s paid wage at $40 an hour multiplied by the ratio. $40 x 3.5 = $140. Our published time-and-materials rate is $137 an hour. This is not a coincidence and it’s not a number I looked up in a book, the rate is the wage times the DLER.

Knowing which to use and when.

The two numbers give you a lens through which to view your projects. GP/day is the perfect metric for when your project in question matches the COGS profile of your average project. DLER is the check against a high labor or high risk project. One is measured against time, one against labor, and they’re two views of the gross profit target the business has to make. I use both but I run GP/Day first to see if the project can be structured to track the average. When it can’t I look closely at the estimated labor and increase the margin according to the risk the project poses to my labor output.

The long hand cost calculation was sufficient for one person. But when your risk starts to scale as fast as your company you need a better set of metrics even if those metrics are also buried inside the long hand calculation.

Last week I wrote that the way out of the wage earner mindset isn’t a new metric. It’s a different question. Stop asking what you charge and what you get to keep. Start asking what the business needs to make, separate from what you want to take home.

A few readers wrote back with the fair, obvious follow-up: okay, but how do I actually turn that into a number I can put on an invoice?

So here’s the math. It’s not complicated. It just runs in the opposite direction from how most of us set a price.

The wage earner sets a rate the way you’d read a thermometer. You look around at what the other guys charge, you land on a number that feels defensible, and you bill it. The owner does the reverse. You don’t start at the rate. You start at the life the business has to fund, and you build outward, one honest cost at a time, until a rate falls out the far end. The rate is the last number you calculate, not the first.

You…

Start with what you want to take home. Not revenue, take-home. The money that hits your bank account every week whether or not there’s a job on the schedule, out of a business savings account, like the steadiest paycheck that you have ever had. Say that’s $2,000 a week. Across the year that’s $104,000. That’s your take-home. It is not the company’s profit. It’s your wage, and we’re going to make the business carry it.

Now, a wage costs more than the wage. When you were self-employed you paid the employer’s half of everything and never felt it, because it came out of the same pile your paycheck did — self-employment tax, workers comp, etc. Loading for all of it runs the number up by roughly a third, though this varies place to place. Multiple it by 1.3 and your $104,000 becomes about $135,000.

Then benefits. If you want to fund a retirement account — a Simple IRA, say, maxed out — add it in. Call it another $17,000. Now you’re at about $152,000. That’s the fully loaded cost of employing one person. That person is you.

The business…

Then overhead. The cost of being in business, whether or not you framed a wall this week: the truck, the tools, the phone, the software, the accountant, the lawyer, the insurance that isn’t tied to a single job. For a one-person shop, put a real number on it. Fifty thousand is an average of per person overhead that I have seen in other company number. Now the number is $202,000.

That’s your cost of being in business for a year. Call it $202,000.

Capacity is the key.

Here’s the step that stings. That $202,000 has to come back to you across the hours you actually bill a paying customer — not the hours you work. You do not bill forty hours a week. Nobody does. The rest is estimating, driving, invoicing, tool maintenance, the callback. So the math depends entirely on that fraction:

• 1,000 billable hours a year → $202 an hour

• 1,250 hours → $161 an hour

• 1,500 hours → $135 an hour

Most one-person shops land somewhere between 1,250 and 1,500. Pick the honest number, not the flattering one.

Additional COGS

One move can bring it down. As a business you don’t only sell your hours. You buy materials and hire subcontractors, and an owner puts a margin on those too. Say you run $120,000 a year of subs and materials through the business and mark it up 30%. That’s $36,000 of gross profit that has nothing to do with your labor, so subtract it from what your hours have to carry. Now the hours only need to recoup $166,000:

• 1,000 hours → $166 an hour

• 1,250 hours → $133 an hour

• 1,500 hours → $110 an hour

For reference: our time-and-materials rate at in Madison is $137 an hour, plus 30% on subs and materials. That’s our number — a company with a crew, a shop, and overhead a one-person operation doesn’t carry. Yours will land somewhere else. The point was never the number. The point is that I can tell you exactly where our number came from, line by line, and you can too.

Don’t flinch.

And here’s the thing the wage earner does with a number like $133 an hour: you flinch. It feels like gouging, because you are comparing it to the $40 you used to “make.” But $40 was never what you made. It was what was charged before the business took its cut in the dark, out of the retirement never funded, the truck ran into the ground, the taxes that ambushed every April.

Run it with your own numbers tonight. A wage earner names a rate and hopes it’s enough. An owner builds one and knows what it’s carrying. In my next newsletter I will show how this math scales to work for a small contractor that employs a small crew.

The Fine Homebuilding Summit

I will be speaking about the evolution of my career and how business owners can provide a nails to numbers career path for their people at the Fine Homebuilding Summit at Endicott College in Beverly MA on August 20th. SCHWANDT50 is a discount code for readers of this newsletter to get $50 off the ticket. Last year’s event was a great time and I enjoyed meeting many readers at the event.

If I had to define what I had for all the years I was self-employed, in one phrase, it would be this: I had a wage earner mindset.

I didn’t have a business. I had a job that I owned. And it took me a long time to learn the difference.

The wage earner mindset goes like this. I charge X. I get paid X. I put X in my pocket. Then I use that money to cover my expenses, or I bill the expenses straight through to the customer and keep the rest. The whole operation is a pass-through for my labor. Money comes in the top, my life gets funded out the bottom, and the part in the middle that people call “the business” is really just me doing my job.

I hear this same mindset in many of the tradespeople I get to speak with through the magazine, podcast and this newsletter. And here’s the thing I keep landing on: what most builders are struggling with is not that they’re ignorant about their numbers. It’s that they’ve never set the business up as a business. They’re stuck in the wage earner mindset, and the mindset stops them from ever building the setup that would get them out of it.

This is why I think so many contractors are drawn to cost plus. Cost plus lets you stay a wage earner. You take your costs, you add your markup, you bill it out. You never have to sit down and ask what it actually costs to run your company for a year, what capacity you have, and what gross profit you need to produce to keep the lights on and pay yourself like an owner. Cost plus keeps the math at the level of a single job and a single paycheck. It feels safe because it feels familiar. It’s the wage earner’s pricing model.

I want to be careful here, because I don’t actually think cost plus is the villain. Cost plus, fixed price, and time and materials are just pricing strategies. Any of them can work. But whether they work depends entirely on whether the person using them understands their business; their real costs to operate, their capacity, their gross profit targets. A wage earner using any pricing strategy is just formalizing the habit of not looking. An owner using a pricing strategy knows exactly what the business needs and uses that pricing strategy as a vehicle to achieve it.

The owner mindset starts from a different place. The business is its own thing. It has costs that exist whether or not you swing a hammer this week. It has a capacity — only so much work can move through it. And it has a required return, a number it needs to produce to be healthy, that has nothing to do with what you personally want to take home. You price to fund the business first. Your paycheck comes out of a business that’s actually built to generate one.

There’s a line I heard recently on the Lazy Leverage podcast (one of my favorite listens) that’s been stuck in my head: just because something is simple doesn’t mean it’s easy. That’s exactly right for this. The setup for running your company’s finances like an owner is genuinely simple. It’s a handful of numbers, a framework for arranging them and a cadence for looking at them. Once you deploy it and build your pricing and accounting around it, it mostly runs. It is not complicated.

But it is not easy, and I don’t think the difficulty is technical. I think the difficulty is the mindset. The wage earner mindset doesn’t just leave you short on knowledge, it leaves you not seeing why the setup matters. If you believe the business is just a pass-through for your labor, then building a real financial operating system on top of it feels like overhead. Paperwork. Something for bigger companies. So you don’t do it, and the not-doing keeps you a wage earner, and it loops.

The way out isn’t a new metric. I could hand you volume per week and gross profit per day tomorrow, and if you’re still thinking like a wage earner you’ll treat them as report cards on your paycheck instead of controls on a business. The way out is a different question. Stop asking what you charge and what you get to keep. Start asking: what does this business need to make this year, separate from what I want to take home and is my pricing built to produce it?

Answer that honestly and the pricing strategy sorts itself out. Refuse to, and no pricing strategy will save you.

The Fine Homebuilding Summit

I will be speaking about the evolution of my career and how business owners can provide a nails to numbers career path for their people at the Fine Homebuilding Summit at Endicott College in Beverly MA on August 20th. SCHWANDT50 is a discount code for readers of this newsletter to get $50 off the ticket. Last year’s event was a great time and I enjoyed meeting many readers at the event.

Pretty normal scenario for most remodelers. But when I sat down with our May financials, that sales cycle shift showed a real-world example of the importance of the WIP adjustment.

Using round numbers here’s what May looked like on paper.

Our build revenue came in at $200,000. Lower than we wanted. But sitting right below it was our WIP adjustment, the monthly reconciliation that converts what we billed into what we actually earned, positive $150,000.

That’s a big adjustment. Big enough that if you only looked at the $200,000 line, you’d think the month was soft. Look at the $350,000 it actually represents once the WIP adjustment does its job, and the picture changes completely.

