Time and materials contracts: when to use them

0:00 Picture this for a second. You've got two contractors operating in the exact same city. Right. They work in the exact same trade. They deal with the same unpredictable local weather, the same supply chain headaches. They're even hiring from the exact same labor pool. Yeah, completely identical playing field. Exactly. Yeah. At the end of the year, they both pull in the exact same top line revenue. Let's call it, I don't know, $3 million. Okay, $3 million. But here is where the story splits. Because Contractor A takes home a cool $300 ,000. But Contractor B... He's stressed, he's exhausted, and he barely clears $80 ,000. Wow. Yeah. Yeah, and it's a scenario playing out in every single market, every single year.

0:46 Seriously. Oh, absolutely. And the difference between those two builders, it isn't luck. And it's almost never that one just works harder than the other, you know? Right. It usually comes down to a fundamental misunderstanding of what actually drives wealth in the construction industry. Okay, let's unpack this. Because the first place everyone looks to explain that gap... is the bank account, right? Like specifically the top line revenue. Oh, for sure. The revenue obsession. Right. The assumption is just that the guy making more money must be selling more jobs. But our mission for this deep dive today is to uncover the four hidden metrics that actually separate the truly wealthy builders from the ones who are just, you know, incredibly busy. Yeah, just spinning your wheels. Exactly. We were drawing on the scaling legends framework alongside some serious market intelligence to figure out what

1:33 the top tier contractors actually track. that you might be ignoring. Which is so critical. It is. And we have to start with that elephant in the room, right? The obsession with revenue. Yeah, that revenue obsession is incredibly dangerous. I mean, in this industry, the old saying holds true. Revenue is vanity, profit is sanity, and cash is reality. I love that. Vanity, sanity, reality. Exactly. Because most contractors, they just love to brag about their top line. You hear it at every trade show, every networking event. Someone will lean in and say, we did $3 million last year. Or, you know, we're on track to hit 5 million. Right. Which sounds amazing on paper. It sounds impressive on the surface, yeah. But it completely ignores the only question that actually matters, which is how much of that money did you actually keep? It's such a common trap.

2:20 Yeah. I mean, bragging about your top line revenue is like bragging about how many calories you eat in a day without ever mentioning how much you exercise. Oh, that's a great way to put it. Right. It is only half the equation. Like if I tell you I ate 5 ,000 calories today, you would probably think I'm overindulging. Yeah, definitely. But if I am an Olympic swimmer burning 6 ,000 calories in the pool, I'm actually losing weight. Exactly. But if I am sitting on the couch playing video games, I am in serious medical trouble. Without the other half of the equation. The raw number is entirely meaningless. That analogy perfectly illustrates the problem. And the reality of what contractors actually retain is honestly sobering. According to Smart Business Automator's market intelligence report, 40 % of contractors

3:07 doing $2 to $5 million in revenue take home less than $100 ,000. Wait, let me make sure I'm hearing that right. Almost half of the builders out there who are running multi -million dollar operations, managing all that risk, all those employees, all that liability, they're taking home less than six figures. That is the harsh reality of the industry. That is why. Because revenue, it simply measures how much money moves through your bank account. It is a measurement of cash velocity, not financial capture. Right. So if you're operating at, say, a 2 % net margin, you can run $5 million through your checking account and still... completely struggle to pay your own personal mortgage. Wow. Okay. So if top line revenue is essentially lying to us about the

3:53 health of the business, how do we actually measure the physical work getting done on the ground? Like we need a way to track if the gears are actually turning efficiently. Yeah, we do. And the first truly revealing metric is revenue per field employee per day. Okay. Revenue per field employee per day. Yes. This is your ultimate productivity check. It strips away the marketing, the overhead, the office staff, and it tells you exactly how effective your labor force actually is on the job site. Okay, so how do you actually calculate that? You take your total revenue over a given period, so say a month or a quarter, and divide it by the total number of days worked specifically by your field employees. Give me a sense of the baseline here. Like, if a builder listening runs that math right now, what should they be looking for? Well, the benchmarks vary

