The state of the industry: What builders expect for the year ahead

Zach Wojtowicz:

Hey everybody. Zach Wojtowicz is here on “The Building Code.” You may notice that today I am flying solo. So, this is a special episode. It’s the first time “The Building Code” as a single host in my time of hosting “The Building code.” Charley couldn’t be here today. No big deal. It’s only a day to talk about data and construction trends, all the wonderful stuff that goes on “The Building Code.” Today we have Russ Stevens co-founder of the Association of Professional Builders. Russ, he’s been on “The Building Code” a number of times. We always have great conversations. He helps run an association of business coaching for construction professionals and now he’s in four countries. He’ll tell us all about it and I don’t want to spoil too much, but it’s going to be fantastic. So, stick around and let’s get Russ in here to talk about the Association of Professional Builders and their data report to talk about trends in the construction industry.

Russ Stevens, welcome back to “The Building Code.” It’s great to see you again.

Russ Stephens:

Thanks so much, Zack. It’s great to be here. I love chatting with you with, I think we’re missing your wing man though.

Zach Wojtowicz:

Yeah, yeah Charley, he’s an important guy here at Buildertrend, so today he had something come up suddenly and so, we’re going to have to do our best without him. I’m sure this might be become my favorite episode just because I got to carry it without my guy. Now, Russ, you’ve been on “The Building Code” a number of times and before we went on air here, we were just talking about, you were just in Las Vegas for the International Builders’ Show. How was it? How was Vegas? You were saying it was a little chilly and I had the same experience even for someone from Nebraska.

Russ Stephens:

Yeah, yeah, Vegas was as always absolutely fantastic. It’s just the quality of the people that you meet there, forward-thinking people, both exhibitors and builders alike. But yeah, like you say, it was a bit fresh there, especially for us Queenslanders heading over from Australia. We’re just not used to it.

Zach Wojtowicz:

Especially this time of year. Do you go to International Builders’ Show every year? Do you try to make it out there?

Russ Stephens:

Well, unfortunately we were due to be there last year, but with all the restrictions, we just could not be sure if we were allowed out of Australia, so we had to pull the pin and fortunately the IBS people were very understanding and allowed us to transfer the space to this year, but we’ll certainly be there every year from this point on.

Zach Wojtowicz:

Yeah, there’s a buzz. It’s a lot of fun. We get to talk to so many customers. I think I talked to 130 customers just myself, but the booth was absolutely buzzing with energy. It was so much fun. Everybody on the events team, got to give a huge shout-out, they help produce it. They’re looking at me right now. It was great. It was great.

Russ Stephens:

Yeah, your booth was just amazing. From the moment that show opened, it was absolutely rammed right to the end. And you guys, you didn’t stop because I was walking around a lot of the expo, a lot of the different halls, and come the last day there was a lot of guys, they were sitting down, they were kind of disengaged and I walk pass your stand, and it was full on. It was a 100%. Everyone on that stand was giving 100%. I think, yeah, I think Buildertrend is the benchmark for us all to aspire to.

Zach Wojtowicz:

Yeah, absolutely. For sure. Well, Russ, let’s remind our listeners about the Association of Professional Builders and talk a little bit about what we’re here to talk about today.

Russ Stephens:

Sure. So, I actually started out way back in about 2010, 2011 selling CoConstruct. I came across CoConstruct. I watched a webinar with Donny Wyatt, and he founded CoConstruct and spoke to Donny and signed the license to introduce CoConstruct to Australia, New Zealand and the UK, and signed up over 1000 builders over the next few years onto that platform. And that led to conversations where builders had solved one problem, but the main problem that they still had was generating leads. So, we started, when I say we, my daughter and I, Sky Stevens started a marketing agency dedicated to generating quality leads for residential home builders. And that went phenomenally well. But what we did notice was when we spoke to these builders, half the builders were saying, fantastic, my problems are solved. I’ve got the project management software in place, I’m generating quality leads, but the other half were telling us that the leads were rubbish.