So why was the adjustment so large? Because our team had been working on and generating billings from existing projects without us bringing in large deposits from new sales. Basically we were earning the money that we already had in the bank.

Now say we’d closed the deal and collected that deposit in May. Build revenue goes up by the deposit amount. The WIP adjustment shrinks by that same amount, because now that deposit is revenue but unearned. The definition of an under-billing. Add the two lines together in either scenario and you land in the same place: $350,000 in real, earned revenue for the month.

Same gross profit dollars. Same actual money the company made. The only thing that moves is how the number gets split across two lines on the P&L, depending entirely on whether a client started or ended their vacation on Memorial Day.

When a company shows a large WIP adjustment, the first question I ask is whether they took a big deposit that month. Billing timing, not profitability, moved that number. Taken as a percentage of gross profit to revenue, I’d have drawn two completely different conclusions about the same month depending on nothing but a signature date. The WIP adjustment evens the numbers and shows the true financial picture.

Here’s how to check this in your own numbers, the next time your gross margin swings hard from one month to the next.

First, before you react to a revenue total, find your WIP adjustment for the month and ask which direction it moved and by how much. A big swing in either direction is a signal to look closer, not a verdict on its own.

Second, ask whether a deposit or milestone payment landed that month, on any project. That single event can move an under-billing or over-billing by tens of thousands of dollars without a single hour of production happening differently.

Third, do the math I just did above. Add your billed revenue and your WIP adjustment together and compare that total to last month’s. If that combined number is stable, your business didn’t get better or worse. Your sales cycle just moved.

That third step is the one most people skip, because the revenue is easy to total up as the month progresses and its sitting right there at the top of the report. But the WIP adjustment takes time and effort to do accurately. This example shows why you need to know both numbers if you want a clear picture of where you stand financially at month end.

The instinct, almost every time, is to go to the field.

Crew’s too slow. Too much standing around. Somebody’s not pulling their weight. You start thinking about who to blame, and about what you’re going to say at the next production meeting.

Hold on.

That instinct is right maybe half the time. The other half, walking onto the jobsite to fix a low DLER is the worst thing you can do. The problem was never on the jobsite, and the people standing there know it.

First, a quick reset

I wrote a full piece on what DLER is and how to calculate it back in November, Labor Efficiency Ratios Define Profitability. If you’ve never run the number, start there. This post assumes you have it.

The short version: DLER is the gross margin remaining after material and subcontractor costs divided by the wages you pay the people doing the field work, before burden. It’s a multiplier, not a percentage. Higher means more gross profit per labor dollar. Your target comes out of your budget; overhead plus profit, divided back down into a number every labor dollar has to carry. That’s the number you set on the way in. The rolling twelve is the number you actually got.

This post is about what to do when those two numbers don’t match.

It’s a ratio, and a ratio can hide things

Here’s the thing almost nobody says about DLER. It’s a ratio. Gross margin on top, direct wages on the bottom. When the number is low, it can be low for two completely different reasons, and the ratio will not tell you which.

The top can be too small — you didn’t generate enough gross margin.

Or the bottom can be too big — you spent too much in wages for the output you got.

Same low number. Opposite problems. Opposite fixes. And the default assumption that a low DLER means the crew was slow only addresses one of them.

The three things a low DLER could actually mean

When I sit with a soft DLER, it’s almost always pointing at one of three things.

Sometimes it’s genuine field inefficiency. The margin was in the estimate and it leaked out during the build through rework, travel, waiting on a decision, cleaning up after a sequencing mistake, two trades in the same room tripping over each other. The hours went in and the output didn’t come out. This is the one everybody assumes. It’s real, and when it’s the cause, the fix is in production: sequencing, handoffs, decisions made before the crew shows up.

Sometimes it’s a pricing and mix problem. The margin was never in the estimate to begin with. You sold a labor-heavy job at a blanket margin that didn’t account for how much direct labor it would eat. The crew built it fine, efficiently even, and the number still comes back low, because there was never enough gross profit in the job to clear your labor. Going to the field here isn’t just useless. It’s corrosive. You’re putting a desk decision on the backs of the people who had nothing to do with it.

And sometimes it’s structural. The crew’s fine, the pricing’s fine, but the labor load has grown out of proportion to what you’re producing. You hired ahead of the work. You’re carrying a bench. Management time crept into direct labor without anyone deciding it should. More wage, same gross margin, ratio erodes.

Three causes. The first lives in the field, the second at the estimating desk, the third on the org chart. A low DLER looks identical in all three cases.

The question that sorts it

So before you act, you diagnose. And the question that sorts it is simple.

Was the gross profit there in the estimate?

Pull a job that came in light and compare its estimated DLER to its actual DLER. (If you don’t estimate DLER on the way in, that’s a separate fix and an easy but important one. You can’t tell erosion from underpricing if you never set a mark.)

If the estimate showed a healthy DLER and the actual came in low, your margin eroded during the build. That’s a field and production conversation.

If the estimate itself showed a low DLER because the job never had the margin in it, then no crew on earth was going to save it. That’s an estimating and pricing conversation, and the field is the wrong room to have it in.

And if it’s neither, if job after job estimates fine and builds fine and the company number is still soft, then it’s structural. You’re looking at capacity and head count, not any single job.

The cost of misreading it

This matters more than a spreadsheet correction, because the cost of misreading the number isn’t just wasted time.

Walk onto a jobsite and start squeezing a crew over a number that a pricing decision caused, and you’ll fix nothing and lose trust doing it. The people in the field can feel the difference between we have a production problem to solve together and I’m blaming you for something that happened at a desk. Get that wrong enough times and your best people start updating their resumes.

DLER tells you the engine is underpowered. That’s all it tells you. It does not tell you whether the problem is the fuel you put in, the load you’re asking it to pull, or the machine itself. Finding that out is the actual work, and it’s worth doing before you say a word to anyone.

The number is the start, not the end

Run it, by all means. Run it on the rolling twelve so the seasonal noise washes out.

But when it comes back low, resist the reflex to go find someone to blame. Ask the quieter question first, where did the margin actually go, and was it ever there at all. The answer tells you which of the three problems you have.

And the three problems don’t share a fix.

A personal note,

This is my 42nd post on Nails to Numbers. The best part of writing it hasn’t been the writing. It’s been the people. Builders who read a post about GP/Day, or about a low DLER, and wrote back to say that’s me, that’s exactly where I am.

I know where they are because I’ve been there. I spent years running my own shop without really knowing whether it worked. I learned what I know about financials after a business of my own came apart, by going back and understanding the things I’d spent years avoiding. I didn’t come to these numbers as an accountant. I came to them as a tradesman who got buried by what he didn’t understand, and decided never to be there again.

That’s the work I want to help other people do. I’m opening up time to advise a small number of companies — owners who came up in the trades and can feel that the business is busy but can’t yet see where the money is or isn’t. Not to run your numbers for you. To help you build the systems and the habit of reading them, so that you own them and they don’t walk out the door with me when we’re done.

If that’s where you are and you’d like to talk about whether I can help, reply to this email or message me in the Substack app.

Thank you for being part of Nails to Numbers.

Ian

I pulled five jobs from our completed work. Not random jobs but our “best” jobs. The ones we had pointed to when someone asked how the year was going. Good clients, clean scopes, crews that knew what they were doing. Jobs we were proud of. Jobs that made money. Or so we thought.

Then I asked a simple question: what if we ran these five jobs on repeat, every year, indefinitely?

The answer was that we would lose money.

Not dramatically. Not in a way that would show up immediately. But steadily, year over year, the company would fall behind. And the reason wasn’t the jobs. The jobs were fine. The reason was that our margin, the number we added to our cost of goods to arrive at a price, did not cover what it actually cost to operate the company.

There was indirect overhead that wasn’t being captured anywhere. Not in the burden labor rate. Not in the OH&P we were applying to each job. It was just missing from the equation.

Instant slip before work started.

Most construction companies set their margin the way we did. They look at what the market will bear. They look at what they charged last year. They look at what a competitor might charge or what a client might tolerate. They land on a number that feels reasonable, apply it to their costs, and call that a price.

That is not a math problem. That is a guess with a percentage attached.

The actual math works differently. The overhead and profit you add to a project — the OH&P, or the plus in cost-plus work — is not an arbitrary margin. It represents the total gross profit your company needs to produce. Once you know that number, you can divide it by the days in one year.

OH&P ÷ 365 = gross profit per day.

That is the number that tells you whether the work you are doing is moving fast enough, financially, to support the company you are running. Not whether a job feels profitable. Not whether the client seemed happy. Whether the company is producing what it needs to produce to cover its costs and leave the owner with the result the business is supposed to deliver.

If the OH&P number is wrong or if something real is missing from it every estimate built on top of it is wrong too. The math looks like math. It has a percentage attached. But it is not solving the right problem.

There is another version of this problem that stalks small operators. One that stalked me when I ran my shop in NY.

The owner still thinks of themselves as a direct cost.

