Episode 25: The State of Residential Construction Industry With Russ Stephens

In episode 25 of the Professional Builders Secrets podcast, we’re joined by APB Co-founder, Russ Stephens to talk about the State of Residential Construction Industry (SORCI) report. Throughout this episode, Russ uncovers some of the most insightful data in the 2022 report that’s benefiting builders across the world.

In the State of Residential Construction Industry report, we reveal invaluable industry insights in operations, marketing, sales and financials from hundreds of surveyed builders across the United States, Canada, Australia and New Zealand. 

This annual report covers insider information from owners, directors, presidents and senior managers covering every aspect of their respective companies as well as industry benchmarks and international building and construction industry forecasts for the following year. 

During this episode, Russ talks about the inspiration behind creating the SORCI report and the value it brings to the residential construction industry. He also unveils the biggest takeaways from the 2021 data as well the trends that have emerged that are shaping the industry for 2022.

Listen to the full episode now to get a true understanding of the state of the residential construction industry.

 

Russ Stephens - Co-founder

Russ Stephens is a Co-founder of the Association of Professional Builders, a business coaching company dedicated to improving the residential construction industry for both builders and consumers. Russ is a data analysis expert who has introduced data-driven decision making to the residential construction industry. Russ is also a proud member of the Forbes Business Development Council.

Connect with Russ

Timeline

1:16 What is the SORCI report and why did APB create it? 

5:17 The gaps in the industry that inspired the creation of SORCI.

8:45 The biggest takeaway from the 2022 report. (Hint: It’s not what you think!)

11:16 The financials trends uncovered from the 2021 data.

16:08 The key marketing and sales insights.

17:56 The challenges that the SORCI data uncovered. 

24:33 How the stigma of the industry is changing. 

25:33 How APB actually create the SORCI report.

28:08 How SORCI is beneficial for builders all over the world.

30:15 What the SORCI data says about the future of the industry.

Links, Resources & More

FREE DOWNLOAD: SORCI 2022 Report
APB Website
APB on Instagram
APB on Facebook
APB on YouTube

Join the Professional Builders Secrets Facebook group for builders & connect with professional builders world-wide.

Bosco Anthony:

Hello and welcome to the Professional Builders Secrets podcast, a podcast by the Association of Professional Builders (APB) for building company owners, general managers, VPs and emerging leaders. Here, we discuss all things running a professional building company, from sales processes to financials, operations and marketing. We have another exciting episode today from the Professional Builders Secrets podcast and I'm joined today by Co-founder Russ Stephens of APB. Thanks for being here today, Russ. How are you today?

Russ Stephens:

Hey, Bosco. I'm great. Thanks so much for having me on today.

Bosco Anthony:

Russ, I'm really excited because in conversations passing you've referenced the State of Residential Construction Industry report, affectionately called the SORCI report, and we get to talk about it today. So, tell me a little bit about what is the report and then we'll get into how this got built.

Russ Stephens:

The SORCI report is an annual report where we look at advertising, marketing, sales, operations and financials. And we go really deep into the businesses of residential home builders.

Bosco Anthony:

Did you feel like you needed to provide this to home builders? I mean, what's the real benefit here for home builders?

Russ Stephens:

We looked around and saw there are lots of industry insights out there. There are reports covering construction trends, but they're all state based, or some are national, but nothing that went really deep into the business side of a residential building company. And there was nothing that compared different countries, either. APB was in a great position to be a provider, or an aggregator of that information really, because we have access to 15,000 builders in five countries and access to tens of thousands more on social media and through our JV [joint venture] partners as well.

Bosco Anthony:

How did you come to find that there was a gap and when were you thinking about it? I'm trying to think about the time when you went from concept to going, "Let's put this together." If you take me back through time, at what point in the journey did you find out that there was a massive gap here?

Russ Stephens:

Over the years, we've always done our regular surveys of our database to really try and understand the pulse of the industry and what's going on. And, of course, when your results are up on surveys, you see different things going on. When I saw a report – it wasn't necessarily for construction, but it was the state of marketing – I thought, "This is what we really need. The state of the residential construction industry, something that goes deep and really gives builders an insight,” because I think builders feel so alone, don't they?

