EP193: Mastering Labor Efficiency with Greg Crabtree

Yeah, I appreciate it. Thanks for having me.

So, you know, for years I was a practicing CPA and, you know, kind of that frustration of feeling like we weren't doing everything that our clients needed. I mean, and so the profession kind of leads you in one direction. Yeah. You do financial statements for banking purposes. You do tax returns. You do bookkeeping, you know, but I guess I'm just one of those that's a little bit of a renegade. And I just kept looking at my successful clients and figuring out they weren't using. what we were developing that often for running their business. And it's like, so if you're successful and you're running a business and you don't need the data I'm producing to be successful, what are you looking at? And the more that we really kind of looked at it, it is more of this blending of, you know, they don't follow general accepted accounting principles, you know, to the T. They're not necessarily pure cash basis or pure accrual. They kind of understand business in a practical manner. Now, some of those things will get you in trouble. There's no doubt. If your business is running very consistently, you know, I can get away with mixing stuff. And then when I go through a massive uptick or a downtick, that's where those folks that run a simple view of things sometimes can get in trouble. But it really kind of led me down this path of really just kind of discovering, okay, if I really had to look at accounting more effectively and fundamentally, you know, how would I deal with it? And it just led to the fact that we started studying our clients' data in a different way, and it led to a couple of things that, first and foremost, it's not about revenue, it's about gross margin. So you talk about revenue all day long. We're looking at revenue minus cost of goods sold before your internal labor to get to that true gross margin number the way we define it. That's the real economic top line of the business. And that was the first learning. But the second one was this discovery of this just incredible correlation of a finite amount of labor that I can spend relative to the gross margin that I generate. And I wish it was more complex than this, but, I mean, we found that 90% of the businesses work off of one number, and that's a two. I got to get $2 of gross margin for every dollar of labor, whether it's field labor or management labor, the owner's salary at a market wage so that you're not lying to yourself. But once you throw all that in there together, that becomes that core DNA of that business. Now, you have some variability of how to do it. I can, as I talked about in the contractor summit, you can have really expensive direct labor out in the field that needs little bits of management, but not much. And so then I can have a skinny management team with a much more expensive direct labor team. I can go inexpensive people in the field, but I better have some pretty good managers to keep an eye on and make sure that they don't start doing something that they wouldn't intend or don't do it to quality standards or those things. And so the two management and direct labor play off of each other from a strategy perspective. I can't go expensive, expensive. I will be profitable. I can't go cheap, cheap. I will fail as a business. And so it allows businesses to put their own signature on how they want to go about things and the team they want to build. But it gives you that total labor efficiency number. It's just an incredibly simple number for people to manage their business by. And so once we came up with that, then we started looking at also structural deficiencies of businesses that to rely too much on debt, they don't keep enough cash. And so essentially we laid the groundwork of setting profit to gross margin at, we want a minimum 15, a targeted 20% profit to gross margin stretch would be 25. You're above 25. They got yourself fortunate. The market's going to beat you back. We get that profit number. That profit number is going to yield a total labor efficiency number that. we think is almost always going to be a two for most people in your industry. And then I've got to then have, I need two months of cash with zero drawn on a line of credit, which tells me I'm fully capitalized. I'm not over-relying on leverage in the marketplace. And if I get those three things right, it then produces a return on invested capital for your industry that could be anywhere from 75% to 125% return. So if you have a million dollars invested in your business to cover AR, inventory, equipment, minus your AP, minus some customer deposits and those things, if you've got a million dollars net invested of the active business assets and liabilities, you should be producing $750,000 in profit to $1.2 million in profit. And that's not... unrealistic in your industry. And so how many people would like a 75% CD? So if you've got a million dollars invested to make this business work, hey, I think I'll take $750,000 of interest. Well, that's really what profit is. It's the return on the net investment in the business when the business is set up properly. And when I can get those four things in alignment, I'm strong. I can take a