It makes sense on the surface. They came up as tradespeople. They are in the field sometimes. So they put their labor in cost of goods sold, apply a margin on top, and assume the equation is complete.

It is not complete.

Even if you occasionally swing a hammer, you are the general manager of your company. That is your primary function. And general managers are overhead. Are you going to lay yourself off if work slows? No, you are going to put on your marketing and sales hat and hit the streets to find work. And as the general manager you need to pay yourself for this work.

Greg Crabtree makes this distinction clearly: you earn a wage for what you do, and a return for what you own. The wage — what it costs to have you running the company — belongs in overhead. The return — your share of what the business produces after it covers its costs — comes out of net profit.

These are two different things.

Conflating them is how the math breaks before you ever open an estimate.

If your compensation as the owner-operator is not in overhead, your OH&P is understated. If your OH&P is understated, your gross profit per day target is wrong. If that target is wrong, your margin was never built from the actual cost to run the company. And you can do your best work, on your best jobs, year after year, and still wonder where the money went.

In both cases — missing indirect overhead, owner comp in the wrong bucket — something real was left out of the equation. The margin looked like math. But it was not built from the actual question the business needs to answer:

Can this company generate enough gross profit, with this labor, over this amount of time, to pay for itself and leave the owner with the result they need?

That is the equation. The variables change. Jobs stretch. People leave. Overhead grows. The owner wants a different life than they wanted five years ago.

So you solve it again. And again. And again.

But you cannot solve an equation with variables missing. That is what the experiment taught me. The math was there. It was always there. We just had not put the right things into it yet.

The math is not separate from the work. It is the shape of the work made visible.

It’s not really a lie about time. It’s a lie about fear. Busy is the alibi. The real reason is that if you open the books and the year isn’t tracking the way you hoped, you have to do something about it. And it’s June, and the truck needs brakes, and a client is upset about a tile order, and there’s always a version of today that’s more urgent than the spreadsheet.

I get it. There was a stretch of my life where I didn’t look at my numbers because I was afraid of what they’d tell me, and being afraid felt easier than being sure. It wasn’t. The fear didn’t go away by not looking. It just waited for me, and it got bigger.

So this post is an invitation to do the thing that feels harder than it is: sit down, mid-year, and find out where you actually stand. Not where you feel like you stand. Where you stand.

Where You Are Is Not What You Think It Is

If you ask most owners how the year is going, they’ll tell you about the bank balance, or whether they “feel busy,” or how the last big check felt when it cleared. None of that is where you are. It’s a mood.

Where you are is a combination of two things: what your P&L says you’ve earned so far, and what your Work in Progress actually shows once Cost to Complete is honest. Those two numbers can tell very different stories. A healthy bank balance can be sitting on top of jobs that are quietly underwater, with the gap not showing up until they close out. A thin bank balance can be sitting on top of solid earned profit that just hasn’t been billed yet.

If you’ve been ignoring WIP, mid-year is when that gap is most forgiving to find. You still have time to do something about it. By Q4, the same gap is a surprise you can’t unwind.

The Four-Part Check

This isn’t complicated. It’s four questions, in order, and each one only matters in light of the one before it.

1. What does your P&L say, year to date?

Pull your actual revenue, gross profit dollars, and gross profit percentage for the first half of the year. Compare them to your annual budget, prorated to six months. Don’t adjust for “yeah but” yet. Just look at the number.

2. What does your WIP say you’ve actually earned?

This is the question most owners skip, and it’s the one that matters most. For every job in progress, is your Cost to Complete current and honest? If it’s not, your WIP is decoration, not information. Once it’s current, look at your WIP adjustments on your monthly P&Ls and confirm that the WIP is feeding an accurate adjustment to the P&L.

3. What’s actually in your pipeline for the second half?

Not “what we’re talking to people about.” What’s signed, or close enough to signed that you’d bet your crew’s schedule on it. Map it against your production capacity for the next six months. Is there enough work lined up to keep your crew at the pace your budget assumes. Or is there a gap that needs to be filled by August, not October?

4. What’s your GP/Day run rate, and where does that put you by December 31?

Take your gross profit from your year to date P&L, divide by the calendar days so far this year, and you have your real GP/Day. Compare it to the GP/Day your annual budget requires. If you’re behind, by how much? And is it a pace problem (the jobs are right, but slower than planned) or a pricing problem (the jobs themselves don’t generate enough GP/Day even running at full speed)? Those are different problems with different fixes, and you can’t fix either one without naming it.

Doing the Forecast Math

Once you have those four numbers, the rest of the year forecast is simple addition, not magic:

Earned GP so far (from P&L) + (Target GP/Day × remaining working days in 2026) = where you’d land if the rest of the year goes to plan.

Compare that to your annual GP goal. If there’s a gap, you now know two things: how big it is, and roughly when in H2 it has to be closed. That’s the difference between a vague feeling that “this year could’ve been better” in January 2027, and a decision you make in July 2026 — about pricing, about pipeline, about a job you say no to, about a conversation you have with your team about pace.

Forecasting isn’t about being right. It’s about not being surprised. Mid-year is the cheapest time all year to trade a surprise for a decision.

Block the Time

This doesn’t take a finance background. It takes an afternoon, your job costing software, your WIP, and your budget. Opened at the same time, on purpose.

If you’ve never done this before, don’t try to make it perfect. Do it once, roughly, and you’ll already know more than you did. Do it every six months, and it stops being scary. Once you start doing it quarterly or monthly it becomes just another thing you do like checking the weather before you frame a roof.

The fear doesn’t go away by avoiding the look. It goes away by taking it.

There’s a moment most contractors have had at least once. You’re in a peer group, or across the table from a consultant, or on a call with your accountant, and someone asks a question about your financials that you can’t answer. Not because the answer is complicated. Because you don’t understand the system well enough to know where to look.

You nod. You write something down. You change the subject when you can.

Then you go home and feel quietly embarrassed about it for a week.

I’ve seen this happen to many contractors that I know. Some of whom who have been in business for decades. These contractors all do great work. They run their crews, manage clients, and carry hard won operational knowledge in their heads. Smart, capable people who built real businesses and somewhere along the way consciously or unconsciously decided that the books were someone else’s department.

That gap is not a character flaw. It’s a structural knowledge problem.

And it has a structural fix.

How You Got Here

Nobody trained you for this. You were trained to build things. To read plans, sequence work, manage labor, solve problems in three dimensions under pressure. That training was real and it was hard and it made you good at what you do.

Financial systems weren’t part of it. So you did what most contractors do. You hired someone to handle the books, handed them the access they needed, and trusted that the output was right. Maybe it was a family member. Maybe it was a bookkeeper who came recommended. Maybe it was someone who had done books for other businesses and seemed competent enough.

What you probably didn’t know — what I didn’t know for a long time either — is that construction accounting is a specific discipline that most accountants are never trained in. Not because they’re not good at their jobs but because of how accounting gets taught.

When I first started getting serious about construction finance and had it in my head that I wanted to function as a CFO of production at our company, I reached out to my sister-in-law. She went to a well known university for accounting, became a CPA, and eventually worked her way up to vice chancellor at her alma mater. I asked her about WIP accounting and indirect allocation, excitedly explaining what I had been learning, expecting her to walk me through it.

She stopped me.

“Let me tell you how they teach accounting at universities,” she said. “In your first year, you learn a little about every type of accounting. At the end of that year, you make a decision. You either pick the generalist route, a type of accounting that works for almost every business there is. Or you pick this very specific type that only applies to the construction industry.”

The vast majority of people, she told me, pick the generalist version.

That conversation changed how I understood the problem. Your bookkeeper may be diligent, organized, and technically competent. They may have years of experience keeping clean records. And they may have been funneled, at the very beginning of their training, away from the one branch of accounting your business actually needs.

That’s not your fault. But it is your problem.

What the Wrong System Costs You

The most visible symptom of a mismatched bookkeeping system is a financial statement that doesn’t reflect your business reality.

Here’s the specific mechanism. You collect a deposit before work starts say, $30,000 on a $150,000 kitchen remodel. On a cash basis, that deposit hits your books as income the day it arrives. Your P&L looks strong. You feel good. You make decisions about hiring, about equipment, about what to take on next based on that feeling.

Then production starts. Labor costs accumulate. Material bills arrive. Subcontractor invoices come in. Over the following weeks, that $30,000 gets consumed by costs that were always coming. You just didn’t see them in the books until they arrived.

The cash was real. The income wasn’t. And nothing in your financial statements told you the difference.

Accrual accounting fixes this by recording revenue when it’s earned rather than when cash moves. A deposit isn’t income. It’s a liability, money you owe the client in the form of completed work. Revenue gets recognized as the work is performed. The result is a P&L that reflects what your business actually produced, not what your clients paid you in advance.

That distinction between cash received and revenue earned is the foundation of every meaningful financial metric in a remodeling business. GP per day, WIP, cost to complete, none of them work correctly if the underlying accounting isn’t on accrual. You can’t build a reliable instrument panel on top of a system that was designed for a different kind of business.