Russ Stephens:

When we talk to builders, they're always just questioning: Are they doing the right thing? What margin should they be working on? How much should they be spending on advertising? And it's all very well, I think, having these gurus out there saying, "Do this, do that," really without having to back it up. But what builders really want to know is what are other builders doing? What are the successful builders doing? And I think that's what the SORCI report gives them. It gives them the insights into what other successful professional home builders are doing.

Bosco Anthony:

Take me through your emotions when you decided to go ahead with this. What you're trying to do is actually create an authority point and build a trust barometer with so many different parties involved. It's a massive undertaking, looking at this from the outside; were you excited, nervous? Were you anxious? Were you thinking, "I'm just going to be brave and we're going to go ahead and do this”? What were you thinking when you were doing this?

Russ Stephens:

Yes, it’s one of those things, isn't it? You get excited by the idea and the potential outcome and then the reality hits of just how much work this is going to bring to the team and the pressure it's going to place on the team, and you think, "Is it going to be worth it?" But yeah, I think that the whole team was really excited about the idea of collating all this information and then making it available for builders. We knew it was going to be a valuable asset and it was going to be something that we could continue to produce for years to come. So, it was a mixture of emotions, I guess. A bit of nervousness as well because what if no one fills in the survey? And excitement.

Bosco Anthony:

Yeah, you're absolutely right. We'll poke a little bit deeper into what goes into building the report. You talked about the fact that you observed a gap in the industry, and at the time you were noticing that there was information, but there was a lot of information still needed. Let's go deeper into that. What do you feel the industry was lacking at the time when the concept of SORCI came to life?

Russ Stephens:

Benchmarks, definitely benchmarks. It's something that our coaches spend a lot of time sharing with builders and then helping them to get to those benchmarks and surpass them because there are just too many myths out there. There are myths regarding pricing. There are myths regarding advertising. Those myths are damaging because they're holding builders back. Builders are not applying the margins that they need to be applying or deserve to be applying to their jobs because of the perception out there that builders don't work on those large margins. The fact is the successful builders, the professional ones, do. So, I think sharing the benchmarks really does give builders the confidence to apply those same standards and pricing models to their own businesses.

Bosco Anthony:

Did you feel like you also wanted to change the narrative? It sounds like because they didn't have the benchmarks or they didn't know the benchmarks, there was a lack of awareness about what you're measuring or how you're doing it. But more importantly, it's a pretty dangerous narrative to sit on thinking you're doing all the right things and then you realise you're actually not charging enough or you're not charging the amount that you should be charging.

Russ Stephens:

Yeah. I think what the SORCI report does is give us proof behind the information that we're currently sharing with builders. Proof as to how advertising impacts margins, proof that charging for quotes leads to a higher conversion rate. There's a lot of strategies that we take our members through and hats off to our members because they go ahead, they apply these and they get success. But there's always a percentage of builders, maybe the older guys, who are a little bit more cynical. They are a little bit more battle weary, I would say, from years in the trenches fighting a very tough battle. There's a little bit of scepticism there and I think the SORCI report gives them that proof, that confidence that, yes, this is the right path. And others have followed that path and here's the proof they get in the results.

Bosco Anthony:

What I love as well is that you can't change or sway the data. It never lies. At the end of the day, the data is there for you to absorb and accept the truth as it's collective.

Russ Stephens:

I've got to tell you about that. After collecting the data, we are extremely fortunate to have a very talented marketing coordinator on our team, Peta Muller, who is obsessive about data. She will not allow one line of data to go into this report unless she is 100% certain it is accurate. It's great to have people like that on your team, because if you are producing this kind of information, the last thing you'd want is for it to be inaccurate in any way, or to have some rubbish data skewing the facts. We have absolute confidence in everything we put out there because we know how diligent Peta is.