4:39 slightly by sector, but as a general rule, for residential construction, you should be generating between $800 and $1 ,200 per day per field employee. Okay, $800 to $1 ,200. And commercial? If you operate in commercial construction, because of the scale and the material costs, that benchmark jumps up to between $1 ,500 and $2 ,500 per day. Let me push back on this for a second, though. Let's see a business owner listening right now. pauses this deep dive, pulls up their payroll and their revenue, and realizes their crew is only generating, I don't know, $500 a day. Right. The immediate gut reaction is going to be anger, right? They are going to think, my guys are slacking off, I am paying for eight hours, and they're

5:24 giving me four. I just have lazy workers. Is that a fair assessment of the data? What's fascinating here is that owners almost always blame the workers first. It is the easiest scapegoat. Naturally. But if you are significantly below those benchmarks, it is very rarely a case of a lazy crew. Usually, it points to one of two deep structural issues. Which are? First, you might have a fundamental systems problem causing a massive bottleneck. That means your guys are spending two hours every morning standing at the supply house because materials weren't ordered correctly the night before. Oh, man. Or they're standing around the job site drinking coffee, waiting for the electrician to finish roughing in before they can even hang drywall. They aren't lazy. They are bleeding time because the project management and scheduling

6:09 are flawed. I see. So the crew is perfectly willing to work, but the environment the owner created... won't allow them to be productive. Like they are blocked. Precisely. They're totally blocked. And the second potential issue is a pricing problem. Okay. A pricing problem. Right. Your team might be working incredibly hard, the schedule might be perfect, and they are swinging hammers for eight solid hours. But you simply aren't charging enough for the labor being expended. You estimated the job poorly and basically gave the work away. And if you don't track this daily revenue metric, you won't know you have this leak until the end of the year when the accountant tells you the bank account is empty. Wow. Okay, so let's say you fix that. Your crews are finally hitting their daily numbers. Yeah. Your labor leak is

6:55 plugged, your supply runs are dialed in, and your estimating is sharp. That's the dream. Right. But here's the dangerous part. Being highly efficient at building a poorly priced job just means you are going broke faster. If the job itself is a structurally bad investment from the start, crew productivity won't save you. Exactly. Which means we have to look at what you're actually agreeing to build. Yes. And that leads directly to hidden metric number two, which is gross margin by project type. Gross margin by project type. The core philosophy here is that we have to stop subsidizing bad work with good work. Say more about that. Well, most contractors look at their overall gross margin at the end of the year and say, OK, we average 20%. Not bad. But they never

7:41 break that average down by the specific categories of jobs they took on. Here's where it gets really interesting. Because an average... hides all the sins. It smooths everything out so you can't see the individual failures. It creates a dangerous illusion. To uncover reality, you really need to track your gross margin by a specific project type over a rolling 12 -month period. You have to isolate the data. Give me an example of how that plays out. So when you do this through proper job costing, you might discover that you make a fantastic 35 % margin on kitchen remodels, but you are only pulling in an 8 % margin on bathroom additions. Wow. But because a contractor bids on both equally and spends marketing dollars on both equally, They are letting the highly profitable kitchens pay for the headaches of

8:28 the barely profitable bathrooms. Precisely. It's like a restaurant keeping a complex, highly stressful, low -margin seafood dish on the menu just because a few regulars like it, while the simple, easy -to -make burgers are actually paying the chef's salary and keeping the lights on. That's a perfect analogy. You are working twice as hard for half the money just to offer variety. Taking that analogy a step further, bidding both equally means you are intentionally capping your own growth. You are filling your calendar with 8 % margins when you could be filling it with 35 % margins. Which is just crazy when you see it out loud. It is. Once you track this for 12 months, the solution becomes glaringly obvious, though not always easy to execute. You have to do more of what makes money and less of what does not.