Five Questions Worth Asking

You don’t need to become an accountant. You need to be an owner who asks the right questions. Here are five that will tell you quickly whether your financial system is built correctly for your business.

One: Are we on cash or accrual? This is the starting point. If your bookkeeper hesitates or isn’t sure, that’s your answer. A remodeling contractor should be on accrual. If you’re not, everything built on top of your books is approximate at best.

Two: Show me last month’s WIP adjustment entry. A WIP (work in progress) schedule is a monthly calculation that aligns your reported revenue with what you’ve actually earned across all active projects. It produces a journal entry that adjusts your P&L accordingly. If your bookkeeper doesn’t know what this is, or can’t show you the entry, your monthly financials are reporting billing activity rather than earned revenue.

Three: Where does field labor live in our chart of accounts? Field labor, the wages paid to the people who build the work, should be in cost of goods sold, separated from office and management salaries which belong in overhead. If all wages are in one account, your gross margin is meaningless. You can’t see what your jobs actually cost to produce.

Four: Can you pull a job cost report for our last three completed projects? This report shows estimated versus actual costs by category for each project. If your bookkeeper can’t produce it, your books aren’t tracking costs at the job level. This means you have no feedback loop between what you estimated and what the work actually cost. Future estimates need to be build on data from past projects.

Five: When were our bank accounts last reconciled? Reconciliation is the process of confirming that the books match the bank statement. It should happen every month. If the answer is anything other than last month, your account balances aren’t confirmed accurate and neither are any reports generated from them.

You don’t need to know the answers to these questions before you ask them. You need to be willing to ask them and to take the answers seriously, even when the answers are uncomfortable.

The Part That Belongs to You

The gap in your financial system isn’t primarily a bookkeeping problem. It’s an ownership problem. Not because you made a bad decision. Most contractors make exactly the same decision, for exactly the same reasons, at exactly the same stage of building their business. But because the decision to hand off the books without building enough understanding to oversee them is a decision that only you can reverse.

Good books don’t happen to you. You have to require them. That means understanding enough about how your financial system should work to know when it isn’t working. It means being willing to have an uncomfortable conversation with your bookkeeper, or to bring in someone who can evaluate what you have and tell you honestly what needs to change. It means treating your financial infrastructure with the same seriousness you bring to your field operations.

I’ve seen contractors make this shift. It never feels like a small thing when it happens. Not because the accounting is complicated, but because claiming ownership of a part of your business you’ve been avoiding takes a particular kind of honesty with yourself. The contractor who comes back from a peer group meeting, goes home and asks a question, discovers the system is wrong, and decides to fix it instead of quietly filing it away is doing something harder than it looks.

That’s the move. Not understanding everything. Not becoming a bookkeeper. Just deciding that your business deserves a financial system built for what your business actually is. And that you’re the person responsible for making sure it exists.

The questions above are where to start. The right people are out there. You just have to be willing to ask.

I have written a lot about why gross profit matters and how to build systems that track it. I have made the argument for open books, for financial literacy as culture, for teaching your team what the numbers mean. That argument is right and I stand behind it.

But arguments are not outcomes. Frameworks are not proof. At some point, the only real question is: does any of it actually land?

Three years into this work at TDS, I am starting to have an answer. It doesn’t look like a breakthrough. It looks like a Monday morning all hands meeting where someone asks a question they would not have thought to ask before.

What the work looks like before it works

When I started collaborating with our finance manager on the month end closing our over/under billing adjustment, the number that captures how much client money we’re holding for work not yet done, or how much work we’ve done that hasn’t been billed, swung by hundreds of thousands of dollars month to month. One month it would be +$250,000. The next, -$150,000.

Those swings are not just an accounting problem. They are a signal that operations and finance are not talking to each other. They mean that billing timing is disconnected from production progress, that cost-to-complete estimates are unreliable, that the P&L is a distorted picture rather than an accurate one. You cannot manage a company well when the scoreboard is lying to you by $400,000 in either direction.

Getting that number under control required three things working together: a functioning WIP process, honest cost-to-complete estimates from the field, and a shared understanding across the team of why it mattered. The accounting work alone was not enough. Finance could not stabilize the WIP adjustment without production owning its inputs. And production could not own those inputs without understanding what they were feeding.

Today that number runs roughly ±$50,000. Some months tighter than that.

I don’t say that to claim victory. I say it because it represents hundreds of individual decisions made correctly by people who understood what they were doing. It is a team number, not a management number.

A question that told me something had changed

Last month during our all-hands, finance was walking through the April financials. Good month. Year-to-date ahead on gross profit and net income. Then she mentioned that with May being a three-payroll month coming, along with some unplanned expenses, would look different on paper.

One of our lead carpenters, asked a question. He prefaced it by calling it “a dumb financial accounting question,” which it wasn’t. His question was this: payroll goes out every two weeks regardless. Why would a month with three payroll periods make the financials look worse when we already know that payroll is coming?

It’s a good question. It’s the kind of question that reveals someone who has been paying attention, who has internalized the basic framework, and who is now seeing the places where the reporting structure creates noise that doesn’t match operational reality. He wasn’t confused about what gross profit is. He was asking why the monthly reporting cadence creates an artifact that looks like a problem when it isn’t one.

I answered it the way I try to answer most financial questions with the team: stay above the gross profit line. Whatever bucket that third payroll comes out of, billable labor or non-billable labor, it’s still tracking against total income to produce that number. As long as we’re managing to gross profit, the payroll timing is mostly optical.

Finance added the institutional context: three-payroll months used to hit us much harder. The discipline around budgeting, the shift from managing revenue to managing gross profit, the work we’ve done to even out the WIP — all of it has made those months less volatile than they were even three years ago.

That exchange took maybe four minutes of a ninety-minute meeting. Nobody wrote anything down. But it is exactly what financial literacy culture is supposed to produce: a field carpenter curious enough to ask a second-order question, and a room that could answer it without a slide deck.

What this is not

The incentive layer is not built yet. We talk about what the numbers mean but we have not yet closed the loop between financial performance and individual reward in a structured way. That is deliberate. The thinking behind open-book management is that you build literacy before you tie compensation to outcomes, because otherwise you are asking people to play a game they do not fully understand. But it means the work is incomplete.

There are still people on the team thinking primarily in revenue terms. That is not a failure. It is where most of the industry starts, and changing it takes longer than a few all-hands meetings.

And the honest accounting of what produced that WIP improvement includes years of friction, at least one project that nearly broke the system, and a lot of months where the number was ugly enough that it forced hard conversations neither management nor accounting wanted to have. The stability we have now was not engineered cleanly. It was earned through repetition and correction.

The argument I keep making

I keep writing about these ideas because I believe the industry has underinvested in financial literacy at every level, not just for owners, but the people running projects and the people doing the work. Most companies treat the numbers as management’s problem. The field does the work; accounting keeps score. The two worlds rarely meet.

What I’ve seen at TDS is that when those worlds start to converge, when a lead carpenter asks a sharp question about payroll accounting and gets a straight answer, something shifts. Not dramatically or all at once. But the questions get better and it reminds me why we meet monthly to report the numbers to the team and open the floor for questions.

That is a slow outcome. It will not show up in any single month’s P&L. But ±$50,000 is a different company than ±$250,000, and the difference is not a spreadsheet. It’s a team that has been paying attention.

What I didn’t explain in that piece is the specific mechanism of how it happened. Not the slow erosion of a bad market or a single catastrophic job, though there were elements of both. The deeper failure was structural, and it started with a mental model that felt completely reasonable at the time.

I treated my wage as the business’s profit.

The Job That Looked Like a Business

When I was working as an employee for general contractors performing skilled and management work, typically for $30-35/hr, the math was simple. I showed up, I worked, I got paid. Expenses were someone else’s problem.

When I started my own company, I kept the same math. I charged for my labor, I put the money in my pocket, I paid my expenses, and I called it working. When there was more in than out at the end of the month, I called it success.

By the only measure I was actually tracking “did I cover my bills this month” most months looked successful.

What I didn’t understand is that a business is not a wage. A wage compensates you for your labor. A business needs to do that and then produce something beyond it — profit that belongs to the company, not to you personally, that accumulates over time and becomes the thing that keeps the company alive when the work slows down, when a truck needs replacing, when a key employee needs to be hired, when an opportunity arrives that you want to be able to say yes to.

I had none of that. The business had nothing. It was entirely dependent on the current job funding the next month, and when that chain broke, there was nothing to absorb the shock.

I did not have a business. I had an expensive job.

Today I’m the operations manager at TDS Design Build in Madison, Wisconsin. I am not the owner of TDS. I want to be clear about that because it matters to some readers, and because the transparency matters to me.

What I can tell you is that the principles I’m about to describe are ones I failed to apply when I was an owner and the ones I now help implement daily in my role at TDS.

The principles themselves don’t change based on whose name is on the door. If anything, understanding them before you own something is exactly the point.

What the Business Actually Needs

Let’s put some numbers to this.