Bosco Anthony:

Well, let's dive into some of this data. I'm sure you have some snapshots, but what were some of the biggest takeaways or insights that came from that first report? What blew you away when you started to look at that report?

Russ Stephens:

We've just completed our second report now. I think what's really interesting is comparing the data to the first report. We did our first SORCI survey at the back end of 2020 and published that report last year, 2021. This year, when we repeated the process, we were able to look at trends. That for me has been where some of the biggest insights and take aways have come from, because of some of the things that stand out. For example, we've seen that the adoption of project management software in 2021 has been huge. It almost doubled in terms of the percentage of builders who responded to the SORCI survey.

Russ Stephens:

Around a third of builders in 2020 were using dedicated project management software, which we know is absolutely crucial for a professional builder to use in order to deliver their jobs professionally and to communicate, et cetera. We saw that number double in the last 12 months to almost two thirds. That was just fantastic.

Bosco Anthony:

Is that because of the times, because a lot of businesses are now working hybrid scenarios or remotely, and you need a digital infrastructure in your business in almost every vertical out there? Do you feel like that's just the sense of the times moving ahead that everyone is now moving towards a digital adoption?

Russ Stephens:

I think so. I think it must be, because there's no question that there was a trend towards bigger adoption, but to go from a third to two thirds in just 12 months, to double, there has to be more behind that. I agree with what you're saying there, I think the whole COVID thing forced people to work remotely, it also gave builders some opportunity during lockdowns to actually look at their building companies and work on them. So, that opened up the opportunity to maybe jump in to taking on new software, which is a big commitment for a builder. Opportunity comes out of adversity, doesn't it? And it's the builders who have spotted that opportunity and taken advantage who are going to now reap the rewards, for sure.

Bosco Anthony:

In one of the conversations I had with you when I first got to meet you, I learned very quickly the difference between markups and margins and costings as well. What were some of the insights around that? I'm just curious because it was so fascinating when I learned the difference. But what did you observe through the trends and the reporting as well?

Russ Stephens:

When we look at the trends – and again, this was quite a surprise to me – we've really seen the number of builders who truly understand mark up and margin has shot up. This was a new question from the back end of 2021, so for the 2022 report. We didn't actually go as in depth because what we've found over the years – and this isn't a slight on builders because this is business owners in general – a lot of business owners do not truly understand the difference between markup and margin. 

Russ Stephens:

It's confusing, it's even more confusing in the construction industry because those terms are used interchangeably. So, not many people truly understand the difference, but what we've seen in the last 12 months is a big increase in the people who truly understand it, because we asked the question, “Do you know the difference between markup and margin?”

Russ Stephens:

Then in the following question, we actually asked a question that disclosed if they did truly understand it. We found that 80% of the builders who responded said they understood the difference, but then 80% of those respondents answered the question correctly to demonstrate that they clearly did understand. Now, that is a lot higher than we typically come across when we're dealing with new builders joining APB. We actually take them through this, because it's one of the first things that we explain and teach builders, because it does affect their overall profitability, understanding that. And that number is way lower than 80%.

Russ Stephens:

What I would say is I think that clearly demonstrates the quality of the builders who took part in the survey as well, which is really important because this is all about a survey of professional builders. It's great to see that the builders who took part truly knew what they were talking about when they answered all these questions.

Bosco Anthony:

It probably reflects on the fact that you are also becoming a content authority, because there's content for people who are members and there's content for people who work with your coaching program. Over the last few years, APB has become that content and media hub for everything around building a professional construction industry as well. So, I think it also reflects on the quality of content that you guys are putting out organically as well.

Russ Stephens:

Yeah, we put a lot of information out there. There's a lot of builders who follow us for a year or two or even three years before joining APB. Part of that reason is because of the amount of information we put out there. We host free webinars – obviously, we've got the Professional Builders Secrets podcasts, which you're listening to now – and there are articles. So there's a lot of information to consume, but obviously it's great consuming that information, but to get the real gold, the downloadable templates, the calculators, et cetera and of course, most importantly, the one-on-one coaching, you need to become a part of the association to access those kinds of resources.

