The Biggest Hiring Mistake Residential Contractors Make in Today’s Labor Market

The Biggest Hiring Mistake Contractors Make in Today's Tight Labor Market
Over 16 million Americans relocated to new cities or states for new jobs, new lifestyles, and new homes during the pandemic recession. Arizona, Colorado, and Idaho topped the list. 

Every so often, the tectonic plates that hold up the U.S. housing market suddenly shift in ways that rattle and destabilize everything on the surface. The same seismic forces can also create a surge in new and different homeowner demands.

That’s exactly what happened in 2020. At the height of the pandemic recession, the U.S. had 32 million unemployed workers filing jobless claims or closing shop. That, on top of months of schooling and working at home, caused many working Americans to rethink their life priorities. Over 16 million Americans relocated to new cities or states for new jobs, new lifestyles, and new homes during the pandemic recession. Arizona, Colorado, and Idaho topped the list. 

On the other hand, millions more remained gainfully employed with reduced expenses from remote work coupled with no travel vacations. Their savings accounts grew and grew. Many made big investments in retirement and real estate nests: digital home offices, basement additions, modernized bathrooms, luxurious outdoor barbeque patios, upgraded kitchens, and those long-wished-for second homes.  

You know this. The waitlist was long. You might be starting a job now that landed on your doorstep 8-12 months ago! 

This is the big one, right?  

Here we are, almost two years later. Still in one of the biggest boom markets of your lifetime. Show me the money! Do you feel it showering all over you? Do you have enough profit left over to get rid of all past debts and squirrel away cash for the next housing bust? Or at least hire more people to help with the job load? 

Because here’s the thing: Work is everywhere, but workers aren’t. 

From April-November 2021, millions of American workers have voluntarily quit jobs each month reaching a record high of 4.4 million resignations in October. They call it The Great Resignation. The Big Quit. Optimists among us call it The Great Shift. 

And It’s far from over. The quitters don’t necessarily have a new job lined up. Most are just fed up, frustrated, or worn out. They want more out of life. They are looking for a greater sense of purpose in the work, a positive culture, good managers, and yes: better pay and better benefits. 

Just like you do 

By now, you should be buying a fancy new rig, taking the family on fine vacations, paying others to run parts of your business, being able to pay the best people with the best pay, and maxing out on your retirement savings. It’s time for your just rewards.   

If all of that has already come true for you – well, you’ve earned it – good for you. If not, doing the same thing for the next two years will not change anything.  

What’s to blame? Shutdowns? Materials pricing? The tight labor market? Or just the fate of being a small business owner?  

No, it’s none of these things. You’re looking in the wrong direction.  

First, let’s look at hiring

When building your bids, what is your budget for estimating, project management, field production…even subs? You need to start with a budget and work backward to price the job correctly, right? If not, you won’t have enough to pay your people. 

It’s the same with hiring. You need to budget in advance for that innovative marketing or sales rep. Make sure their costs are built into your price before you even think about recruiting them. 

But unless you can accurately predict your future revenue and nail your profitability (the money left after materials, special equipment, labor, and operating expenses), the biggest hiring mistake you can make is hiring anyone at all.

If you’re like most general contractors, the bulk of your frustrations come from the staffing side of things. So, do you really want to hire more people to train and manage? Easier said than done. Even if you did want to staff up, how well can you compete for strong players in today’s labor market – with higher expectations around pay, benefits, autonomy, and flexibility? 

Wouldn’t you rather improve your profits with the crew you have – rather than hire more people to do more jobs and still walk away with the very same profit level? 

You see, the biggest mistake contractors make is ignoring their profit margins – and yet those margins are the biggest indicator of business success. Sadly, the average profit margin in residential construction is far too low considering the life-changing value you to deliver to homeowners. Spending more money to put more people on the payroll only worsens that situation. 

So, I’d like you to reframe your thinking from more…to better.

It’s about money you KEEP, not just the money you make

The question is this: do you want to make more money, or keep more money? I think you’d rather keep it for your family, yourself, and for your existing loyal team. That way you could provide better pay, benefits, career development, skills training, and keep your inside expertise inside. If you’ve done all that, I bet you’d like to keep some for future retirement.  

If keeping more money for a better quality of life is really what you’re after, then choose the easier, safest, more reliable path to prosperity. That’s not hiring more people. It’s not taking on more jobs. And it’s not cutting pay and benefits when the labor market is so competitive. 

It’s doing just one thing: fixing your profit margins

Let me be clear: that is different from charging more or price increases for your customers. Margins and mark-ups are completely different things. (Aspire covers this in our one-day Business Owner Workshops). 

To nail your profit margins – job by job – Aspire ensures you allocate labor costs appropriately across jobs. For example: build your own labor cost into the job equation too – say 20%. Don’t just give away your time for free. 

Profit is different from revenue or total sales – it’s what’s leftover. Revenue is all the money you make before subtracting out the cost to build, namely: project management, preconstruction job organization, materialsspecial equipment, labor with a properly calculated tax and benefit loadsubcontractors, productivity tracking and management, change orders, and any operating expenses specific to that job such as gas mileage, site permits and more. After you take all that out, you land on your Gross Profit

Once you’ve nailed your Gross Profit job by job, you still need to subtract fixed operating costs to get the total picture of your business. Fixed costs are things like office space, administrative staff, and technology (computers, software, subscriptions). Those costs are spread across all your jobs. That final bottom-line number is called your Net Profit 

Whether it’s Gross or Net, those profit margins are far too low for today’s general contractors. 