A small remodeling business. $1.5 million in annual revenue. Owner working in the business — doing sales, overseeing production, probably still swinging a hammer. Two or three field employees. Company vehicles, tools and equipment. Maybe a rented office or shop. A real overhead structure.

Here’s what the budget looks like when profit is treated as a residual — meaning whatever is left after everything else gets paid:

• Revenue: $1,500,000

• COGS (materials, subs, direct labor): $1,000,000

• Gross Profit (33%): $500,000

• Operating Expenses (overhead): $450,000

• Net Profit: $50,000

On the surface, $50,000 looks like something. Three percent net profit. The industry benchmark is often cited at 5–10% (Crabtree advocates for 8-12%), so this company is underperforming, but it’s not zero. The owner might look at that number and feel okay about it.

Now a harder question: what did the owner pay themselves?

If the answer is $100,000, a reasonable market wage for someone running a $1.5 million operation, then the $50,000 net profit is real. The company made money above and beyond what it cost to run, including paying the owner fairly for their time.

But if the owner paid themselves $50,000 in wages and $50,000 in draws because of tax and other financial strategies and the $50,000 net is what remained after that elevated draw, then the picture is completely different. This strategy is very common and splits the owners compensation between COGS and Operating Expenses.

Greg Crabtree, in Simple Numbers, puts it plainly: you get paid a salary for what you do, and you get a return on what you own. These are two separate things. Conflating them is one of the most common and most damaging financial mistakes small business owners make. If the business cannot afford to pay someone market rate to perform the owner’s role, then the business model doesn’t actually work — it’s being subsidized by the owner’s own labor at below-market cost. The profitability is a fiction.

Budgeting for Profit Instead of Hoping for It

The fix is not complicated in concept, even if it requires discipline in execution.

Profit is not what’s left over. Profit is a line item. It gets budgeted before the first estimate goes out, alongside every other cost the business carries.

Here’s what that same $1.5 million company looks like when profit is designed into the budget rather than extracted from whatever remains:

Start with what the company needs to survive and grow:

• Owner salary at market rate: $100,000

• Operating expenses (insurance, vehicles, office, software, marketing): $300,000

• Total overhead: $400,000

Now add a net profit target. A reasonable target for a company this size — one that provides a meaningful return on invested capital and begins to build real financial resilience — is 10% of expected revenue, or $150,000.

That means the business needs to generate $550,000 in gross profit to cover overhead and hit its profit target.

At $1.5 million in revenue, $550,000 in required gross profit means you need a gross profit margin of roughly 36%. If your current margin is running below that, you have a pricing problem, a cost problem, or both. The budget tells you that before the year starts — not in December when you’re looking at a disappointing P&L and wondering where it went wrong.

I wrote about this in my previous Substack, Get Profitable With What You Have where I describe the bottom-up budget as a planning tool. You don’t start with revenue and hope the math works out. You start with what you need to operate including profit and build the revenue target from there.

What Profit Becomes

Let’s say the budget works. The company generates its $150,000 in net profit. Now what?

This is where most conversations about profit stop, but it is where the most important part of the conversation actually begins.

That $150,000 does not belong in your personal checking account. It belongs to the company first, because the company has needs that haven’t been funded yet.

Working capital is the money a business keeps on hand to cover the gap between when it pays its expenses and when it collects from its clients. In construction, that gap is structural. Payroll runs every two weeks. Supplier invoices come due on net-30 terms. Client payments arrive on milestone schedules that rarely align perfectly with your costs. Even a well-run company with healthy margins will experience months where more goes out than comes in. Working capital is what absorbs that without requiring the owner to personally fund the shortfall or, worse, to take on debt.

A common rule of thumb is two to three months of operating expenses held in a business reserve. For our $1.5 million company, operating expenses run roughly $37,500 per month. That means a basic working capital reserve requires $75,000 to $112,500 sitting in a business account, untouched, not available for distribution, not funding the owner’s kitchen renovation.

Until that reserve exists, the company is one or two bad months away from a crisis. I know this not as a concept but as a lived experience. When the estate that I worked for canceled it’s planned 2016 projects, there was nothing to cover the gap. The money that should have been accumulating in retained earnings had been spent on my wages, on shop expenses, on the month-to-month mechanics of staying alive and when the storm came, the company had no reserves to draw on.

Beyond the working capital reserve, retained earnings fund growth. A new truck. A better estimating software package. Hiring an additional field employee six months before you desperately need one rather than six months after. The ability to take on a larger project because you have the financial depth to carry the early-stage costs before the first billing milestone. These are not luxuries. They are the investments that determine whether a company grows or stagnates.

A business without retained earnings shackles its owner to a treadmill.

The Sequence Matters

First, pay yourself a market wage. Not what the business can afford, what the role is worth. If the business can’t afford that, you need to know that now, not after three years of underpricing your own labor.

Second, budget for profit as a non-negotiable line item. Set the target before the year starts. Build your pricing to support it. If the target isn’t achievable at your current volume and margins you have a strategy problem The budget is the tool that reveals it.

Third, when profit materializes, retain it before you distribute it. Build the working capital reserve first. Then fund the growth investments. Then, when the business has genuine financial depth, take a distribution.

The distribution, the return on what you own, is the last thing on this list, not the first. That’s the inversion most small business owners never make.

What I Wish I Had Known

When I was self employed, I thought the goal was to stay busy and cover expenses. That felt like success because I had grown up in a trade where showing up and doing good work was the whole job. Nobody talked about retained earnings on a job site. Nobody explained that the company needed to make money separate from and above what it paid me to work.

The mental model I carried into ownership was built for employment, not ownership. It was not wrong per se, just incomplete. A business needs to make money. Not you through the business. The business, as a separate entity with its own financial needs and its own future.

If it doesn’t, you don’t have a company. You have a job. And jobs, as most of us have learned the hard way, can go away.

Not done immediately. Likely by February, March at the latest. The home mortgage payment and the shop overhead couldn’t both get paid from what I had, and I had been telling myself for months that something would change before it came to that. On that plane, I stopped telling myself that.

The business I had built over six years was a good one in the ways that I understood how to measure “good” at the time. I loved the work. The clients were wealthy and demanding, but satisfied. I had accumulated the kind of specialty tools and equipment that serious craftspeople spend careers building toward. I was doing historic restoration and architectural woodworking in the Hudson Valley, working on estates and churches and private homes in Millbrook and Manhattan, the kind of work that many carpenters envy.

What I didn’t have was any real understanding of what I was doing.

I had started the business in 2011 with insurance money that I received after my brother was killed in a workplace accident. I used it to buy equipment and set up a shop and begin the slow work of becoming self-employed. That money gave me a runway that I didn’t know how to use correctly, but I used it anyway, and by the time I was sitting on that plane doing the math in my head it was essentially gone. Converted into tools, rent, insurance and the thousand other small costs of keeping a shop running that I had never fully accounted for. When I eventually closed the business, the equipment I sold was enough to even the books. I didn’t lose everything in a dramatic sense. I lost everything in a slow quiet sense, which is harder to talk about but so much more common.

The thing I’ve come to understand about the years between 2011 and 2017 is that I was confusing proximity to excellent work with building a business. For much of that time I was essentially a quasi-employee of a large private estate in Millbrook. I was showing up, doing beautiful work, getting paid well and covering my costs. What I wasn’t doing was learning how to run anything. I was perfecting my craft and pleasing my client and not once looking at the horizon.

When the estate stopped spending money almost overnight in 2016, spooked like a lot of wealthy people by the uncertainty of that election year, I didn’t have the business infrastructure to absorb the loss. I had clients and some ongoing work and I figured I could sort it out. And then I did what I now recognize as the first move of a business that is bleeding out: I started selling tools.

Not all at once. If you have ever hit hard times you know that’s not how it works. You sell the things you know you can get full value for, the specialty items, the things only another “real craftsperson” would pay good money to have. You tell yourself you’re being strategic, liquidating assets, making smart decisions. What you’re actually doing is dismantling what you built, piece by piece, to buy time that you don’t know how to use.

Then you go back to work that feels safe. Handyman carpentry, small jobs, familiar tasks for people you already know. Not because it’s profitable. Because when you feel like you’ve lost control of everything, work you’ve done a thousand times feels like control. It isn’t. It’s just the illusion of forward motion.

And then, if you’re me in late 2016 and early 2017, you do the opposite — you take on work you’re not confident in, projects outside your expertise, because you’re desperate enough to think that a big score will fix what careful accounting would have told you couldn’t be fixed that way. The handyman work and the long-shot work aren’t opposites. They’re the same fear expressing itself in two different directions.

By the time I got on that plane, I had been doing all three of those things for the better part of a year. My wife, who was sitting next to me on the plane, didn’t know the full picture. She knew things were hard but I really did not have the right words to have a real conversation about it. When I told her I was going to close the business and go back to work for someone else, she was supportive. She understood that we needed the income. When I told her I needed to sell the tools, she pushed back. She didn’t want me to. I understood why, but I also knew that what she was trying to protect was the version of the future where this still worked out, and I had already let go of that somewhere over the Great Plains.

