Episode 70 - Losers are Winners: The Costly Confusion That Nearly Sank My Business

Losers are Winners

Dec 10

Episode #70 | Losers are Winners | The Costly Confusion That Nearly Sank My Business

In this Losers are Winners episode of The Curious Builder, Mark keeps it real about how builders can actually keep more of the money they earn—mainly by understanding the difference between markup and margin (spoiler: he wishes he’d known sooner!). He shares honest stories about lessons learned, why it's so important to know your numbers, and how sticking to your value can lead to happier clients and better builds. It’s a super practical, down-to-earth chat packed with advice for anyone wanting to run a smarter, more profitable building business.

About The Curious Builder

The host of the Curious Builder Posdast is Mark D. Williams, the founder of Mark D. Williams Custom Homes Inc. They are an award-winning Twin Cities-based home builder, creating quality custom homes and remodels — one-of-a-kind dream homes of all styles and scopes. Whether you’re looking to reimagine your current space or start fresh with a new construction, we build homes that reflect how you live your everyday life.

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Mark D. Williams 00:00
For those have been following the podcast for a while. You know, we're very interested in the wellness space and promoting wellness among our entrepreneurs and our community. We do have sauna camp, which is coming up in Minneapolis on March 20, from two to 8pm we did this last year. Tickets are now available online. We've got Ryan Rivard, he's an Iron Man athlete, as well as an Everest summiter. Alex Larson, who's a nutritionist and Iron Man finisher, and we have a psychiatrist that we're bringing on as well. And the whole concept of this particular podcast will all be about wellness, prioritizing training, prioritizing your mental health and your body. As business owners, after that initial wellness podcast, we'll be going straight into the saunas. So after two hours of sauna and cold plunging, we have fumo, which is amazing Mediterranean style dishes, and it's all grilled outside by wood fire grill, and just really ends the evening on a high note. So if you're interested, head to cures builder.com under retreats under sauna camp that is going to be March 20. Ian,

Mark D. Williams 01:04
this episode is really just, how do we keep more of the money that we have earned? Because at the end of the day, I'm still going to put the same product out there in terms of quality time into it, like it's going to be a rock star home, for sure. That's my reputation. But I want to do it once, and the subs do too. No one really likes to do things twice. All right.