shot from the marketplace. have bad performance on one job and recover. I can hold my team accountable to performance standards. I'm also prepared to take opportunistic growth in the market, but I don't have to grow. I can be profitable where I'm at. And when growth occurs, okay, we go for it, stop there. And this is kind of where, you know, call after call I've had of late is reminding people, you know, depending on where you're at in the country, Really pretty much all over. The prospect for real growth is a little muted. Now, we're going to see a bump post-election, regardless of who wins, because everybody's been sitting on their hands for six months waiting to find out whose playbook we're going to live under. I got news for you. I get to travel the world doing what I do, and there's no place I'd rather live than here, regardless of who wins the election. Let's just hope that there's not a dispute and we move on because the economy will take care of itself if you just let it go. And I think if we get into that, there's going to be this pickup of a bump of postponed activity, and then it's going to stall regardless of who wins. It's going to stall because we've hit a point in time that I keep trying to remind people of. We're at this population demographic shift of where population has stalled. We would have actually gone backwards in population in last year had it not been for the illegal immigration that came across the border. Now, I'm in no favor of illegal immigration, but, you know, there is this, you know, it's a definite economic impact to have declining population. And I think that's something that we've got to come to a reassessment of the impact of that. And none of us know for sure. We've never lived through this before. We're in a declining population marketplace. But there's still going to be work. And oh, by the way, last time I checked, everybody's got a job. Everybody wants a job, has got a job. So I kind of look at that and I'm going, okay, so what? I mean, do we need a market that grows if everybody's employed and everybody's profitable and things are stable? That's not so bad. So growth for your marketplace is going to come more so in the next five years of gaining market share within your market. not riding the wave of market growth that we've seen in the last 25 years. And I think those are the biggest issues that in our study of businesses, I mean, our practice is all over the U.S. So really the practice unit that I have now, the firm that I started back in 1986, we merged with a national firm in 2020, Carvig's and Ingram. So we're just a, we're a special purpose consulting unit now. So we're actually not a CPA firm. We can still do some taxes, but we do refer. We work with our other offices that are CPA firms to deal with tax preparation a good bit of the time. So our focus is really running a consulting practice that helps you understand your data in a more effective way, run reports that you can't run yourself, although we can show you how to do them, but most times people just have us do it. But once we understand that, we're helping guide those businesses to stay within those four parameters. Are you hitting your profit target? What's your labor efficiency ratio? Are you fully capitalized? Are you getting the return on investment? And if one of those four is out of kilter, and typically two of them are going to be out of kilter if one of them's out, what are you going to do about it? And what are those trends? Are you trending downward? Are you trending level? Are you trending upward? And a lot of it is really just kind of being that independent observer of data and helping hold you accountable to making the right actions. faster. Because the traditional accountant that looks at your data, they look at it once a year to file a tax return or produce a financial statement that the bank needs that, oh, by the way, the bank sticks in the drawer and then calls you and pesters you for more information that wasn't in the financial statement. And my argument is, well, if that financial statement was so good, the bank shouldn't have to ask you any more questions. And unfortunately, that's why I say those kinds of services are insufficient for what entrepreneurs need to run their business. And so we create a model that we update every month through the class we work with on an ongoing basis, you know, that pretty much fills the need of that. I mean, it's answering every question, you know, pretty much that you have. And for businesses in your space that become more lateral, they do more than one thing. You know, maybe I have a construction division. I've got a maintenance division. I've got a hardscape division. I've got a turf care division. So whatever you can isolate and look at segments. You'd have to look at it and say, am I good at all those things? And are those contributing segments or is one of them eating my lunch? And maybe I shouldn't do that. Maybe I should contract that out, take a management fee for what I contract out. I'll make a little bit of money off of it, but I don't lose money at it. And we're big fans of everything should be contributing. I shouldn't lose money at any activity that I do. I'm not a big fan of the loss leader idea.

