If you're not earning profit fast enough to cover your fixed expenses, your overhead expenses, you could have gross profit, but you don't have enough of it fast enough to cover your expenses and that's where you go bust. One of the most important metrics to measure in construction is, I'll tell you here in a minute, but this is the most important metric to measure because if you're not paying attention to this in your business, you could be making money. You could be profitable on every single job and you can still go bankrupt.

Let me tell you a quick story here. A contractor came into my office years ago and he was like completely discouraged. He was frustrated. He was like sad. I mean, all this stuff. He's completely broken. He's like, Steve, I'm like one week away from shutting the doors of my business. And I was like, what the heck's going on? He said, let me see your job profitability report. And so he listed out all of his jobs for me and we looked at them and guess what? Every single job was profitable.

And he's like, I don't get it. How can I be profitable on all these jobs, Steve, and run out of cash and go out of business? He's like, it makes no sense. And that's when I explained the concept that I'm going to explain to you right now in this episode.

This is the most important thing to be measuring. So if you're not, I'm going to show you exactly how to do this in your business. It's called throughput.

Throughput is some financial measure divided by some element of time. Let me explain. The easiest way to measure throughput is by taking revenue, right? The amount of money you're going to earn on a contract, your contract value, and dividing that by the number of hours to complete the project. That will give you your revenue per hour.

Now, here's the caveat. Revenue doesn't equal profit. So ideally you're going to be measuring gross profit or operating profit as a function of time.

So in other words, gross margin per hour, operating profit per hour, or you can even get fancier — cashflow per hour, right? The problem with those items, gross profit, operating profit, or cashflow, is that they're typically lagging in measurement. So when you're doing a job, think about it. It's easy to compute revenue per hour.

You take the contract value divided by the estimated number of hours or the actual number of hours accrued on the project so far. But when it comes to gross profit, you have to turn in your receipts for material purchases. Payroll has to be processed, et cetera, to account for all the costs in order to compute gross profit.

So it's lagging. So obviously gross profit, operating profit, and cashflow are better metrics after the project is done to evaluate whether or not the project was a good fit for the business and whether you made money. But in real time, you can very easily implement throughput as a function of revenue per hour right now in your company.

So here's the deal. I went into a company years ago and I was turning them around. They had the belief that retail was a terrible sector to compete in.

They're a general contractor. And they believed instead that data centers and healthcare was a better sector for them to compete in because the margins were higher. The fees were higher, right, on their project management.

But then I started doing an analysis on throughput. And here's what I found. Although retail had lower fees, lower project management fees, they were actually earning profit faster as an element of time compared to healthcare jobs because the healthcare jobs had a lot of mobilization and setup.

And then you had to be careful because on the other side of the dust wall, they're performing surgery. And if you got dust in the HVAC system, God forbid, you'd kill the person in surgery. So construction was so much more technical.

And then the closeout process was more arduous. And so these projects just dragged on and on and on. I'm not saying healthcare is a bad sector.

You could be very successful in healthcare. I'm just saying for this company, they didn't have the capabilities and the specialization in healthcare to be successful. So their throughput was terrible.

Now, when I explained this to the CEO, he's like, Steve, it doesn't matter. Profit's profit. We're going to earn it over a certain period of time.

So why does it matter if we earn it over a month or two months, it's still the same amount of profit. And I said, that's where contractors get into trouble. So let me explain.

Let's say I told you, I have a job for you and I'm going to pay you $500,000. And you're like, wow, that's a great salary, $500,000. And then I say, oh, well, I forgot to tell you it's over 50 years.

And you're like, that's terrible. That's even below minimum wage. You're ripping me off. Right? So the element of time does matter.

So when I was running my own business, my own specialty contractor business, when I realized that throughput was a huge determinant in the success of my business. And when we started tracking it, everything changed.

We went back to our strategy. We changed our market focus and position. We started pursuing jobs with high throughput — the jobs that had a lot of hardscape, a lot of masonry involved with it that really slowed us down.

We stopped doing those jobs or we subcontracted out those scopes. So then our teams and our crews could focus on the highest throughput activities because that's how we generated profit faster and faster with our company. So that's what you have to understand.

And it's hard to illustrate as I'm just explaining it to you right now. But what you could do is with your bids starting right now, you can have a spreadsheet and you can put your contract value in there in one column. And then you could have your estimated hours in the next column.

And then just do the math — contract value, your estimated contract value divided by your estimated hours. And then just see what your revenue per hour is. Now, like I said, gross margin per hour is better.

So you could do that. You could add another column, but just look at your revenue per hour for simplicity's sake. Then you'll start to identify which projects are going rogue before you submit the bid and you take on this contractual work.

And when you start doing this, because this is what I did in my business, I realized, oh my gosh, there's a problem here with this bid, right? We're off on our labor hours, or maybe we need to add more markup because the throughput is lower or we just turn down those jobs and we would go after other jobs with high throughput. So you have to start tracking this in your business and then you have to communicate it out there in the field.

And that's why it's important to start with the bidding process because then you'll win the job. And then you can explain to the crew, look, we need a throughput of 200 bucks per hour on this job in order to be profitable.

So if you explain that to your PM or the CM or your foreman, whoever's in charge of putting the work into place, then they'll have a target. And then when they're doing scheduling, they'll know, okay, I got a four-man crew. We're going to do this job in five days, do the math there.

Okay. That's 150 bucks an hour. That's a problem.

Maybe you need to get done in three days. So it will give better targets to your teams. They'll be able to increase their production rates.

They'll be more efficient out there in the field. And then you'll be able to recalibrate bidding and operations when you're measuring the same thing on both sides of the equation, because remember that's where most of the friction happens. Estimating is like, field operations are too slow.

Field operations are like, estimators need to add more hours to their bids. But estimators are like, we can't add more hours because our bid price is already high and we're priced out of the market, et cetera. And there's this clash and measuring throughput will help you to overcome this. So this is a huge lesson that I had to learn over and over again in my career.

But once we started measuring throughput, everything changed. And going back to that retail versus healthcare example, once we did that, we changed our strategy and we pursued more retail jobs and guess what? Profit increased. The business turned around because we were focusing in an area where we were recovering enough margin to cover our fixed costs in a timely manner.

And that's what it comes down to, because if you're not earning profit fast enough to cover your fixed expenses, your overhead expenses, you could have gross profit, but you don't have enough of it fast enough to cover your expenses. And that's where you go bust. Right?

Do you want to hop on a call? I'm happy to explain this to you, walk you through this and help you to implement this in your business. We could talk all about that. We offer a free 20 minute strategy call by going to coltivar.com.

So if you are in the construction space, if you're a contractor and you're interested in learning more about that, be sure to go to Coltivar and check that out. We also have a lot of great tools on our website, calculators and whatnot that will help you in your business. And we have a free training for the construction industry. So be sure to check out those resources that we have available to you.

Right. That's what I have. And until next time, take care of yourself. Cheers.

One of the most important metrics and they had the belief that where we were, where we were recovering, where we were correct. Where were you? Okay.