Mark D. Williams 01:28
Welcome to curious to the other podcast. I'm Mark Williams, your host. Today is our Thursday episode, Q and A, this is kind of going to go under our losers are winners series. And I've alluded to this a lot before, and I think it's really important for us to know this, but I had mentioned that I didn't know the difference between markup and margin for 17 years of my business. It wasn't until I went to contract a coalition summit where we were going through all our numbers, where I really became clear at how much money I'd left on the table over 17 years. At that point, I literally millions of dollars I lost by not knowing the difference. And one of the reasons why we have the podcast is to talk authentically about our mistakes, to have guests on to talk about losses that they've had, so that we can all learn from it. It's why we have the curious collective so that we can all learn from each other, whether it's AI or client experience or profitability or multiple revenue streams, all this is an effort to basically become better. So I want to talk a little bit about this episode, just what the difference is between markup and margin. And even if you know the difference, great, it's really just understanding your numbers is the root cause of it. And I think I know that early on in my career, I certainly I hard bid everything. I always have, I probably always will, and I don't really do estimating. And so, you know, I always had a good handle, you know, on my on my numbers for framing and lumber and plumbing and all those things. I think as my career progressed, I was better at understanding the true cost of what it cost, you know, to build a high end custom home. And so throughout the years, I think all of us have done this. Depending how far you're in your career, you're adding things like site protection or cleaning, or you're adding things like duct cleaning, you're adding, you know, window cleaning, porta potties, you know, all the stuff that's not super sexy that clients don't see. But if you don't have it on your sworn construction statement, that means you're subsidizing. That means you the builder, you're paying for it, and it is a cost that your homeowners should pay for, and they they should want to pay for it, because a a job site where people want to work is going to yield a better result. You're going to build a better product if you charge the right amount. And also, it's not sustainable as a business, to run a business that is not profitable, it's just simply not going to work, you know. And we've all been in cycles where we've either lost money or we've had some down years or down months. And so I get that, but as if you you're not going to make it in business three years, five years, 10 years, multiple decades, multiple generations, without having a profitable business where you know your bottom line. So I think before we dive into markup and margin, I think, I think the biggest thing really is really take the extra time to know your numbers. And I know I made this mistake all the time, where I would be meeting with a client. I always work better under deadline, where I would put the time on my schedule, where I was going to meet the client. This is years ago, and you know, I was still getting bids in the night before or even the morning of, and you're still tweaking your proposal. That's just not a great way. We would have been far better off, or I would have been far better off just telling the client, saying, like, I need a week. I have all the numbers, but now I need a week to put them all together. And, oh, by the way, by taking the time and really digging deep on the numbers you're going to drill on where your subcontractors missed something. It's not like they're usually doing it on purpose. Usually they didn't read the spec right, or they didn't read the you know, they didn't read the plans right, or they're just they weren't considering something, or they just brought out missed something, because we need all that time to follow up, ask questions. And I think that's one of the benefits of having trade partners that we work with over and over again. You get a real good sense of where their numbers should be. And I think one of the things that's nice about either a lead estimator or someone who's been in charge of their dollars for long periods of time, is because I've been doing this for 21 years with largely, you know, the same people, you know, I can look very quickly and see quite quickly what numbers seem sort of out of line. Now, as tariffs rear their ugly head, inflation like the numbers start getting bigger and bigger. So you kind of need to stay in that estimate cycle on a really regular basis, or you can get out of touch with your numbers super, super quick. And I do know, I mean, I think covid taught a lot of people, especially people who are doing fixed bid. You know, if you weren't updating your numbers, you really got burned. I was so fortunate that time that I had a a couple big projects through that time. But B we were cost plus. And so cost plus definitely is, well, it's a lot more work, a lot more documentation. It really fits my personality of just being very open, being very transparent with the client. In fact, have one number of jobs because of it, and also it, there's some insulation. I mean, if the cost of something goes up because of market forces, like the client is taking the risk, you, as the builder is not taking the risk. And I think if a if you choose to do fixed bid construction, which is totally fine, as long as you know your numbers and the client has made