And when we delved into it, we realized that the guys that were struggling didn’t have a documented sales process, which is why in 2014 we launched ACRIS sales training where we documented the entire sales process for a residential building company and then trained them on taking a new lead all the way through to contract. And that went exceptionally well. Now, we were generating the leads and showing the builders how to convert those into contracts, but we were still having conversations with builders that were time poor and not earning the kind of money they needed to be earning, which is why in 2015 we launched the Association of Professional Builders, which is a business coaching company dedicated to improving the industry for both builders and consumers.

Zach Wojtowicz:

I love it. Yeah, it’s something that we see more and more as the building industry continues to take on more technology and really look at best practices in the industry. We’re seeing more experts who can come in and give solutions to some of these problems that have been solved before. So, the Association of Professional Builders, how many customers are you guys up to now? I remember last time we were on, you were growing pretty rapidly. What’s your client base looking like now?

Russ Stephens:

Yeah, well since we last spoke, we’ve appeared on the list of Australia’s fastest growing companies after the last two years now …

Zach Wojtowicz:

That’s crazy.

Russ Stephens:

And we’re now coaching over 600 building companies in four countries, which is very exciting because yeah, we feel like we’re starting to make an impact on the industry

Zach Wojtowicz:

Yeah, for sure. And as we know in construction, word of mouth spreads quickly. Right. I mean, a lot of builders tell you that builders have found an answer to these problems, I know how to solve them. Let me get you in touch with my friend Russ. Right. So …

Russ Stephens:

Yeah.

Zach Wojtowicz:

One of the things I love about your company, Russ, is you also do a lot of analysis and thought leadership and you talk about kind of the trends in construction and that’s pretty unique in the construction industry. And recently APB put together a comprehensive survey about the construction industry, and it’s called the state of the residential construction industry, appropriate. So, it just came out last week, which is super exciting. So, we want to talk to you about that today. Give me the top line highlights. What are some of the keys of the things going on in the construction industry?

Russ Stephens:

Yeah. And let’s not forget the massive part that Buildertrend played in helping to compile this survey as well, where over 1,000 builders took part and completed over 100 questions, which is an incredible commitment really. That takes a lot of time and these builders go into a lot of detail, which enables us to collate this data, which really does reveal what is going on in the industry. And what we found, there were three real key points that really surprised us as we went through the data. And the first one was, despite all the obstacles, despite all the challenges that builders faced during 2022, the vast majority, almost 58% of builders delivered homes on time. And I think that is an absolute incredible achievement, and it’s a testament to the professionalism of builders, and I think really is linked to the use of project management software like Buildertrend as well.

Another thing that really surprised us, well, I guess it, well yeah, it was a surprise. The number one sales challenge for builders was generating quality leads, but the number one marketing challenge for builders was also generating quality leads. So, in terms of marketing, it was generating, but in terms of sales, it was actually dealing with quality leads. But I think the thing that really did surprise us was, despite that being the big challenge, 64% of builders did not write a single blog article in 2022 and 60% never emailed their database. And social media was actually down in 2022, social media activity was down in 2022 compared to 2021, which as we know, that’s the solutions in what builders were not doing was the solution to the challenge. So, that was a bit of an eyebrow raiser I would say. But the most positive thing I think to come out of this data was that builder’s financial understanding continues to improve year-on-year. We’re still not where we need to be, but it is improving year-on-year, which is very reassuring and encouraging for companies like ourselves.

Zach Wojtowicz:

So, when you say, there’s a couple places that I want to go that with the headliners of the statistics, when you say that their financial understanding is improving year over year, how are you defining that? What’s your measurement framework there?

Russ Stephens:

Yeah, we’re using a combination of questions and trick questions, I guess to …

Zach Wojtowicz:

Psychology.

Russ Stephens:

Catch them out. So, markup and margin has always been a very misunderstood term in all industries, not just construction, but it’s something that really does hurt builders because they end up leaving money on the table when they charge a markup instead of a margin that they’re entitled to charge. And what we’re seeing is a improved understanding on the difference. There’s still a lot of builders that don’t fully understand and if you’re not completely understanding the difference between markup and margin, don’t be embarrassed about that fact. Everyone had to learn this at one point. You just need to reach out and find the answer to that because it is an important thing to understand. But I guess the biggest thing, the most concerning thing in terms of financials is the work in progress calculation for a residential building company.