9:13 It takes incredible discipline to look a client in the eye and turn down a massive bathroom addition because, you know, the margin is only 8%. But protecting that margin is exactly what separates the wealthy contractors from the busy ones. Okay, so now we have a leaner, meaner operation. We have productive crews hitting their daily numbers. And we are only taking on highly profitable project types. The business looks great on paper. Sounds perfect. But what is the personal cost to the owner making this happen? Because a highly profitable business that completely destroys your life, keeps you away from your kids, and ruins your health. isn't a success story. Not at all. It is a prison you built for yourself. This brings us to the third hidden metric, which might be the most critical for an owner's long -term survival

9:59 and sanity. We call it the freedom metric. The freedom metric. I like that framing. Yeah. Formally, it's owner hours per dollar of profit. Okay. Walk me through how we actually quantify freedom. The goal of a business isn't just to generate raw profit. It is to generate more profit per hour of the owner's time. Let's look at the math on this. Say a contractor successfully takes home $150 ,000 in profit. Okay, solid. On the surface, that sounds like a great year. But if that owner is working 60 -hour weeks, 50 weeks a year? Oh, wow. That is 3 ,000 hours invested. If you divide $150 ,000 by 3 ,000 hours, their effective hourly rate is only $50 an hour. $50

10:45 an hour. A mid -level project manager in most major cities makes more than that. And they get to turn their phone off and go home to their family at 5 p .m. Exactly. Meanwhile, the owner is taking on all the financial risk, the liability of the job sites, the stress of making payroll every Friday, and they are compensating themselves worse than their own staff. If we connect this to the bigger picture, the owner is absorbing all the friction of the company but reaping none of the leverage. I have to play devil's advocate here, though. Doesn't every owner have to wear all the hats to scale? I mean, you are the head of sales, the chief estimator, the senior project manager, the HR department, and the janitor. Yeah, that's the narrative. Isn't that just paying your dues in the construction industry? Like, that is the hustle culture we are all taught to respect. It is what the industry celebrates,

11:31 yes. But wearing all the hats is exactly what traps owners in that $50 an hour reality. It creates a hard ceiling on your growth because there are only so many hours in a week. Right. You just run out of time. Exactly. To increase your effective hourly rate, to actually improve this freedom metric, owners must relentlessly delegate, eliminate, or systemize the administrative burden. Systemize. That is the magic word, but it's also where people get stuck. Completely. How do you actually systemize with... Without losing control of the quality, how do we extract the owner from the constant data entry loop? Removing administrative bottlenecks is the only way to scale without drowning. And this is where we have to look at how top -tier contractors leverage specialized technology. You have to

12:17 adopt platforms that handle the heavy lifting of information management. Okay, like what? For example, let's explore what happens when an owner implements an AI -powered platform designed specifically for construction. Let's get into the weeds on this because AI is a buzzword thrown around constantly. What does systemizing with these tools actually look like for a builder on a Tuesday morning? Sure. Think about the sheer volume of document organization required to run a job. A massive chunk of an owner's week is spent just hunting for files across text messages, emails, and messy cloud drives. It's a nightmare. It is. A true AI system provides smart document organization. It instantly tags, sorts, and categorizes site photos, architectural plans, city permits, and daily reports the absolute moment they're uploaded.