all the selections your plans are rock solid. There's no reason why you can't be very, very successful. Some of the most profitable builders I know are fixed bid builders, but they know their numbers and they're rock solid with them. But you hear these horror stories where people, let's say, do a similar type, home, semi custom, or or more production built, and they don't update their numbers. Well, they're signing a contract on unknown, and if those numbers go up like they're eating it. And so anyway, this is all. This episode is really just, how do we make, how do we keep more of the money that we have earned? Because at the end of the day, we're still, I'm still going to put the same product out there in terms of quality time into it like it's going to be a rock star home, for sure. That's never really been something that I was willing to compromise on, sure, different things that we put into, some are more expensive, some aren't. But, you know, I like to joke with my clients, it's not like, if you want to make the house less expensive, you know, I'm going to tie a blindfold over the painter and just have them just go to town with a paint gun. Like, bad quality is not how you get something cheaper. That's just not, that's, I mean, that's not what I'm interested in. I want, you know, it's my reputation, but honestly, it's just, I want to do something. I want to do it once. I really in the subs do too. No one really likes to do things twice. I remember, years ago, I had my framers, who Mikey now is my project manager, but for years, they would never frame the fireplaces as they were drawn on the plan. And this was before I was using architects and having really skilled 3d drawings and things like that, so where you can envision in all of this, but it was just 2d and it was just very simplistic architectural design at that time. And for whatever reason, fireplace were always kind of my hot button. And so I think what I was notorious for doing is they would frame the fireplace like it was drawn on the plan, and then I would get there and I'd hate it and make them rip it out. And I did that enough times that they used to have this motto that they would never frame the fireplace unless I was there. Anyway, just kind of a funny memory. Now I haven't thought of that in a decade or so. Well. Anyway, back to the margin and markup for this model. I'm just going to use 15% so I've got a couple examples here, just to put it out there. And we can get a lot more we get a lot more granular in the collective but way more granular in the contractor coalition Summit. We'll spend a couple hours on this with examples sworn construction statements, and we're not going to do that on the air, because it's too confusing without kind of a spreadsheet to walk through. But just simply, for those out there that don't know, and this is where I think, by the way, a lot of business owners that were in corporate America or have a real strong financial background have a huge leg up on being an entrepreneur and being in construction in general. A lot of us get into construction, myself included, because we like building, we like the trades, we like design, but we didn't have the financial background, we didn't have the entrepreneurship training, so we just didn't know. I mean, you don't know what you don't know. And I remember, you know, my dad used to tell me this. This was 21 years ago. You know, he used to charge 12% for his for turns out it was markup, not margin. And he said, If you net at the end of the year, 12% he must have been making higher. I must have misunderstood him, because even if I charge my client 12% markup when I did my taxes and I did my returns at the end of each year, you know, I was probably, I was, for sure, single digits, probably 678, percent net. But your your CPAs, they report in margin. And I could never figure out that, even if I charge my client 12, why I was netting 678, whatever it was. And in hindsight, I'm kind of upset that my you know that my CPA never explained the difference. They know the difference. They would have been a prime opportunity to teach a young 2325 27 year old kid what the difference between markup and margin was. And I think their solution was just, you know, raise your rate. And it is true. I mean, you know what we'll talk about today, like, essentially 15% margin is the same as 18 and a half percent markup. And so there is a conversion there. But then I think this is where it comes into, you know, if you're doing cost plus, like, there is the optics test, like, when you're wherever you are in the country, whatever your rate is for remodeling, for new construction. I'm just picking this 15 number, just for an example, is so that people can relate to it when they're listening to it, and your clients, when you sit down with them, especially in a Cost Plus model, like we show them everything. We show them every single plumbing, concrete, all the stuff. If they want to see a bed, I'll be happy to show it to them, because we're building this together. It's how you build trust. It's how it's how I want to build a house if they want to change something Sure, no problem. What do you want to change if you want the cost of the house to go down? What do you want to change? And it's gone great. The homeowners, you know, at least for my clientele, are mostly business owners. They have to face these exact same questions for whatever business they are so they understand it. Then the more sophisticated we are as builders or as entrepreneurs, as I like to keep saying, the more that the clientele that we work with like it.