And the reason this is such an Achilles heel in our industry is because it’s calculated in a different way for almost every other industry, typically manufacturing, where it means something completely different. And it’s that lack of understanding of how to calculate work in progress that leads to the ruin of so many building companies. And even now we’ve been bashing the drum on this for over eight years now, training builders and accountants, I might add one by one on this calculation. We still find that only, well less than 10% of builders truly understand it. 50% of builders believe they understand the work in progress calculation, but when we test them with a subsequent question, we find that that number actually plummets to around about 9.1% of builders that truly understand how to do this calculation, which is a big concern because it means their financials are not correct.

Zach Wojtowicz:

Yeah, that’s a huge variance in someone who is probably using that calculation to make business decisions and they may be doing it with the lack of information to do it to, I assume they’re probably still functioning, but it’s not maximizing the profits of what they’re could be doing. I used to talk about this all the time.

Russ Stephens:

Yeah, it’s dangerous. It’s dangerous because I think if you believe that you’re making more money than you are, or if you believe you’re making money when you’re actually losing money, that’s dangerous because the cash flow masks the problem, and you continue doing the same things as you always done. If you don’t understand there’s a problem, you’re not going to try and fix that problem. So, that’s where this danger really comes from.

Zach Wojtowicz:

Yeah. Well, and what’s really interesting is these communities of builders that are continuing to evolve, it’s like there’s a possibility, too, that you might learn from someone who actually is doing it wrong and then you’re basing your decisions around it. So, having experts in these business construction processes and ultimately these accurate accounting management pieces is essential. I don’t know how much of the trade secrets you’re willing to share, but what is the trick question that people think they’re using correctly to run my whip, but actually you’re missing this key element. I’m just curious and feel free to hold it to yourself.

Russ Stephens:

Oh look, I’m happy to share all our secrets with you Zach. Yeah, that’s …

Zach Wojtowicz:

The benefits.

Russ Stephens:

That’s how we improved this industry.

Zach Wojtowicz:

That’s right.

Russ Stephens:

But yeah, I mean, first of all, I’m not sure what’s more dangerous, the builders that openly said they didn’t know how to do this calculation or the ones that thought they knew how to, but then didn’t. But what we do find the misconception, the myths surrounding the work in progress calculation, a lot of builders think that it applies to the un-invoiced amount of invoices on their contracts. So, if they’re halfway through a million dollar contract, they think work in progress means half a million dollars. There’s other people that think it applies to the total value of their pipeline. There’s a couple of different variances on what builders absolutely, or actually think it means. But the true calculation for work in progress in the construction industry is to identify that hidden liability that is caused by front loading jobs because, and there’s nothing wrong with this.

We front load jobs, we try to claim as much money as early as we can, but there’s always a lag factor with those invoices. So, a builder may find that he’s invoiced the client half a million dollars if he’s halfway through a project, but he only has maybe $200,000 worth of invoices in his accounts package, which then shows obviously a $300,000 gross profit, which he knows is not correct. And that is why he doesn’t pay too much attention to his P&L and balance sheet because it’s wrong. But what they do pay attention to is their bank balance.

And that’s where a lot of the danger comes from because that money is what we call other people’s money. Unless you understand exactly how much is a liability, there is a tendency to think you’re doing better than you are and to continue working on margins that are way too low. But yeah, to answer your question, it’s typically to do with the amount of work on the go, and I’m not just pointing the finger at builders here. In our research, 95% of accountants do not understand this calculation either, and that’s simply because of the terminology we use actually confuses them.

Zach Wojtowicz:

Yeah, it makes a ton of sense, and I think it just shows there’s a lot of nuance in the construction process that takes years of experience to really kind of be able to learn to do properly. The other part of your report that you singled out that is interesting is the way that people are calling qualified leads versus unqualified leads. And that’s something that in my line of work we hear pretty often for getting people to sign of our software, it’s like, oh, this is a hot lead versus a lead that maybe has a little more work to do prior to sale. So, it’s interesting to hear construction data to turn back similar kind of criteria of how you define someone as qualified lead. What are builders looking for when you use the term qualified leads? How did you distinguish kind of what is qualified or unqualified?