It's just a little bit, just a few ideas.

Well, I mean, inflation, the market adjusts itself. I mean, inflation is going to be there. I mean, I think. As we see this energy post-election, you're going to see a little creep up potentially in some more wage spikes of some of your key players because some of the people who need to hire to tap into this spurt of demand, they'll go try to poach your people. And so understand that that might happen. And so wages, anytime the wages take off and start to increase. That is the primary thing that causes inflation into the spike. Now, and just think of it like this. The excess demand that we're going to get in the next six to nine months is the lack of demand that we've had in the last six to nine months. That's all it is. That's why I say it's going to stall out because we track this data. We've got 100 companies that we monitor as kind of our eyes on the market group. And we started seeing this happen in the fall of 23 of where the economy just stalled out. And so that 100 company model is only showing like 5.5% growth this year over last year. And this is a hard number to measure. Nobody can measure it precisely. So take it for what it's worth. I mean, as I like to say, I am just a chicken farmer from Alabama. So you can put any weight on this that you want. But we're pretty good with numbers. And we believe real. economic growth is a negative 2% to 3%. So with 5.5% revenue growth, I think inflation is about 7% to 8% in real terms across those businesses. And we have a sense of how much those businesses have raised prices because we work with them every month. And so I guarantee you there's easily 8% price increases in our clients' data that only yielded a 5.5% revenue increase. So that tells you that, in effect, you know, inflation was kind of negative or economic growth was a negative 3%. And, but, but there again, I said, okay, so, but everybody's employed. Yeah. I don't think that's a horrible thing.

Oh, absolutely. I mean, so when we look back at our clients' data over the late 2020, all of 21, I mean, our models showed 21% growth in 21. There wasn't growth. Nobody added bodies. If you don't add labor and your revenue goes up 21%, That's all inflation. You just charge 21% more. It was about 16% growth in 22. And then in the fall of 22, as the Fed started raising interest rates and the market really kind of cooled off, you know, from that standpoint, then now you kind of saw everything kind of slow down. Now there's a couple of sectors that, I mean, you know, we've pretty much not had much in the way of existing home resales, you know, which, you know, In your industry, if we get back to any kind of momentum of existing home sales starting to turn over again, those lead to renovation projects of either getting a home ready to sale or the new owner doing something once they buy it, you know, and those things. And so your industry, you know, has been somewhat hurt by that. But there's still a decent amount of maintenance projects that are going on as well. And that's kind of just core demand, you know, of what's there. But I do think that, you know, inflation is kind of here to stay. And anytime that you have full employment, wages are going to continue to drive inflation at least a minimum 5% a year in real terms. And sometimes it will spike a little bit, maybe go 7 to 10, you know, if you get a little hot period. But it's going to stay between 5 and 10 at least. But, I mean, we can work that math. I mean, that's not. Personally, I don't mind 5% inflation. It's like, okay, we can do the math. The problem that we're running into, though, is there's becoming this upstairs-downstairs part of the economy. So the necessary businesses are able to pass through all of their cost increases. So if you're an HVAC company, electrical contractor, plumber, IT services businesses, those are necessary. There's not enough of them. You've got constraints in terms of the technical labor needed in those professions, and so they can charge you whatever they need. Those businesses are up about 17% this year or last year based on our latest model. If you're a discretionary business, you sell stuff in a retail store. If you're a discretionary services business to where it's a luxury to have, you don't have to have it, those people are down about 15%. There's a core demand where they will settle out at. but they're shrinking. And unfortunately, our data is screaming at us, telling us that the one thing they're not doing is cutting their management labor as much as they're cutting their direct labor. And eventually you have this unsteady business that just has too much management labor for what it can afford. And you've got to make some hard decisions. But some of those businesses will actually become unviable. I mean, TGI Friday's restaurant chain just went bankrupt. I mean, they're in that middle tier. The middle tier restaurants are the hardest hit. If they raise their prices, they become too expensive relative to the value they deliver. If they cut their prices, they can't be profitable. I mean, they're in no man's land. And so you're probably going to see a restaurant industry that has either low end or high end. And there's just not going to be a lot in the middle. because it's just a tough place to operate.

Well, I think what's going to happen is you're going to see more player coach managers that you're going to be a coach to your team working with you, but you're going to be slinging a shovel with them. Yeah. Yeah. And, and, Oh yeah.

I can't afford that positional manager. You know, I got to have somebody that, you know, kind of get stuff done. And, and yeah, that, that does hurt you from growing, but it's like I told your group, I said, you know, our number one thing right now is you got to take, you got to get profitable with the work you have. Absolutely. If you're not profitable where you're at today, why do you think growing is going to make you more profitable? It doesn't work that way. You know, I got to get profit with what I got. And then I will find a way to incrementally take the next step, next step, next step. And, you know, where do I add? How do I adjust? But I think you will see some innovative management structures start to evolve to where the marketplace is a cruel taskmaster. It will force you to find a way because the numbers have to work at the end of the day.