Mark D. Williams 11:10
This episode is brought to you by adaptive. If you're still chasing checks and juggling spreadsheets, it's time to upgrade. Adaptive is revolutionizing how builders get paid with AI powered bill pay, automated draws, one click payments and built in Lean waivers, Faster Payments, fewer headaches and total visibility. Adaptive takes care of the back end chaos so you can focus on what you do best, building. We've used adaptive for two and a half years, and trust them to keep our projects moving and payments flowing. Learn more at Adaptive dot build and simplify the Pay Process today. For more information, you can also listen to episode 10 and episode 15. So going back to this markup thing, I'll just talk about audibly here, since we don't have a spreadsheet up for this, but essentially, I'll use an example of a million dollar house. Million dollar remodel. Doesn't matter. We're just doing it for easy numbers. If you have a million dollar build and you do 15% markup. And so the way you do that is simply 1 million times 1.15 your sale price is going to be $1,150,000 you are going to earn $150,000 so the reason I say that is essentially you can't factor in the cost of the home and then your profit as well. So this is the way to get that. So the client, you made 150 grand, the clients paying 1.150 if you do 15% margin, it's obviously a little bit different here, and I'm going to explain why. So now you have 100 your cost is a million dollars, and you have 15% margin. So your client is now you're basically taking a million, dividing it by point eight, five, and the sale price is 1,176,470 so you're basically making 176,000 so the delta between those two, between 15% markup and 15% margin on a million dollars, is $26,000 but here's where most people in my experience, and this is where I got it wrong too. I used to take a million dollars, and that was my sale price, and you have to deduct because your true cost, let's say on a million dollars. If you were doing 15% you would think, I need to make 150,000 you were, in your mind, you thought it was margin, but you're really doing markup. And so that means it was really 850,000 was your cost. You were basing your profitability on a million dollars, when really the cost of goods was 850 so we actually made even less than that. So you can kind of do some of these scenarios. I mean, pump them into AI and run a number of scenarios for whatever market you are in around the country, if you're doing markup or margin, it actually doesn't matter. You just need to know what you're doing to know your numbers, so that when you charge your client, you can have the expected payout at the end. And this is where I think it's important to be really clear with ourselves, but I think demonstrating how how we know our numbers to our clients, even if it's higher or lower than what they what they think it should be, is sort of irrelevant. It's really just you demonstrating that you understand the cost of their home. And what happens is, is that they look through this long list. It's like a visa bill for the year. You know, you look at your summary of all the things you spent your money on, and then they isolate the last thing that they see. Well, the last thing that they see is your GC, margin or markup, depending on what you're charging. And that's the number that they fixate on, because it's a number they think they can control. So inevitably, they want to try to get the price down. So what do most homeowners do? They ask the builder, saying, I don't want the house to change at all. I want you to lower your margin or your markup, and so then it's a conversation where I think it's a real opportunity, and this is something I learned a lot later in my career, where I think it's an opportunity for you to educate the client of you know why you're being paid, what you're being paid, and the numbers above. Line item. You can't get those numbers from just anybody you know, for I can just speak for myself, and we do. We're a high end custom home builder, you know, you can't just pick any plumber, any frame or any trim or any cabinet guy, any painter, and get the same results. So it's not based on numbers. It's based on relationships, and the relationships that we have. Yes, we do have multiple trade partners per category, because they can't always do our work, and we have to have Plan B and Plan C, but they're all really a talent, and so you're explaining to your client, you know that they're you're managing their money, you're managing their expectations, you are managing their build, and if you're doing so in a good way, you're actually making whatever money they want you to take a concession. You're actually making that back. And I'd like to focus on value. I don't really like to focus on the cost. I mean, I'm not saying the cost isn't important. But if the client tells me in this example, like, Hey, this is a million dollars, we want it to get down to 800,000 no problem. Let's sit down. Let's look at every single line item, and we're going to get there together. But the solution isn't to just kind of a race to the bottom. If they say, I think our industry, the reason I'm doing this episode is to just put it out there very blankly that, you know, just because someone else is willing to slash their bottom line to do the work, I don't think you should. I know. I don't. I think it's an again, it's an opportunity for us to tell the client, like, the reason you're building with us, and the reason you're choosing to move forward with us is because you were attracted to us because of our past work, or because of our reputation, or the quality of the of the work that we do, and if it's any of those things, then for us to perform on that, that's what it's going to take us to do. And you know, lately, I've been in interested in listening to podcasts about cars and just, you know, different brands. And you know, it'd be like, you know, going to Ferrari dealership. I don't even know what Ferrari cost, but let's just say it costs 250,000 and being like, Hey, I love the way this drives. I love the way it looks. Man, does this thing roar when you when you floor it. But I'd really like to buy this for 100,000 I mean, that's no one would do that? Because you all know that no one would agree to that, like you are attracted to the Ferrari brand because of what it's, what it represents, the performance behind it. And here's the other spoiler alert, what other industry shows you every single line item that goes into it while you make it? I mean, when you go car shopping for this analogy, I mean, they show you the MSRP on the sticker window, or they might show you a few comparisons, and they have maybe a list of like 10 upgrades, like a sunroof or seat warmers or different hubs and things like that. It's not that they won't try to upsell you, they certainly will. But there's like 10 of them. There's not that many. Think about a house. There's 1000s of things you can add. And so really the best way, at least the way we do it in high end custom work, is we just show you everything, and we build it with you. And our job is to make it not intimidating, because it can be a little overwhelming. Again, that's all a story of how we it's not about justification. It's a reason, and it's a story behind what we charge, what we charge. And if you stand your ground and say no. And I think the first thing you have to do is you have to believe your own value proposition. If you don't believe it, why would another homeowner believe it? And so I know that when you you know, when you look your clients in the eyes and you say, you know to do the work that you're expecting, this is what we need to get paid and what we need to pay our people. And I've done it before. I mean, there are times where you have to make a judgment call. Could be that special project. It might be an architect you want to work with. It might be an interior designer you want to work with. It might be a piece of property or a client or a friend or a family member or whatever. Just know that once you start I'm not saying that you can't give concession. I'm not saying you can't do things for your clients. I think you should, I think you should think about what means something to them. But if you start off the relationship by saying, the first sign of trouble is that you're that you're going to take responsibility for it financially, I think you've set a daydream precedent. And Ian, the reason I'm sharing this story is I have made this mistake many, many, many times, and I'll probably make it again. Hopefully I'll listen to this episode and remind myself to you know, to stick to my guns and and sometimes losing a losing a client that wasn't your ideal client is the best thing that can happen to you. This