Going back to work

In February of 2017 I went to work for a company doing high-end residential work and I walked out of my shop for the final time that July. On paper this should have been the right move. The work this company performed was serious. I set up my own woodworking shop on site, built doors and millwork by hand, the kind of thing I’d spent years getting good at. I tell people sometimes that it should have been my perfect job. Maybe it was, in terms of the work itself.

The company managed its people by keeping them uninformed. Not maliciously, I think, just as a habit of control and the assumption that workers perform better when they don’t know too much about what’s happening around them. But I had just spent six years as my own boss, making every decision, knowing everything there was to know about my operation even when what I knew was bad news. I couldn’t work that way. I lasted maybe five months.

Both that move and the one that followed — going to work as a lead carpenter for Hudson Valley Preservation — were made out of financial desperation more than anything else. I think there’s a version of this story where I make the pivot sound deliberate, like I saw something clearly and acted on it. I didn’t. I was trying to keep the household intact and running on instinct.

I found that I enjoyed working at HVP alongside the owners of the company who still worked in the field every day. HVP did work that aligned with my estate work and about a year into my time at HVP the company hired Andy Engel.

Andy was a longtime editor at Fine Homebuilding and JLC, the kind of person who had spent decades in and around the trades and understood them at a level that went beyond technique or business. He was looking to get back in the field after working the trade show circuit and HVP brought him on as lead carpenter, and from early on he took an interest in what I thought about things. He wanted to talk shop and life. He wanted to know where I’d come from and what I’d seen and what I believed about the work.

We talked about my apprenticeship, about what it had meant to have teachers who actually grabbed hold of you and wanted to help you make something of yourself. About developing apprentices on my own crews in those years, the family tree of people I’d worked with and watched grow that I still keep up with today. About the idea of the trades as something you receive from the people ahead of you and pass forward to the people behind you. Andy called it a continuum and the word fit exactly what I’d been trying to say.

Andy was a people developer at heart. He was one of those people who wanted to see those around him be seen, even people he barely knew. He had momentum. He knew people, he generated goodwill, and he used both to help others find their footing. He told me I should be writing. Not someday. Now.

When Andy told me I had something worth saying, I published a few pieces tied to the projects that we were doing at HVP and the ideas about leadership and career paths learned during my apprenticeship. Then at the beginning of covid we sold our house in NY, moved back to Wisconsin and built our house on my family’s farm. I wrote about the build and the financial and emotional costs of being an owner builder but I was still writing from the perspective of a tradesperson.

Trading the hammer for the pen

I took a Project Developer role at TDS Custom Construction in Madison in the summer of 2020 a few months before a change in ownership that saw a 20 year employee, who moved from laborer to GM, purchase the business from the owner of 30+ years. It was a genuinely inspiring story arc for me to witness. Soon after the ownership change I found myself part of a five-person leadership team working to run the business. We were a decision-making collective, figuring out how to run something that had just changed hands during a pandemic while the broader construction market was doing things none of us had seen before.

Some of what I experienced in those two years felt familiar. Not identical to what I had lived through during my shop years, but recognizable. The patterns of a business under pressure have a recognizable choreography to them once you’ve seen them up close. I started calling things out, decisions or directions that matched patterns I associated with businesses in trouble. Sometimes I was right. Sometimes I was wrong. Sometimes I was overruled and the outcome proved me wrong or right in unexpected ways. It was not clean. It was a complicated mix of partial knowledge and imperfect communication and collective decision-making under stress, which is what it actually looks like to try to apply hard lessons inside a real organization.

What the pressure of those years drove us toward was better tools. The coaching work and lifelong learning. VPW, GP/Day and how to apply it. Financial forecasting and modeling. Crabtree’s Simple Numbers framework specifically landed the way it did because I recognized myself in the failure cases. The owner who couldn’t read a P&L. The business that confused revenue with health. The person staying busy and going broke without understanding why.

I had been that person and now being at TDS talking about gross profit and labor efficiency ratios and what the numbers were actually telling us, I understood what I had not understood during the shop years. I hadn’t been running a business. I had been running a craft practice with overhead I couldn’t see and no real mechanism for knowing whether any given week of work was moving me forward or backward.

That’s not a character flaw, though I spent a long time treating it like one. It’s a knowledge gap. The trades do an extraordinary job of teaching people how to build things and a remarkably poor job of teaching people how to build businesses. The skills transfer. The frameworks for profitability rarely come with them.

The continuum

The instructors that I had at the Southeast Wisconsin Carpentry Training Center were the first people in an educational setting who grabbed hold of me and wanted to help me make something of myself. I came from a small rural high school. I hadn’t gone to college. I was in my early twenties and I had no particular map for what came next. And then there were these instructors who saw something worth developing and decided to develop it.

That experience shaped everything that followed. Not in ways I could have articulated at the time. But when I found myself developing apprentices on my own union crews a few years later, I was doing a version of what had been done for me. When Andy Engel told me I should be writing, he was doing what that instructor had done. When I meet someone who came up through the tools and is trying to figure out how to think about the business side of what we do, I am trying to do the same thing.

Andy died suddenly in 2023. Heart attack, no warning. We had stayed close after I moved to Wisconsin. We’d done some writing together and I was honored when he asked me to help with some financial work for the business he’d started back in Connecticut, we’d kept up in the way that people do when they’ve found something real in each other. When he died I thought a lot about what he’d given me in that one year at HVP, and his ideas of the trades being a continuum.

The trades, at their best, work this way. Someone ahead of you sees what you can’t see about yourself and transfers something; knowledge, confidence, momentum, a framework, a name for something you already knew was true. You receive it and you use it and eventually if you’re paying attention, you pass it forward.

While my brother never got to see any of this, his death in 2010 sent me down a path. And the money that came along became the equipment that became the business that became the lessons that became everything I’ve written since. I don’t know what he would have made of the writing or the framework or the consulting practice I’m slowly building. I know that the money he left me bought me the education I needed even though it didn’t feel like education at the time. In that way I’m still trying to spend it well.

The person on that plane in November of 2016 couldn’t see what was still possible. He could only see what was ending. He was doing math that confirmed what he already knew and dreading the conversations that would follow and trying to figure out how to hold it all together through what came next.

If I could say something to him I wouldn’t give him the framework. He wasn’t ready for the framework yet. I’d just tell him that the thing he was most ashamed of — not the failure itself but the not knowing, the years of not understanding what he was actually running — that was going to become one of the most useful things about him. That the cost of not knowing was going to be exactly what made him credible to the people he would eventually try to help.

And that there were still people ahead of him on the road who would grab hold of him and help him make something of himself. And others still who would gain something from his experience.

He would have found that hard to believe. But it was true.

There’s a moment in almost every project where the client, a salesperson, or sometimes you asks a question that sounds harmless.

“While we’re at it, what would it cost to add a stamped patio?”

If you’re the person responsible for budgeting and pricing the project you know exactly what happens next. You do a quick mental calculation, arrive at something that feels reasonable, say a number, and the conversation moves on.

But you’ve just made a commitment you didn’t intend to make, on a scope you haven’t designed, using information you don’t have.

The stamped concrete range runs from around $24 to $60 per square foot installed, depending on pattern complexity, access, whether there’s existing hardscape to demo, and which trade partner is available during the project window. On a 12’ x 12’ patio, that’s the difference between $3,500 and $8,600. The right number requires knowing things you don’t know yet. But the number you said? That one lives now. It’s in the client’s memory, and it’s going to be there when the actual price comes in.

I’ve watched this play out more times than I want to count. The client doesn’t remember that the number came with caveats. They remember the number.

What a budget actually is

In my Fine Homebuilding article Budgeting Is Helpful. Estimating, Not So Much I wrote about how a budget at any stage of a project is a representation of what is currently known about the cost of that project.

While that sentence sounds obvious, it isn’t. Because what it implies is equally true: a budget cannot honestly represent what is not known. The moment you add a line item for undesigned unspecified scope, you haven’t added information to the budget. You’ve added noise and given the appearance of precision without the substance that would justify it.

This is the trap that smart people fall into it constantly. The number feels like information. It has a dollar sign. It’s written down. It appears in a column next to other numbers that are based on real information, and it inherits their credibility by proximity. The client reads the document and sees a complete picture. What they’re actually looking at is a partial picture with a placeholder dressed up to look like the rest.

The damage isn’t just that the number might be wrong, though it probably will be. The damage is what it does to decision-making. A client who sees a line item for a stamped patio at $7,000 starts making decisions around that number. They approve the project. They mentally spend $7,000 on the patio. When the actual number comes in at $12,000, they don’t experience it as new information about a scope item that was never properly priced. They experience it as the contractor being wrong, or worse, as the contractor padding the budget after the fact.

You’ve turned a pricing problem into a trust problem. And pricing problems are fixable. Trust problems derail projects and reputation.

The internal version of this problem

If you’re the owner of a small construction company and you’re doing both sales and estimating, this problem is harder to see because there’s no one to push back on you.