They have. I mean, you know, and we definitely are seeing some of those. I mean, I do believe if you have a market with 15 competitors, they're going to shrink to 10. Now, the 10 will be better businesses and you want to be one of the surviving 10. But I do think that we have an excess amount of unnecessary businesses in many of the markets. And as that consolidation occurs, then things will kind of find a settling point for a while. But then it's just a question of how do you deal with this labor component? And that has a little different flavor market to market. You know, some areas have more accessible labor than others. Some have more demand than others. We've seen a little bit of a cooling of the migration of population from the Midwestern and Northern states down to the Southeast. You know, although there still is movement, you know, Florida is still going to have positive population growth just from migration, but not, not, not from a birth rate. And that market still continues to grow. You know, all our clients down there that are in the construction related industries, they're doing pretty good. And so now there's others that aren't. I mean, so once again, there is this separation. I think I said this to your group. I kind of forget who I said to and who I didn't. But I really think that we're entering a phase where the good businesses are going to be rewarded for good practices more so than ever. If you're good at team building, if you're good at customer service, if you're good at organization and structure for your team, you are going to get more benefit from that today than you would have gotten five years ago pre-COVID. Because the market was so hot, you can throw out your single and you can get business whether you had experience or not because you were the next one available. Because there was nobody available. That's not the case. I noticed this as I have seen more contractors on the Saturday football broadcast running commercials. than I have ever seen in my life. I mean, these are companies that have never advertised before. And that just shows you how desperate they are because these are people that they don't advertise. The customer doesn't call them. They're a contractor to a successful GC that keeps them fed and keeps them busy. They rarely have to deal direct, but they're so desperate for work that they're reaching out and direct a customer for activity. And I remember, you know, when back in, you know, pre-COVID, you know, you'd call somebody, I remember I was trying to get my screen and porch screened and I called this, this screen company and they just blew me off. It's like, I mean, they, it's like, no, you know, I mean, they were so full up with work that they didn't want to deal with an individual customer. They were just being fed jobs that were, you know, already priced and no, no issue. And, and, and then they had this thing to where. Even at that, I did get out of them. Your porch is screened from the outside. We don't do outside. We don't put people on ladders outside. You do screening porches and you don't put people on ladders? I mean, come on. I mean, every screen is not attached from the inside. But when things were so good, you could put all of these conditions in place. Oh, I only want this. I only want this. I'm a fan of niches and specialization. I agree with that. There's riches and niches sometimes. But I'm telling you guys, right now, you better start being a little broader and you better have more than one trick in your handbag that you can pull out and take care of a customer's need because the demand is still going to be pretty inconsistent. And you'll have a hot moment and you'll have a cold month. And you'll have a hot month and you'll have a couple of cold months. And so you better meet your cash requirements and stay off that line of credit if you want to hang around for when the work's going to be there.

The good news is, I mean, I'd say the top 30%,40% of the wage earners are still going to be in pretty good shape and making pretty decent money. But even that group... that drives a lot of the bigger ticket spending are finding that they're still having to make some value choices. And so you will still see inconsistent demand. You will see spikes in pauses. And that's the part where I think, you know, you just got to have a little bit of a longer view of saying, what's my longer view trends? I can't manage moment to moment. I got to manage over a rolling three month view of things. And so if I look at those rolling threes, that's more giving me a clue. If I look at a month, I I'm going to, you know, alternate between scared and discouraged. Yeah. Uh, you know, and, and so you gotta, you gotta expand your view a little bit, you know, as well.

Absolutely. It's true.