Russ Stephens:

Yeah, we have that as two stages within the sales process and the initial stage is what we call a marketing qualified lead. These are closed questions that quickly establish if this lead is likely to be a prospect for a contract build. They’re simple closed questions. They’re asking where is this build going to take place? Because if it’s outside your radius, then you’re going to disqualify it. So, being that they are closed questions, they’re non-emotional disqualifiers and they’re very quick to get through. And this helps to protect a builder’s time. So, there’s typically seven of these questions that a builder will ask and that will within a few minutes, get them to a marketing qualified lead. And it can even be done without speaking. It can be done via messaging because that’s how a lot of people like to communicate these days.

But the next level, which I guess is what you’re really drilling into here, is what we call a sales qualified lead. And this is where the open questions come into play. And this is where we’re looking for the emotional drivers behind why us, why now? Because what we don’t want to do is go through the whole sales process with a prospect that is simply using us as a price check because they’ve built before and the builder did a great job, and they already intend to use them again. But just to keep them honest, they think they’ll go out to another couple of builders and make sure that the price isn’t over the top, and we don’t want to be caught in that loop. So, very important you understand if they’ve built before, what did they like about that process? Because when you ask someone what they like about it, they’re going to tell you what they didn’t like. Yeah, it’s a very simple question. Then why aren’t you using this builder to do this build?

And they might say, whoa, he’s quoting you at that point, but no we’re simply being price checked, but we want to go into other emotional drivers as well. We want to understand exactly what they expect out of this home that they’re building, what the emotional drivers are and also what their priorities are. Because there’s always three priorities that come into play, and that is budget, speed and quality. And when we understand that we can tailor our proposal to make sure we’re ticking those boxes because quality is someone that’s built before. This is their dream home. These guys are not price focused, they’re quality focused, and also importantly, communication. So, we’ve got to make sure our proposal really demonstrates how we’re using a solution like Buildertrend to enhance that communication.

Equally, if speed is important, they’ve got the relatives coming for Christmas, they need this home finished, we’re going to use the scheduling tool features to highlight the schedule at a very high level. We’re not going to give them detail, but that will put us ahead of the pack when it comes to demonstrating how we’re going to get them in their home before Christmas. And if it’s budget, well, we’re typically talking about first home buyer, and we’re going to give them options to downgrade on the price rather than upgrade because they cannot go beyond their budget.

Zach Wojtowicz:

Yeah, that’s a great insight. It makes a ton of sense. There’s a lot of layers to pull back there. You’ve spent a considerable amount of time in the data. You do this report annually. Why do you do it? What is your kind of end goal of getting a resource like this for builders?

Russ Stephens:

Yeah. Well I think it started three years ago and with coaching rightly, there is a lot of skepticism out there in the marketplace from builders. Builders obviously work extremely hard, they work extremely long hours, and they’re being sold to every hour of the day by different suppliers. So, they’re rightly skeptical when coaching companies come along and suggest there is a better, easier way of doing things. And one of the drivers for producing this survey was to be able to demonstrate in pure hard facts to builders that when you have a documented sales process in place, you are four times more likely to achieve the industry benchmarks in terms of margins. And which leads me onto what are the industry benchmarks? Because I can remember when we started the Association of Professional Builders and we would do seminars in Australia and we’d get builders openly laugh at us in these presentations when we suggested to them that 10% net margin was where they needed to be, and that meant marking up new construction by 33%.

They would fall about laughing and some guys would even get up and walk out, I’m not listening to this rubbish. We don’t get that any more fortunately because we have so much proof. There are so many builders that openly testify that yes, this is possible, this is what I’ve been able to achieve. But to take that step further by doing a survey and producing the data and linking margins to marketing results and how much builders are prepared to spend on marketing and how that affects their margins. So, cross analyzing and linking the data, it really enabled us to produce a lot of hard facts for builders, which I think you need when you’re making a big decision like a change in business strategy.