13:04 Oh, wow. So when a foreman needs the latest electrical revision at 7 a .m., they find it. instantly in the system. So no more panicked phone calls waking the owner up because someone can't find an email attachment from three weeks ago. Exactly. The system just surfaces the data, then consider daily log summaries and document intelligence. Every owner knows the pain of reading long, rambling field reports from site superintendents. Or conversely, reports that just say, everything went fine. Exactly. An AI platform can read those messy inputs and turn them into clear formatted summaries with bulleted action items. Furthermore, it extracts vital details from complex architectural specifications. What does that mean in practice? It means you don't have to spend three hours reading a 400 -page spec book to find the exact requirement

13:51 for window flashing. You ask the system and it pulls the exact paragraph for you so nothing is missed. That alone saves an owner a dozen hours a week. But what about the back and forth communication with architects and engineers? Because RFIs... Oh, the requests for information? Yeah, those RFIs, when a plan is unclear, they can stall a project for days while the owner tries to draft the perfect email. That administrative drag is solved by smart search and RFI assistance. Imagine having natural language search across all your project files. You type a question in plain English and the system finds the answer buried in an old meeting minute. That's incredible. Even better, when you do need to submit an RFI, the AI drafts the response for you using the historical context of the project. It knows the contract, it knows the specs, and it writes the

14:38 draft. You just review it, verify it, hit send, and move on. You are effectively hiring a digital project engineer. Pretty much. But what about the financial side, like catching things before they bleed that precious gross margin we talked about earlier? That is where risk and budget capabilities come in. The system acts as a proactive guardrail. It detects schedule bottlenecks before they happen. It identifies budget variance trends before the month is over. Wow, so you aren't waiting for the accountant. Right. And crucially, it runs change order impact analysis. So if a client suddenly decides they want to move a load -bearing wall, the AI instantly analyzes how that specific change order impacts both your timeline and your overall material costs. So you aren't just guessing in the moment. Exactly.

15:24 Allowing you to present a fully baked, profitable number to the client instantly, rather than guessing and eating the difference later. And finally, you have the reporting. Because doing the work is one thing, but getting the data into the accounting software is another nightmare entirely. Which is why you must systemize compliance and reporting. These platforms use custom workflows and API integrations, which is essentially software code that allows two different programs to talk to each other. And that connects directly to your existing ERP or enterprise resource planning software, which handles your accounting. This means when a change order is approved in the field, it automatically updates the budget in the accounting software. Zero manual data entry. Zero manual data entry. So the owner is no longer the human bridge transferring numbers from a spreadsheet to QuickBooks. By implementing these

16:11 systems, the project managers can handle three or four more jobs simultaneously without burning out, and the owner gets their life back. The working hours drop and that $50 hourly rate suddenly skyrockets. It fundamentally changes the business from a job you perform to an asset you own. Okay, so the owner has finally freed up their time by systemizing all this administrative chaos. They have their sanity back. Yeah. Now they have the bandwidth to hunt for more of those high margin projects we identified earlier. But how do they find those perfect clients efficiently without just... blowing their new profit on random advertising. This raises an important question about how we view growth, and it brings us to the fourth and final metric, which is customer acquisition cost by source, often referred to as CEC. Okay, good. You have to track exactly

16:57 where your jobs are originating and what it costs you in dollars to acquire that specific contract. This sounds like a metric a tech startup uses, not a roofing company. How does a contractor calculate this? It is simpler than it sounds. Let's say you decide to run a Google Ads campaign. You spend $5 ,000 over a month. Okay. Out of all the clicks and calls, you land two actual jobs worth $40 ,000 total. So you spent $5 ,000 to get two paying customers. Your customer acquisition cost for the Google Ads source is $2 ,500 per customer. Right. And if my margin is already thin, spending $2 ,500 just for the privilege of acquiring the customer might wipe up my profit entirely. Exactly. Now compare that to a different

17:43 source. Let's say you have a great relationship with a local architect. He refers three jobs to you over the course of the year, and those jobs are worth $180 ,000 in total. Wow, okay. You didn't pay for advertising. You just bought him a nice steak dinner once a quarter. Your acquisition cost for those three highly lucrative customers is effectively zero dollars. But to actually track this, you can't just casually ask, how did you hear about us at the end of a job? You need a mechanism. Like you need a unique, trackable phone number on the side of your trucks that is different from the phone number on your website. Yes. You need a required drop -down menu on your contact form. You have to capture the origin at the exact moment the lead comes in. That is the only way to get clean data. And once you have that data, the strategy