If you want to hire in today's competitive job market, custom home builders and remodelers need to fix their profit margins to afford new people.That’s why Aspires focuses on profitability as the ultimate measure of business health – rather than revenue, sales, or job volume. Because increasing those things can translate to more stress, burnout, and chaos but not more take-home pay for you or your team. That makes it hard to find great people. 

Fixing your margins means redesigning your business strategy and remodeling your business processes – from estimating and production, to sales, marketing, and yes -hiring.  

Becoming a profit-driven employer

With a profit-driven business, you can control how much of every revenue dollar you get to keep. That number is often expressed as a percentage called a profit margin. If you’re down in the single digits or teens – say, 2, 6 or 15% like we see so often – you’re not bringing home what you’re worth. 

What Aspire shows you is how to make substantial gains in your profit margins – so you keep more money. When it comes to hiring, we focus on your gross and net profit margins – because they’re the single most important indicator of who to hire (what skills and expertise), when and where to hire (labor market), and for how much (salary range). 

Unless you have a clear line of sight on your future profitability, you may not know whether you can afford to keep those great hires long-term. That’s churn and burn, and it’s expensive. 

High employee turnover in construction is double the industry average

A “healthy” employee turnover rate for businesses is 10%. But the construction industry’s turnover is more than double that at 21.4% (source: ADP Workforce Vitality Report). The cost is huge. As a percentage of income, turnover gets increasingly expensive. For example, for a construction employee who makes: 

  • $30,000 or less, the cost to you is 16% of annual base salary or $4,800 
  • $50,000 or less, the cost is 19.7% or $9,850 
  • $75,000 or less, the cost is 20.4% or $15,300 

And upwards we go. 

Talking about big profit leaks, employee turnover is huge for home builders and remodelers. So, it’s a significant risk when you hire someone you can’t afford during the boom-and-bust cycles. Sure, they might stay for six months, but then they’ll leave for a better offer – along with all that knowledge and customer loyalty. 

What you can dial up right now is retentionKeep the talented team you have with meaningful work, great career growth and development opportunities, better pay and benefits, a positive work culture, well-managed processes, and profit margin discipline. Smart leaders have also rediscovered “The Stay Interview” – the opposite of an exit interview. Instead of asking why an employee is quitting, a stay interview focuses on what motivates the employee to stick around. Your questions focus on what could be better about their work experience, and how they envision the next stage of their career. 

All these strategies are within your control – especially now when people are quitting jobs not because of pay, but because of toxic work cultures, unethical or greedy managers, chaos due to lack of process discipline, and burnout from too many hours, or not enough appreciation. 

For 2022 and beyond, you have a once-in-a-lifetime opportunity to woo away employees who long for a higher sense of purpose and outstanding management practices. 

Since November 2021, according to LinkedIn job surveys, more people are looking to change careers and industries now than any time in recent U.S. history. Younger employees – namely Millennials (born after 1980) and Generation Z (born after 2000) are especially eager to move in a different direction compared to older workers. What’s more, women changed careers 10% more than men since March 2020. Take note since we are seeing more female business owners and workers in the construction industry than ever before. 

The Great Resignation has shown us indisputably that people value a healthy work environment far above a paycheck alone. That doesn’t mean poor pay and benefits which can be related to poor profit margins. It just means today’s employees across generations highly value other aspects of your work environment. 

Fixing your profit margins is critical to attracting and retaining the best talent so you can afford them!The best part of fixing your profit margins is this: Not only can you afford to hire highly skilled talent, but you’ll also discover that you don’t need as many as you thought. 

That’s because becoming a margin-driven business – versus revenue or sales-driven – makes you far more efficient. That efficiency is what affords you the time to do the things you love. If you prefer the business development side of things, it allows you to hire a professional project manager or part-time HR expert to find great new talent in unusual places. Or, put a succession plan in place for your lead carpenter or best estimator – so you’re not left in the cold one day. 

Profitability and people go hand-in-hand

The biggest reason that contractors make big hiring mistakes in tight labor markets is from looking at the wrong measurements – namely, job volume, revenue, or some subjective measure of workload. “I’m too busy” is not a hiring strategy! 

So again, nail your profit margins first. They’re the single most important indicator of what skills to hire, who, where, when, and for how much. You may very well be willing to pay 30% more than you budgeted for a rock star if it helps with your overall efficiency. 

Aspire is not a recruiting or HR firm. But we will help you get into a solid financial position to attract, hire, develop, and retain great people with healthy pay, benefits, career growth, and a positive, productive workplace with the right combination of autonomy and connection.  

And that’s when you can become The Great Attraction in your industry as the rubble from the last two years continues to settle.

Drop me a line and share your thoughts! [email protected].

Heather Dixon Srigley
Vice President of Marketing
The Aspire Institute

 

About Aspire
Aspire is a coaching, consulting and mentoring firm for residential General Contractors. We have helped well over 10,000 small businesses like yours reconnect with their dreams and establish a powerful and reliable track to achieving them.
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