Zach Wojtowicz:

Absolutely. Data, if Charley was here today, well, he would always love to say data is king, and that’s how any business should be making decisions about their directions. And construction companies got data sources that could really improve and boost your bottom line to help you stay in business longer or build more houses or take in more staff, whatever your business plan takes you. I love this type of content because it just gives such credence into what we’re trying to accomplish at Buildertrend, bringing centralization of your systems, your platforms, and bringing insights that you can make decisions. And it’s also really interesting because I don’t, in my experience, a lot of builders are word of mouth lead processes, right, kind of like you’re talking about where it’s not written, it’s just kind of like, well, people bring work to me. And also a lot of times they end up trying to work through a pretty extensive backlog.

And by having kind of a standardized process, not only are you able to service more of those leads, you can start to be really selective and intelligent about which ones are going to be kind of not only hitting faster timelines, getting them done faster because you’ve worked with clients who are pre-qualified, and you’ve done work before, they’re better, but you also are going to be able to invest back into your business more to kind of continue to grow more efficiently. So, when we kind of look at the segments in construction, I’m curious, does your data this year show any differences between home builders and remodelers? You kind of started the conversation talking about all the challenges of construction that we’ve faced over the last couple years, and a lot of our other economists have kind of talked about like remodelers are seeing a big boost right now as interest rates are going up, people are staying in place. So, I’m curious, did your report show anything different from a home builder, remodeler standpoint?

Russ Stephens:

Well, the data we collect from remodelers is only the guys that are doing contracts in excess of $50,000.

Zach Wojtowicz:

Okay.

Russ Stephens:

So, we don’t collect the data from those smaller ones in order to keep the data more useful and a bit tighter. But I guess the main difference that we do see between remodelers and new home builders are the gross margins are typically significantly higher for remodelers. And subsequently the net margins are higher, too. But conversely, their revenue is lower. And that is because it’s harder to scale a remodeling company simply because the amount of decision making that needs to be done all the way through a job. And I think we see this in all industries, the more custom the solution, the harder that is to scale. So, that’s why we see remodelers typically on a lower revenue but a higher margin. But it’s also maybe the reason why we see remodelers get to a point where typically they outgrow their model, and they do transition into new homes, which is a lot more scalable. So, yeah, having been done this for a number of years now, yeah, we have seen that pattern emerge where there is that transition from remodeling into new homes.

Zach Wojtowicz:

Interesting. So, you feel like people are into the growth plan, they maybe start in remodelers, and they transition more to new home, more common than a new home builder trying to diversify their offerings by getting into remodeling in the case of interest rates going up?

Russ Stephens:

Yeah, I think for a lot of builders coming into the industry, I think it’s less daunting to start with remodeling as well, because you can start with smaller projects and typically having come from a carpentry background, I think, yeah, they feel more comfortable and then they start doing larger and larger remodeling jobs, more and more complex, their confidence rises, their reputation rises, and it’s the next logical step for them.

Zach Wojtowicz:

Yeah, it makes a lot of sense. And the other thing about this survey is you guys kind of collect all this information, I think you can do a little bit of exploration about where the industry is going. So, what are some of the things in this upcoming year, we’re still early in 2023, what’s the Association of Professional Builders focused on for construction and in this coming year? Or what are some challenges?

Russ Stephens:

Well, I think without question, the market will soften throughout 2023 and maybe even more in 2024. So, generating quality leads will become an even bigger challenge. And it’s almost become a bit of a forgotten art, the lead generation, the marketing, but even the entire sales process. One surprising thing was that another thing we measure is how many builders run an objections manual? And that actually declined in 2022. And when you think about it, well, sales have been pretty easy for builders over the past two years. They’ve encountered less and less objections. It’s more about when can you start? So, it kind of makes sense that less builders are having a focus on a objections manual, but if you don’t document those objections and how you overcome them, these are skills that could get forgotten, just like your marketing skills.

So, it’s really, really important I feel that we get back to basics in this industry and make sure that we are marketing ourselves and looking ahead to 2024, what will the funnel look like in 2024? And make sure that we do have that documented repeatable sales process in place and making sure that our team are following it. Because in sales, whether you’re doing the sales yourself or you employ people, it’s very easy to take your foot off the gas when things are easy and start short cutting and then all of a sudden you forget what you were doing when it was all working so well. So, this is why we have to document everything. And when things do soften, we have to revisit those processes and retrain, rethink and make sure that we are endearing because without question, we are going to see a return to the pre COVID challenges. And that is where builders need more leads.