And so we have a prime philosophy in simple numbers of going never, never, never mix labor with something that's not labor. And I was taught this by a client years and years ago, and it just kind of hung back there. And I started playing with it as we started coming up with these concepts. And I mean, it's just been eye opening because labor, labor is the only cost that comes to work every day with an attitude. I mean, that's why it needs to be separated. It's got good days and it's got bad days. If I mix labor with something that's not labor, I don't know which is my problem. Because here's the thing. If you look at the simple number structure of taking revenue minus non-labor cost of goods sold to get to gross margin, gross margin becomes the pure service value add that your labor and your management is delivering to that customer. So one, it's a pure, it's a clean, clean, clean number. Secondly, I have a choice about that direct labor. I don't have to have employees do it. I can be an absolute contractor that just sells projects and subs them out to other subs. And I can fix my economic performance so that then if I sub everything out, including the labor to another company that'll agree to do those things for me when I need it, then my gross margin then is... the value of my management of my ability to sell, my ability to get to a contract, and then oversee that the subs and materials do what they're supposed to do. I am in the contracting world, and we have contractors all over the board. Some do some self-performance, some do all self-performance, some do none. I can win at all three of those. I just have to understand. So what we wanted to do is create an economic structure that basically encompasses All of these types of approaches to solving the customer's dilemma of delivering the product or service that you need.

And the other thing that. creates value in the separation. Almost all of your peers that are listening to this podcast do not flex that direct labor. I mean, they may flex it an hour or two, but if I plot it on a graph, you're not seeing this. You're seeing this. I mean, they're moving at a flat rate because you commit to labor in a different way than I commit to subs, than I commit to materials. And so we need to be able to see when are we effectively filling up the capacity of that labor. So when we look at a labor problem, essentially there's three things that I got to look at when my gross margin to the direct labor piece, not management, but just that direct self-performance piece. When that ratio gets out of line, it's one of three things. Number one, did I price the work effectively? I've got that. So that gross margin represents how well I defended my team's value from the people who bid it to the people who did it. I got to price it effectively. Number two, do we have good processes? Am I just helter-skelter? We don't have good tools available. We have to share. We don't have an effective duplication of tools that every crew has and we share, or do we have every team properly outfitted? Are we taking on jobs that require excessive amount of travel time versus staying focused in a geographic area? But if I do have travel time, I've priced that into the job. I've got to deal with those things. The third is people. So if I priced it correctly, I've got good processes in place. Do have the right people. Let's face it. I mean, you've been in this business long enough. You know, you get one bad apple on a team. How well does that team produce? Not good. And when there's a scarce labor market, you, you know, I always ask this in my talks all the time. How many of you have failed to terminate someone that you should terminate just because you don't know if there's another fog breathing person or person that can fog a mirror, you know, available to replace them. And everybody sheepishly raises their hand. And yeah, we've all done it. Or the other question I always ask is, have you ever fired anybody too soon? No, we always drag our feet. And I'm more of the opinion, because I mean, I get to see a lot of reps of this, of clients dealing with it. I mean, we're all holding on to labor that we should be letting go of. And that the space of them being gone is better than them being there. I know that's a bold thing to say, but I think we all know it intuitively. Oh, yeah. And so, but once again, the structure of that equation of revenue minus cost being the gross margin, look at gross margin relative to direct labor and gross margin minus direct labor, we call it contribution margin. It's what everybody listening to this probably calls gross profit. Right. We don't like the word gross profit. And I was taught this by Vern Harnish, who wrote the book Scaling Up. I wrote a chapter for that book. And Vern, you know. made a very good point, and I've used this ever since, is that the word profit is a slippery term, and you should reserve the word profit for the bottom line of the business. And so we came up with the term contribution margin instead of gross profit, and then gross margin for that first step of the equation. And so that really creates a cleanness in terminology. And so the idea is contribution margin. After COGS and after direct labor, that's the cleanest, purest, that's the horsepower of your business engine. And if that number is elevating, great. If that number is declining, what am I cutting in my overhead that's going to make up for that? Or else I'm just giving it away out of profitability. And so by being able to see those three data inputs of revenue cogs and direct labor and looking at that net output, that's where I need to spend 90% of my time watching and seeing it move and say, you know, are we delivering on that and making sure that that's, that's what my team is producing. Yeah.