Bosco Anthony:

Do you feel that builders also are little bit more financially aware of their daily costings or fixed costings as well now, in comparison between the two years?

Russ Stephens:

Yeah. That was something else that we saw a massive improvement on. One of the numbers that we asked was about fixed costs per job per day. This is about understanding your fixed expenses, which is not your cost of sale. It's those expenses that can't be directly attributed to a job like your office rent, maybe an estimator in the office contract, administrator, et cetera.

Russ Stephens:

All those fixed expenses and understanding how they apply to each and every job, and then understanding how much that figure is on a per job per day basis. Because when you understand that, you understand the cost of a one week delay. That's been in incredibly important this past 12 months with the supply chain issues we've had causing weeks of delays. That has impacted the bottom line for builders.

Russ Stephens:

It's had an impact on the bottom line, so understanding that is crucial. A really encouraging stat that came out of the SORCI report for 2022 was around about 50% of builders now understand their fixed costs per job per day. That was a 50% increase on the previous year's survey.

Bosco Anthony:

Any insights around marketing, advertising, sales?

Russ Stephens:

Yes. Something we've always said – and I'm sure you've heard us say this over and over again, I know we've said it on these podcasts – margins are linked to marketing. We say this over and over again, and that's all to do with the supply and demand formula. The more demand you generate, the more it gives you the opportunity to not only grow your building company, but to increase your margins. When you have more demand than you have supply, that makes it really easy to increase your margins, and the only way to do that is through advertising and marketing.

Russ Stephens:

We've been able to use some of the data in the SORCI report to prove that margins are linked to marketing, just by looking at different questions and combining the answers. This is again where I’ve got to take my hat off to Peta, because she does a fantastic job of answering my questions when I look through the data. "Well, what about this? And how about if we overlay these two questions?" She goes away and creates the pivot tables so that I'm not making assumptions, but looking at hard facts.

Russ Stephens:

We are able to prove that margins are linked to marketing because the builders who were spending one percent or less on advertising had the lowest margins. What you invest in advertising – obviously, as long as you do it correctly – that comes back in the form of margin. The extra margin that you can charge consumers more than covers what you spend on advertising. That's something we've been beating the drum on for years now at APB.

Bosco Anthony:

What do you feel is keeping builders up at night? For the new builders out there, do they struggle with infrastructure, IT? What stresses them out right now?

Russ Stephens:

Right now, what we are hearing as the most frequently mentioned challenges are margins and systems. The reality is, it's always been margin and systems. It's been margins and systems ever since APB started in 2014. However, what has changed is the perception. Prior to 2021, the perceived problem was marketing and sales. It was always, “I need more leads.” “Why do you need more leads?” “Because if I had more leads, I'd have more sales. If I had more sales that would solve my cashflow problems and I'd be profitable; that would kind of solve everything.”

Russ Stephens:

That was why builders generally reached out to APB, because they wanted to understand how they could market their businesses better and how they could convert more of those leads into sales. However, when we sat down with these builders, we always started by looking at their business model, looking at their margins and looking at their systems and it was all always a case of having to fix their margins first. We cannot scale an unprofitable business. I think the big myth is that builders think, “I'm working on low margins, but if I had more sales, the business would be a lot more profitable.”

Russ Stephens:

But the reality is it won't. If anything, it goes the other direction because of the effect of owner's influence. Building companies only really start benefiting from the economies of scale once you pass the $6 million mark. Before that, they actually go in the other direction. So, you must get your margins working correctly first. So, I guess to answer your question, the reality is we've always focused on margins and systems first with builders, but the perceived problem over this last 12 months has been margins and systems over marketing and sales for builders.

Bosco Anthony:

What's really refreshing as well is the fact that even though we're living at a time of uncertainty and lockdowns and all these different things that affect supply chain issues, construction people are actually just getting on with it. They're sitting there saying, "We know that these are the challenges. We know these are the problems, but we want to get our systems right to accommodate for everything," which is very optimistic and refreshing to hear as well.