Zach Wojtowicz:

Yeah. Got to keep the funnel up. Right. Our kind of closing note here, and we always like to kind of get the prospects of what’s the positive things that we can be looking forward to in the construction industry. What are some wins or advantages that you think builders can be excited about in the coming year?

Russ Stephens:

Well, in terms of wins and really easy wins is what we’re all looking for in business. The truth is there are no shortcuts, but if you do want more quality leads, start a content marketing strategy. Follow up your leads using email through a CRM, and then attract more leads by using paid advertising because 50% of builders are not doing paid advertising as well. And if you don’t have time to do all this stuff, then employ people or contractors that can do it for you. And if you can’t afford to do that, then that is a sure sign that your business model is not currently working, and it becomes a catch 22. You can’t afford to advertise because you don’t have the margins. You don’t have the margins because you don’t have the demand.

So, I guess the win is follow a proven model because then you will have an advantage over the majority of builders in this industry. And if you are prepared to work on your business, you will succeed because there are so few that are prepared to work on it. They get caught up working in their business. It’s not easy, but in all honesty, it is way easier than it should be because so few builders are doing it.

Zach Wojtowicz:

Yeah. Yeah, the competitive advantage. What’s the cliche? Don’t let the business run you, run the business. Right. And this is an area that.

Russ Stephens:

Absolutely.

Zach Wojtowicz:

Yeah.

Russ Stephens:

Take control and as same with clients, you are the leader. Don’t be dictated to by your prospects and clients. You’re the leader in this relationship. Lead the way.

Zach Wojtowicz:

I love it. Russ, whenever you’re on “The Building Code,” the half hour just flies by. I’m looking at the clock right now and it’s been 30 minutes. It’s unbelievable. You have this effect. I’ve just like look down and boom, 30 minutes.

Russ Stephens:

Well, I guess I talk too much.

Zach Wojtowicz:

No, that’s, no, it’s the opposite. I could listen to you all day and I think our listeners love this content. So, thank you so much for coming on “The Building Code” today. You’re always welcome back. You’re a three timer. I think the record is five times, so we’re going to keep pushing those numbers and we’re going to get you at the number one spot here in “The Building Code.” What do you think about that?

Russ Stephens:

Hey, I reckon we should aim for double digits, aim for the stars, and we’ll hit the moon.

Zach Wojtowicz:

Yeah, if that happens, we’re both doing pretty well. I hope we’re both still here. All right, Russ, thank you so much for jumping on “The Building Code,” and we’ll talk to you again sometime. Okay.

Russ Stephens:

Hey Zach, thanks so much for having me. And what I’d like to offer you is a link for your listeners to get the latest state of the residential construction industry report free of charge.

Zach Wojtowicz:

Absolutely. And don’t forget everybody listening, you can check out the Association of Professional Builders at the associationofprofessionalbuilders.com, but we’ll have all the collateral that Russ is going to give us in our shownotes. We’ll see you again, Russ.

Russ Stephens:

Great stuff. Thanks so much, Zach.

Zach Wojtowicz:

We just had Russ Stephens on talking about a lot of stuff in the construction industry. Russ, of course, the co-founder of the Association of Professional Builders. Always great and insightful to have Russ on “The Building Code.” This is normally the part where I ask Charley, Hey, what do you think? And it’s always good to recap. We have a lot of information chockfull in this episode. I highly encourage you to go check out that survey report linked in the shownotes where you can get all types of insights about the construction industry, how it’s stacking up across different segments, what types of questions. 100- question survey is insane. There’s a ton of great details in there. I was looking through it before the show, and I was just blown away. I wish we could have talked that much longer about all the things that are happening in construction.

Stay tuned right here on “The Building Code.” We have great guests all the time talking about things that are happening. And next time we’ll have Charley here to get his perspective. So, thanks for watching. Thanks for listening. Remember to like, comment, subscribe where all podcasts are available. This is “The Building Code.” I’m Zach Wojtowicz, and I’ll catch you next time.