They're ratios. So essentially, think of it, labor is always the denominator, the bottom number of the fraction. So labor is, and then you're saying, what does that labor produce? So it should always be a positive number, obviously, and generally two or more. But for direct labor, if I'm looking at direct labor relative to gross margin, landscaping, that number is probably three and a half to a four. except for mowing. Mowing is probably going to be a two to two and a half, which sucks. And probably the reason why you shouldn't be in the mowing business. And, you know, but you know, it's a commodity. I mean, it doesn't take any brilliance to do it, you know, but you can certainly screw it up. And so once again, you're looking for those things that are saying, what are the things that we make the most money from? And so generally what we've seen irrigation work. good quality landscaping where you're doing creative building, you know, and those kinds of things. Generally you should be in the three and a half to fours, you know, on the, just the direct labor alone. And then I've got the piece that then when I look at management labor added in the total labor, including direct and management, that's where I got to get that too. And that I keep saying, I wish it was more complex than that because I could charge more for it. But it's not. I mean, it's just, I do these, you know, it doesn't matter if you're a landscape contractor or a renovation contractor. I mean, it's just wild that that two number, you know, fits for just so many businesses. I mean, there's a handful of outliers, but not many. I would say conservatively,90% of businesses offer that one metric of the two total LER. And this is the way I teach it. You know, I think I told you guys this. Okay. So we're sitting here in the month of November very early at the moment, so let's take November. You know today how much you're going to spend in labor for the month of November, or first week of November. You can calculate that number. Take that total labor from everybody, from the owner of the business down to the floor sweeper. Take that number times two. That's your gross margin target to go produce for the month of November. And so when I have people do that, the first question I ask them is, all right. Have you sold enough work to be able to do that? And if the answer is yes, this is great. Now, can your team do that? And if the answer is yes, then now you've got four weeks generally to hold people accountable with a few dead days. You've got a few extra days in some months. But just kind of think of it as four weeks of production that I've got to, you know, if my total labor is $100,000 for the month, I've got a $200,000 gross margin target. Well, that's $50,000 a week. Well, at the end of the first week of November, did we do $50,000 worth of gross margin work? I mean, I may not know the number precisely, but I got a pretty good guess. And then after the end of week two, have we done $100,000 worth of work so far this month? At the end of week three, oh, by the way, there's this holiday in that fourth week that you got to count. So maybe we might need to do a little more in weeks one, two, and three to make up for that one or two days, if any, that we get work out of the holiday weekend. But there again, you're attacking it from as you do it versus turning around at the end of the month and looking back at a bad month and saying, what happened? And that's the difference between great businesses and ones that are going to get run over and have tire tracks up their backside.

Labor efficiency ratio. Which also allows you. A dollar of labor input. regardless of what it is, to what is my gross margin output, not revenue gross margin.

Now that's taking a piece of it and looking at it. So the production team, I look at relative to gross margin. So gross margin divided by direct labor. But management labor, I hold them accountable to a different number. So I take the management labor piece because management has three functions. Management has to go get revenue. It has to help me manage the non-labor cogs effectively. Do I have a bottom at the best price? Do we have waste on the contract? Those things. And then I also have to manage the labor. So management's held accountable to contribution margin when we look at their effectiveness number. And so you can't add management labor and direct labor efficiency together to get to the total. That doesn't work that way. You know, so just understand that those, the two individual ones are on two different factors, you know, but, but once again, as you look at it across time, all you're asking yourself is you want numerical validation of what you feel. Am I getting better? Am I getting worse? And when you can see it in the numbers and you see it with your eyes and your gut, it's time to take action. What am I going to do about it? And. There, that's where you earn the big bucks as the owner of the business. You get to make all of those unpleasant choices that the average person has no appreciation in the world. I mean, the people in the world that wants to, you know, get on the businesses about price gouging or any of those kinds of things is like, that is a person who's never made payroll in their life.

Oh, I mean, my goodness. I mean, those are just people that are ignorant. And I get it. And I have to have some appreciation for the fact that they just don't have the experience. But no, they don't get it because it's like we don't have anybody that's making egregious profit. We just have people making the profit they should make for the risk that they're taking and the excellence in which they do it. And I'll give you this. I mean, say this is a good example of outside interference. So we run this group of. mastermind group of HVAC contractors. Their total LER to hit their right number is two. Simple as that. You need $2 of gross margin for every dollar you spend for your techs, your office staff, the owner of the business, and it works. Unless you're a union shop and to hit the same profit number that the non-union shops hit, you've got to get a 2.5. So that is the impact of union labor. with no other benefit coming out of it. Right. And, I mean, that is just the starkest comparison you can see. I mean, it's like it's just painful to see. But, you know, in our clients who are in the shops and cities, fortunately, most all are competitors in the union as well. But, one, there's kind of a blend. There's some non-union and some union. And, boy, that's a tough thing to manage because you're already. you know,0.5 LER in the hole, you know, to, to your competition.