In a larger company, there’s at least structural friction between the salesperson who wants to give the client a number and the estimator who knows the number isn’t ready. That friction is frustrating, but it’s useful. It’s a check on the impulse to over-promise.

When both of those roles live in your head, the check disappears. You feel the client’s excitement and the pressure to maintain momentum, and you give a number because the alternative, saying “I don’t know yet”, feels like losing ground. You tell yourself it’s a ballpark. You tell yourself they understand. And maybe they do, in the moment. But the number is out there now.

The discipline required here isn’t estimating skill. You already know how to price a stamped patio once you have the information you need. The discipline is epistemological: knowing what you know, knowing what you don’t, and refusing to let the discomfort of uncertainty push you into a precision you can’t back up.

Say it plainly: “I don’t have what I need to price that yet. When we know more about the design, I’ll get you a real number.”

That’s not evasion. That’s accuracy. And accuracy, even uncomfortable accuracy, is the foundation of a client relationship that survives contact with the real cost of the project.

What the budget is supposed to do

A project budget at any stage has one job: give both parties enough shared, accurate information to make the next decision well.

Early in a project, that decision might be whether to proceed into design at all. Later, it might be whether to add scope, cut scope, or stay the course. At contract, it’s whether to commit to a fixed price.

None of those decisions can be made well on information that isn’t real. And a line item for work that hasn’t been designed and spec’ed isn’t real. It’s a projection of a projection, a guess dressed up as a number.

The budget that is honest about what it doesn’t know is more useful than the budget that appears complete. The client who understands that their $7,000 patio number is a placeholder pending actual design and trade partner pricing is a client who can make good decisions when the real number arrives. The client who thinks the patio is decided, at $7,000, is a client who’s been set up for a hard conversation.

A slow march forward

Admittedly, I’m still working on the exact language for this. If you’ve found a clean way to tell a client that you can’t price something yet without it sounding like you don’t know what you’re doing, I’d genuinely like to hear it. The tension between maintaining confidence and maintaining accuracy is real, and I don’t think it resolves cleanly.

What I’ve landed on is: the budget represents what we know. This framing is far from perfect but I believe that we can tell you that honestly at every stage: what’s in the budget, why it’s there, and what’s not in the budget yet, and why. When we get to the things that aren’t in yet, we’ll price them on real information, not on guesses. That takes a little longer. But it’s the only way I know to give you a number you can actually rely on.

The alternative is a document full of numbers that look right until the final numbers roll in.

That’s not a contradiction. It’s actually what a well-run remodeling company looks like. One division is pushing into new territory; bigger scope, more complex work, building new systems. Another is locking down what it already does well, pushing the margins, trimming the friction.

The problem isn’t doing both at once. The problem is not knowing which is which.

Two Different Modes Show Up Differently in the Numbers

Take a bathroom remodeling division that has been running the same project type for five years. The team knows the scope. The lead knows the trade partner sequence. The project manager has seen every version of this problem. Over time, the VPW on those projects should be rising. Not because the work is getting cheaper, but because the team is executing more cleanly. Less schedule slippage. Fewer change orders driven by scope confusion. Better labor allocation within a known footprint.

That’s honing. And in the numbers it looks like: stable or contracting duration on familiar project types, improving GP/Day on that work, and a VPW that reflects genuine execution efficiency rather than just higher pricing.

Now look at a division pushing into room additions after years of interior-only remodeling. VPW is probably lower than expected on the first few projects. GP/Day may be harder to hit because duration estimates are uncertain, trade partner relationships are newer, and management costs are harder to predict. The lead carpenter is operating at the edge of his experience. There’s more schedule slippage, not because the team is failing, but because they’re learning.

That’s growing. And in the numbers it looks like: wider VPW variance, more frequent cost-to-complete conversations, and GP/Day that is hard to forecast because the historical data doesn’t exist yet.

Neither mode is a problem. Both are expected. But they require different things from the people running them and different expectations from the leader watching the numbers.

The Numbers Don’t Lie, But They Do Mislead

Here’s where owners get tripped up. They look at the addition division hitting 28% margin while the bathroom division is running 33%, and they ask: why are bathrooms more profitable?

Sometimes the answer is that bathrooms are genuinely more efficient for this company. Sometimes the answer is that the addition division is still in a learning curve, and the right response is patience and closer attention, not abandonment. And sometimes the answer is that the addition division has a pricing problem, a scoping problem, or a production management problem that is hiding inside the unfamiliar territory.

You cannot tell the difference from a single margin report. You need to know which mode each division is in and you need to have set your expectations accordingly before the job ran.

VPW and GP/Day give you the tools to make that distinction. A bathroom division with a tight VPW range and strong GP/Day is healthy. A bathroom division with a tight VPW range and declining GP/Day is telling you something is wrong inside the work you think you know. An addition division with a wide VPW range and developing GP/Day is learning. An addition division with a wide VPW range and flat GP/Day after three years of additions is telling you it has never actually learned.

The Same Frame Applies to People

Your team is running both modes too.

I had a junior lead on a job last week who was balancing trade partners, watching the schedule, and managing scope questions from the client. He’s growing into a role he hasn’t fully owned yet. He’s making decisions he hasn’t made before. His VPW equivalent, his output per unit of time, is still developing because the work is new to him. He needs room to make mistakes, real accountability when he does, and close attention to whether the gap is closing.

On another site, I watched a carpenter doing detailed finish work. He was absorbed, clean, on budget. He’s honed that part of the craft. He doesn’t need coaching on the cut sequence. He needs higher standards and the trust to execute. Pulling him out of that to give him project management tasks he hasn’t asked for would be the same mistake as abandoning the addition division because its first-year margins didn’t match the bathroom division.

The leader’s job is to know which mode each person is in and build conditions for the right kind of improvement in each. Push a grower too fast without support and you get expensive mistakes. Park a honer without raising the standard and you get complacency.

The Vision Has to Hold Both

The reason this matters at the company level is that your business plan, your budget, your capacity model, your forecast needs to account for the different financial fingerprints of each mode.

If you’re planning to grow the addition division, you need to budget for a lower GP/Day on that work for some defined period while the team builds the data. You need a VPW range that acknowledges uncertainty. You need a cost-to-complete process that catches problems earlier when the work is newer.

If you’re planning to hone the bathroom division, you need VPW benchmarks tight enough that deviations are visible and meaningful. You need GP/Day targets that reflect genuine execution improvement, not just price increases. You need to be asking why any bathroom project takes significantly longer than your established range.

Neither mode runs itself. Both require intentional leadership. But different kinds of intentional leadership.

The companies that lose track of which mode they’re in tend to manage everything the same way. They apply growth-mode patience to a division that should be tight. They apply honing-mode pressure to a division that needs room to learn. The financials look similar on the surface. The underlying problem doesn’t show up until the margin has already slipped.

The Questions Worth Asking

Look at your company’s divisions or project types right now.

For each one: what mode is it in? And are the metrics you’re watching appropriate to that mode or are you measuring a growth-mode division with honing-mode expectations?

Then ask the same question about the people running those divisions.

If you’re running both modes, most healthy companies are, the job of the leader is to hold the distinction clearly enough that neither one gets managed like the other.

Last quarter we missed approximately $18,000 in scope on two contracts that got signed before the design was ready.

Nobody was careless. The design team did their job. The development team did theirs. The client was eager and the pressure to move forward was present and familiar. So we kept our foot on the gas and sold the job.

This is the failure that produced the $18,000 miss. Not a bad estimate. Not a dishonest proposal. A process that didn’t have the infrastructure or frankly, the organizational authority, to say “we’re not ready to sign this contract yet”.

I’ve been thinking about why that’s hard to do, and what it would take to do it reliably. The answer I keep coming back to is that we’ve been asking a single question “how much will this project cost?”, when we actually need to be asking a sequence of questions. “How much do we know about what this project will cost, and what kind of cost knowledge does this moment in the project’s life actually require?

Those are different questions. The difference is the whole argument.

The Cone of Uncertainty Isn’t Wrong. It’s Incomplete.

A couple of years ago I wrote a piece for Fine Homebuilding about a model I called the cone of uncertainty. A construction project starts with a wide range of possible costs and narrows toward a fixed contract as the design work brings the scope into focus. At the open end of the cone is a client with a rough idea and no drawings. You guide the work toward the point, which is a permit-ready set of documents and a price you can actually stand behind.

That model is right. I still use it. But it describes the process of narrowing without making the deeper argument about why that process is correct.

Here’s the deeper argument: a schematic design budget built from historical square footage costs isn’t an imprecise version of the contract price. It’s a different kind of number. It exists to answer a different question. The suggested construction budget at first contact is asking: is this project financially viable, and are we the right company to build it? The schematic design budget is asking: what does the fixed scope cost, and what’s left for finishes? The design development budget is asking: are we ready to lock this down and sign? The contract price is answering: this is exactly what we’re building and exactly what it costs.