18:28 becomes incredibly clear. Double down on the cheapest, highest quality sources. Stop feeding ego -driven marketing campaigns. Exactly. Stop feeding campaigns that cost two grand to acquire a low margin client and start taking that architect out to dinner more often. Okay, so we have mapped out four massive areas to track. We have revenue per field employee per day to ensure our labor isn't blocked. We have gross margin by project type to stop subsidizing bad jobs. We have owner hours per dollar of profit to protect the owner's life. And we have customer acquisition cost by source to protect the marketing budget. That's the framework. But for a listener who feels completely overwhelmed right now, do they need to go out and double their performance in all four of these categories tomorrow to see any real financial

19:16 results? Not at all. And this is the most encouraging part of the entire framework. It is not about doubling anything. It is about the compounding effect of small incremental wins. Break down the math on how that compounds. If you improve your labor productivity by just 10 % and you improve your project selection margins by 10 % and you use systems to reduce your owner hours by 10 % and you shift your marketing to be 10 % more efficient, it doesn't just equal a flat 10 % overall improvement. Because these metrics interact with and multiply each other, the gains compound significantly. So what does this all mean for the bottom line? We can look to Smart Business Automator's market intelligence report for the outcome here. The data shows that this simple 10 % compounding improvement across these

20:02 four specific areas results in roughly a 40 to 45 % improvement in the owner's take -home pay. Let that sink in for a second. You don't have to dull your revenue. You don't have to hire twice as many guys or buy five new trucks. You just get 10 % sharper in four specific areas and your personal take -home pay jumps by almost 50%. It is the literal definition of working smarter, not harder. You are optimizing the machine rather than just shoveling more coal into it. So here's your action plan. We know running a construction business feels like putting out fires all day. So do not try to overhaul all four of these metrics tomorrow morning. Definitely not. You will overwhelm your team and you will burn out. Instead, take our simple 90 -day challenge.

20:47 You don't need a complex software suite to start tracking this today. Just open a simple spreadsheet. Keep it simple. Right. Make four columns, one for each of the hidden metrics we discussed. This Sunday, sit down and calculate all four of those metrics using your actual data from last year. It might sting a little to see the real numbers staring back at you, but run the math. You have to know where you stand. Exactly. Once you have your four numbers, circle the ugliest one, the absolute worst performer. Yeah. That single metric is your sole operational focus for the next 90 days. Ignore the noise and just fix that one specific leak. Update your spreadsheet weekly. It takes maybe 20 minutes and you will start to achieve total business clarity. It is

21:32 a transformative process. But as we wrap up this discussion, I want to leave you with a final thought to mull over. We have talked extensively about margins, systemization and metrics today. But step back and look at the actual structure of your daily life. Oh, this is important. If your construction business can only grow by you personally working more hours, answering more calls and putting out more fires. Do you actually own a business or did you just create a very stressful, high liability job for yourself? The goal is to build an asset that works for you, not a prison that requires your constant supervision. That is a heavy question, but it's the exact question every builder needs to confront. Remember those two contractors we talked about at the very beginning, the one taking home 80 grand and the one taking home 300 grand. They have the exact same revenue. The only difference is

22:19 that one of them tracks the reality of the business and the other is just busy. Choose to be the one who tracks the reality. If you got value out of this deep dive today, please do us a favor. Subscribe to the show from whatever platform you are listening on right now. Rate and review us. It genuinely helps other contractors discover these insights and elevate the standards of the whole industry. Share this deep dive with a colleague, a fellow business owner, or your own internal leadership team. And finally, if you want to learn more about systemizing your operations, removing those administrative bottlenecks, and protecting your margins, visit smartbusinessautomator .com. Thank you so much for joining us, and we will catch you on the next one.