It's a, it's a great question. I don't believe in the concept of markup. So, so think of it like this. What you're trying to do is charge a market value for the thing that you're doing. So when I teach, I don't think I got to the slide in your presentation. I've got a slide that I do where I talk about pricing strategy. And so when you're doing a fixed price quote for a job, I want you to charge what the market will bear. And it just at the end of the day, then once you do your takeoff, you just got to make sure that you hit your minimum acceptable profitability. Because here's the thing, not all materials are the same. I mean, you don't make any of those materials. There's probably no material that you have access to that the customer can't buy directly themselves. So you're not in the business of selling materials. You're in the business of using materials. And so in reality, from a pricing perspective, what you're trying to come up with is what is the amount of labor and effort that it took to procure, to scope, procure, and deploy the material or subs, same difference, no matter if it's a sub or a material, what did it take for me to scope the need to get it under contract and have it started heading my way and then to get it on site and start doing what it's supposed to do to the value of the job. And so theoretically, the simple convention that I've developed for my clients is if you could add the labor, the cost of the labor dollars that it took to do those three things, multiply that labor cost times two, that is actually the value that needs to be added to that material to move. Because to a certain degree, it has nothing to do, I mean, I can have really inexpensive material that takes a lot of labor to scope it and have it delivered and organize it. I can have really expensive material that takes very little labor to figure out how to buy it and get it delivered. To put a 10% markup on materials is just asinine. I mean, That's not the value. It might be the right number, but in 99% of the cases, it's not. And so there is a concept out of government contracting that I learned years ago when I used to work on some government contract clients called material and sub handling. And so essentially the value is what value did you add to make those materials and subs show up and be effective? And then I've got my labor piece that I've got a multiplier then off of the value of my labor that I'm trying to get, you know, that, that hits that. But at the end of the day, the total price should be, what is the market willing to pay? Because contractors all over the place are leaving money on the table because they start doing the math and they underprice the value of something because that's what the spreadsheet said. And it's like, no. What is that customer, what do they appreciate about what you're bringing to this deal and what are they willing to pay? And that's what you should charge. Now, if what they're willing to pay and the value they appreciate is less than what your takeoff is, I still do the math. That's just step two, not step one. If the math says the cost is higher, the price should be higher than what my estimate of market value is, okay, well, I've got some work to do. I've got to convince that customer. hey, this may not appear like a value, but for us to do it, this is really what we've got to charge, or else it just doesn't make sense. And you've got to see this in contracting all the time. Somebody has a small job, and they want you to charge the hourly rates for a three-hour job that you would charge for a 40-hour job. No. Right. I mean, because you... You have to encompass all of the, it still took the same amount of planning, the same amount of coordination. You got to get to the job site, got to make sure all the equipment, everything's there. And then you leave the job site and there has to be a much more substantial add on to a small job to make it even worth even remotely considering. Right. You know, from that standpoint.

Yeah. But in, but in essence, it really comes back to, you really don't make more money. You make, you make a perceived higher margin, but it's really to cover your overhead costs that were the exact same on a $2,000 job as it was on a $10,000 job. Right. Yeah. And, and that's really the reason is you really, I mean, everybody will say it exactly the way you said it, but I will argue that that's not true. You didn't make more money on it. You just, Once you recovered your appropriate overhead cost, net-net, it actually was the same. Right,

That's the way to say it. My gross margin is higher, but my net profit is the same. Right,

Because I have to get that recovery.

Exactly. And you're starting to see smarter companies now. I mean, I had an electrician come out to my house, and it was a minimum $350 service call, whether he solved the problem or not. But I'm not an electrician, and I ain't about to learn on the job. And he did a great job. He actually took care of something much more significant that turned into a much more expensive deal. But I was... extremely happy customer when he was done. And it's like, great. This is the way it should be. I'm perfectly happy with that. I mean, he didn't, he didn't hard sell me. I mean, he said, I can do this and we're done. Or I see these things and, you know, I'd have enough understanding about what he was talking about. They go, yeah, I agree with you. Let's get it done while you're here. Yeah.