Mark D. Williams 19:16
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I just interviewed Vince Longo. His Episode will air here in a few weeks, and he had this story where it was going to be like he's down in Atlanta, you know, one of the best build opportunities he had early in his career. It was going to be a huge difference maker in his career, and he got a really clear sign that he should not take the job, that it was going to be bad for his career, and he just didn't listen to the answer. Finally, he ended up face down in the grass and realized it was, it was a pretty strong moment. You have to listen to that episode of what he shouldn't do. And sometimes, what makes us great and makes us optimistic, also makes us blind to reality, and that's why we need a peer group. That's why we need people on our team. I think it affects us all kinds of different ways, even like interviewing like I've decided personally that I'm too optimistic, which I think is a good thing. I don't think it's a negative thing, but I it makes me really bad at interviewing people, because I just want to hire everyone, because I think everyone is great. So from here on out, you know, I've sort of made my team hire people. So when people reach out to us and want to work with us, which I'm very flattered that they're attracted to work with us, and we need, you know, people obviously coming up, I will then, you know, give it to Joel on my team. He runs a first pass. And so just, I guess, just understanding, you know, where you are at as a company is just not only going to help you, but it's going to help your clients too. And I think and I think I know that there are clients where I've said no to and they respect you more because of it. You know, sometimes it's kind of like that old adage, if you don't ask for it, you'll never get it. There are definitely clients out there that will test that boundary. They will ask you, like, Hey, will you do the same amount of work, but we want you to do it for less? And here's what I think is kind of a cool little c want I don't like that phrase, dirty little secret. This is a secret that I want to share when clients don't ask for concessions on what we should make while we build. Guess what happens? We give it to them. Ask yourself this question. I know this is true for me. Your best clients that you've ever had in your career? Did you make? Was your margins the best that they've been? I would say yes. Did they get the best service and the best build? And are they your happiest clients? Also Yes. And so I think there's cause and effect here. I think when you know that your client appreciates the work that you do, and when your client is paying you what you think you're worth. Because no clients gonna come to you and say, Hey, I'd love to pay you more. You did a great job. You know, it's not like there's a I wish That'd be funny if there was a hey, just so you know, on this contract, there's a 20% gratuity tip at the end of this bill. That'd be amazing. I wonder if my lawyer would allow that. That would be pretty funny and but, and my point is, is like, by them agreeing to pay you what you are asking, you now have the ability to give them more than they asked for. Now, when there comes up, there is something in the build that doesn't go well, you can take care of it. When something comes up in the build where you think they just need a little bit of help, or there's something that, you know, sometimes we fight for the design, or, like, I think this is really amazing, and the client, the client isn't going to pay for it. And you say, You know what, I've got this. Like, we had a situation the other day where there was a pantry and they they were going to save money and go to, like, beautiful custom kitchen, gorgeous home. Love the client, love the build, love everything. But it's just a real financial deal where they're just like, You know what, we've got to cut money somewhere. We're going to take this very visible pantry and we're going to put melamine in it. And in my mind is like, over my dead body, like this is way too important, and it's probably not the best practice to pay for our clients build. But I just felt that was really important to the architect, to the designer, to the team, to the end product that this be done. I don't know the cost probably going to end up costing me about five, 6000 and I just told the client, I said, How about this? Is my early Christmas present to you. I will pay for the difference between the custom cabinetry upgrade and the melamine cabinets. And my point is, is that client never really asked for concessions on, you know what we were charging them. And I appreciate that, and I want to, and I didn't, maybe listen this episode. Maybe they won't, maybe they don't even know who they are, but that's not the point. The point is make sure you know your numbers and make sure that you stand by your numbers, because that's what it takes for you to build the home that you want to build. And if you do that, you will have a better build, you have a better client, and you will be a better business. Until next week, thanks for tuning in the curious builder podcast. Thanks for tuning in the curious builder podcast. If you like this episode, do us a favor. Share it with three other business owners. The best way that we can spread what we're doing is by word of mouth, and with your help, we can continue to help other curious builders expand their business. Please share it with your friends. Like and review online, and thanks again for tuning in.