Each of those is the right number for its moment. Asking the first to do the job of the fourth isn’t asking for more accuracy, it’s asking for false certainty. A specific number dressed up to look like a contract price before the project has earned the right to one. And that false certainty is almost always what produces the $18,000.

Call it the maturation model: each stage of pre-construction produces a legitimate form of cost knowledge, and the job is to know what kind of knowledge you have at each stage, communicate it honestly, and not let urgency pull you forward before you’re ready.

The Language Is Not Cosmetic

The words you use to describe the deliverable at each stage shape what everyone in the conversation thinks they’re agreeing to.

An “estimate” is owned by the expert who produced it. The client receives it, evaluates it, and negotiates against it. The estimating process happened out of their view. They weren’t part of it. So when the number changes, because the design changed, because the scope wasn’t clear, because you learned something you didn’t know, the client experiences that as the expert getting the answer wrong.

A “suggested construction budget” is different. The client made decisions that produced it. The number belongs to the project, not to the contractor, and the client is part of the project team. When the number changes, it’s because the project changed and the client understands, because they were there when it happened.

I stopped using the word “estimate” for pre-construction deliverables years ago. That change alone didn’t fix anything. But it created the conditions for a different kind of conversation. One where the client understood that the number they received was appropriate to what they knew at the time, not a rough draft of the number they’d receive later.

The language is structural. It signals the epistemological state of the number. And if you want clients to trust a process that doesn’t give them a fixed price at the first meeting, you need the language to carry some of that argument for you.

Building the Infrastructure (Which Is Harder Than It Sounds)

The thinking shift and the language shift are necessary, but they're not sufficient on their own.

What makes the maturation model real rather than theoretical is infrastructure. Shared signals about what “ready” means at each stage of the project’s life, built into the tools the team uses every day. At TDS, we’re in the middle of building this. Some pieces are running. Some are still being designed.

We recently added a new custom field in JobTread, QuickBooks Ready - yes or no, that tells our accounting manager when a budget line item is confirmed enough to cross from the project management system into our accounting software for cost tracking. It sounds like a small thing. What it solved was a persistent communication problem. She couldn’t always tell from the budget alone whether a number was locked or still an allowance, which created accounting noise every time she tried to import project costs. The QuickBooks Ready field is a signal. It says: this number has matured enough to live in the accounting system.

The pre-construction equivalent would be a signal that says: this project has matured enough to live in a contract.

We don’t have that signal fully built yet. The $18,000 is partly why we’re building it. But here’s what I’ve learned from building the accounting version: the signal only works if the culture has internalized what it means to respect it. We can build a field in JobTread that says “QuickBooks Ready.” But if the pressure to move fast means our accounting manager is expected to import things that aren’t marked ready because someone is behind on updating the field, the signal is meaningless.

The same is true at the pre-construction gate. You can define the conditions that have to be true before a contract gets signed. You can build checklists, phase gates, drawing completeness standards. But if the organizational culture allows a client’s urgency to override those conditions and if the company hasn’t developed the authority to say we’re not ready to sign this yet, the infrastructure doesn’t matter.

That’s the hardest thing the maturation model requires. Not a better spreadsheet. Not a new naming convention. A company that can say no at the right moment, to the right person, for the right reason.

Building that authority starts with understanding why “not yet” is the most professional thing you can say. The client who wants to sign today doesn’t know that a contract signed before the design is ready isn’t protecting them. The contractor who lets it happen isn’t being accommodating. They’re abdicating the expertise the client hired them for.

That’s not a systems problem. That’s a culture problem. And culture changes slower than software.

What This Gets You

Contractors who approach their work with a focus on the thinking, the language, and the systems build better projects with fewer scope misses, cleaner contracts and less defensive budget conversations during construction.

But the bigger return is the client it attracts. Someone who understands they’re buying a process, not a transaction. A client who chose you because you were the first person who explained that the number you gave them at the first meeting wasn’t a rough draft, it was exactly what they needed to start designing. Someone who is still a satisfied client when the contract price is higher than the suggested budget, because they were part of every decision that produced the difference.

The cone of uncertainty describes the path from idea to contract. The maturation model describes the epistemology of that path. What you know at each stage, and what it would mean to pretend you know more.

Build the infrastructure. The thinking is done.

I want to start with a number.

Thirty-six weeks.

That’s our typical timeline from signing a design agreement to signing a construction agreement on a standard bathroom remodel. I used it in the last post as an example of how process thinkers and systems thinkers read the same data differently. I want to be more specific now about what I actually see when I look at it.

A thirty-six week design phase leads into an eight-week pre-construction period: permits, lead-time material orders, subcontractor scheduling. Then ten weeks of production. That’s fifty-four weeks from first signature to final punch list.

Here’s what matters. Roughly eighty percent of the gross profit on our typical bathroom remodel is earned in the first eight weeks of production.

Fifty-four weeks of work. Forty-four of them spent carrying risk. Eight of them producing most of the margin.

When I look at thirty-six weeks, that’s what I’m seeing.

I’m seeing forty-four weeks of overhead load before the GP machine turns on. I’m seeing the challenge of layering fifteen to twenty projects so that the production schedule (the part that actually generates the company’s gross profit) stays full even when the build is nearly a year out from signing. I’m seeing what it costs, in time and attention and real dollars, to convert a design agreement into work in the ground.

That is a systems view of a single number.

What a process view sees

A process thinker looks at thirty-six weeks and sees thirty-six weeks of work to be organized. Which is accurate. The design phase has phases. The phases have gates. The gates have deliverables.

I have a project manager named Kevin who is exceptional at this. Give Kevin a schedule item and he will produce a hundred-step checklist to complete it. Not a rough list. A real one, sequenced correctly, with the dependencies identified, in the right order. It is a genuine skill. It is hard to find and harder to develop.

Kevin is not wrong about what thirty-six weeks contains.

He just isn’t asking what thirty-six weeks is doing to the rest of the company while it’s happening.

The other mind

Our Ops Admin is Phil. Phil is a retired PM who does not think like Kevin.

Phil can pull five years of project data and find the structural flaws in the financial model, in the schedule assumptions and apply what he finds to projects that haven’t started yet. He reads patterns across time. He sees the connections between what happened on last year’s large addition and what is about to happen on this year’s.

Where Kevin sees the hundred steps inside a phase, Phil sees what that phase is doing to the two projects stacked behind it.

Both of them are right. About different things.

What each failure mode actually looks like

I want to be concrete about this, because it’s easy to talk about process thinking and systems thinking in the abstract and lose what actually happens when each one breaks down.

I wrote earlier this year about a porch rebuild we had scheduled for last fall. During design, we overlooked an underground electrical service line running beneath it. I used that story to talk about where friction comes from. I want to look at it differently here, specifically as an illustration of how the same event gets diagnosed completely differently depending on which lens you’re using.

When we found the line during Design Development, the resulting delay pushed the project start out of fall and into spring.

A process thinker diagnoses that as a missed step. The fix is a new checkbox on the site evaluation SOP. The problem is identified, the process is updated, everyone moves on.

But that’s not what happened to our company.

Because our direct labor is our ultimate constraint absorbing that delayed project into an already full spring season meant restructuring our entire spring workload around a crew that had no additional capacity. One missed utility line didn’t just delay one job. It rippled through our Volume per Week projections, compressed our Gross Profit per Day, and complicated the scheduling of every project behind it.

That’s the difference. The process view finds the broken step. The systems view sees what the broken step cost the company.

The TDS history

Before I moved into a production leadership role at TDS, the company was run predominantly by people who thought like Kevin. Good people. Skilled project managers. Genuinely strong at putting the individual pieces of a project together.

But the company was not connecting project to project, week to week, month to month in a way that produced consistent profits. The individual parts worked. The system didn’t.

What looked like a financial problem was actually a thinking problem. The framework the leadership team was using — thorough, process-oriented, checklist-driven — was not designed to see what was happening between the projects. It was designed to execute inside a project.

Running a profitable construction company is not that kind of problem.

It is non-linear, non-stop, and it cannot be tamed through better checklists.

Why you need both and why they’re not interchangeable

Kevin’s checklist is what gets a project from design agreement to construction agreement without losing scope, missing a permit, or surprising a client. Without that discipline, the road Phil is trying to read has too many potholes to navigate. Systems thinking only works if the process underneath it is reliable enough to trust.

But Phil’s pattern recognition is what tells us whether we can afford to take the next project. Whether the layering of our current backlog can absorb a new design agreement. Whether the thirty-six weeks on the project we’re about to sign has the margin to survive the forty-four weeks before production starts.

If you only have Kevin, you build great projects one at a time and wonder why the company never quite gets ahead.

If you only have Phil, you have a clearly mapped road that nobody can build.

The tension between them is not a management problem. It is a competitive advantage if you can understand what each person is actually seeing and then leverage it.

What this is really about

Kevin and Phil are not unique individuals. They’re orientations. And most people in this industry if they’re being honest came up through the field leaning heavily toward one of them.

The question worth asking is not which one is better.

It’s which one is running your company right now. And what the other one might be seeing that you’re missing.