And I think to a certain degree, to that point, because this is such a schizo kind of sales marketplace, it points out that the better your guys at the customer site understand to keep your eyes open, there may be other things that we can help with. Now, I'm not trying to sell somebody something. I don't want to put a hard sales technique on somebody. But there's just sales opportunities sitting there in front of your people's eyes if they just look around and go, we take care of that for you. Those are just gimmies in terms of margin.

I mean, I think, don't think that you need a fancy accounting system to make it happen. Tools like the conference we were at for Sync. org, those are great tools that help you do it, and we're huge fans of any time that you can get to that job-level data and systems work seamlessly with how you operate. Those are helps. But if you don't have – if you're not a current user of that system, you don't have to wait to get an accounting system in place to start doing the simplistic accounting of – Revenue COGS gets to gross margin. Gross margin minus direct labor gets to contribution margin. And looking at those, and then also the other that I mentioned is looking at profit to gross margin. I mean, yes, you might have to take your data out of QuickBooks or whatever accounting system you use and put them on a spreadsheet to do a calculation. Hey, it will take you 15 minutes. It's worth it. Don't look at that as an impossible barrier. that I've got to take data and reformat it. And in QuickBooks, hey, you can, QuickBooks, you can print a P &L to an Excel sheet and then just do some quick math on it. I mean, you can do it in five minutes. So don't let those things be barriers to getting better insight and better data. Use what you got. And then as you become comfortable with what it's telling you, Then you start to evolve to systematize it, and then you look into better ongoing systems and processes, you know, that'll help you take it to that next level. But I think also the other thing is I am super, super big on people being part of peer groups and going to conferences like the one where we met at. You know, do not be like this with your company. You need to be like this. You know, open the kimono and just be out there. And because those are the businesses that learn and grow. And if you, and if you're afraid to let everybody know just how bad your books might be or how low they think you're profitable, but you're really not, that ain't helping you, you know, be honest, be real and get better. And, and when you do those things, but you're not alone. I mean, everybody runs a business. I think I said this to your group, you know, when you run a business, all of a sudden your peer group changes. All of a sudden, everybody who used to have a job, you know, that was your friend, when they start telling you about their problems at work or what their boss did to them, you have to bite your tongue and kind of, because you agree with what the boss did, because you understand, because you've been in that seat. And all of a sudden, this loneliness starts to set in being an entrepreneur, because, you know, if somebody else is not an entrepreneur, they don't understand. They don't understand the risk that you take, the pressure that you're under, the responsibilities that you take for people who you care more for them than they care for their own situation in so many times. And so there's groups out there all over the place to connect with and plug in with. And you need it because if you're out there swimming by yourself. It's a big ocean and you're going to drown.

I'll tell you, though, part of that is a lot of those folks are all hat and no cattle, too. They got big revenue businesses. And I mean, I, I'm the times that we go in and look at people's data and I'm going, Oh my goodness, we got to fix this. And it's like, I mean, they're, they've got the reputation and, and you get them in the room and start going through it. And you can tell they it's the imposter syndrome at best is they, they feel like they're an imposter. And the only way to get out of that is you got to be open and honest about what's truly going on. And yeah, I mean, you're not going to share with everybody, but you've got to have that peer group, you know, that, that helps you get through. Absolutely.

Yeah, the 2.0 book definitely goes into a lot more case studies and higher level detail. There's a couple of sides. The book site, it's got links to Amazon. You can go direct to it or just go straight to Amazon. But gregcrabtree. net is my speaker website. But the company website for consulting services is simplenumberscri. com. We're a subsidiary, a special purpose unit for Car Rigs and Ingram. We're a top 20 U.S. accounting firm. So it's a big group. But we're just this focused unit on just helping people run a more profitable, successful business. You know, and certainly, you know, those are, you know, you can reach out, email contacts are on those pages. And so I'm probably the easiest person in the world to find. If you Google Greg Crabtree or simple numbers, you will find me with great ease. So fortunately, there's not too many people like that name. I'm in good shape. Awesome.

Yeah, I really appreciate it. Thanks.