Russ Stephens:

Yeah. I think residential home builders have made us proud to be in this industry over the last 18 months, the way these guys have stepped up to take the challenge head on. It’s the biggest challenge that we've faced in this industry in living memory, with the supply chain crisis, with rising costs, rising prices of materials, labour shortages and working on fixed price contracts in a lot of cases as well, getting continually squeezed, continually having to reschedule. It has been an incredible challenge. And of course, the big myth outside the industry is that builders are making a fortune, what do they have to complain about?

Russ Stephens:

Anyone in the industry knows that the reality is very different. And like you say, I am so impressed seeing the way so many builders have stepped up in these last 18 months and used the time, the downtime that's been forced on them, to actually work on their businesses and improve them. It's been fantastic to see.

Bosco Anthony:

I was actually at an event that you had put on for builders in Brisbane, and I remember watching different builders from different walks of life come together and connect on similar struggles, connect on similar problems. They were just happy to be around each other and they weren't there to compete. They were just there to share each other's common struggles and learn from each other, and it was a well organised event. You had so much information, you created that connection as well. It was really inspiring to see, Russ, because at the end of the day, it really brought that notion of we're all in this together. We're all going through the same problems as well.

Russ Stephens:

Yeah. I love these live events that we do. It's been a shame there just haven't been enough of them during COVID, but we're looking forward to getting out on the road again, and most importantly, bringing builders together. We love mixing with builders and meeting them in person. Like you say, it's great to see builders, networking and just sharing war stories with each other, because they find so much support in that. Obviously, we've been plugging the gap online with the members’ Facebook group.

Russ Stephens:

We see great interaction between builders within APB’s Facebook group, where they constantly ask each other questions and support each other. But meeting in person's fantastic. And I think the great thing about these events is in our minds, builders are true professionals. They're right up there with architects, lawyers, accountants; they are professionals on the same level.

Russ Stephens:

The problem is, they don't always get treated with the respect they deserve, simply because they did their formative years on site, whereas other professionals did their formative years at university. Because of that, for some reason, people tend to look down on builders to a certain degree and that's not right. These guys have huge experience, huge intelligence, so much expertise to offer, they deserve to be treated as professionals. And that's what we do at our live events. We treat builders as true professionals. So, we always meet in nice hotels, we put on a nice evening for both our members and our non-members and it's how it should be in this industry.

Bosco Anthony:

Yeah. It was great to watch it come to life. I was really impressed at how everything was there for them. It was just a resource for them. To see the smiles on their faces and to see the breakthroughs just by having conversations was really inspiring. Do you feel like the stigma is evolving with associations like yours, where it's really geared towards changing the professionalism and the perception of the industry and how the media and how people perceive builders moving forward? Do you feel that in the next few years, people are going to look at builders with a different sense of appreciation?

Russ Stephens:

A hundred per cent. I think there is a very big lag factor, unfortunately, because as we see in the data, builders are getting a lot more professional at a very rapid pace. I don't believe the perception from the public is moving as fast as the reality. So, there will be a time when that changes. There will be a tipping point when they do become viewed as professionals. But right now, it's just great to see that they are truly becoming more professional in the way they operate.

Bosco Anthony:

Let's talk a little bit about the SORCI report. I was sitting here last night thinking how much time and insight and people and resources were put into this. I've seen the first report and I was blown away. I went through the pages and all the different entities, and you've got it nicely broken down into financial sales, advertising, marketing operations. Take me through the process of what goes into creating a report of this magnitude.

Russ Stephens:

It's massive. First of all, there's a review of the questions because there's roundabout 100 questions, which is a massive ask of builders. I've got to take this opportunity to thank every builder who's ever participated in one of our SORCI surveys, because we do appreciate this is a big, big commitment of time to go through and answer those in-depth questions. But the benefit for the builders who do is it acts like a self-diagnostic tool because it really prompts some objective thinking about what may be missing in their own businesses.

Russ Stephens:

Once we've got the questions, we then embark on three months of data collection, data gathering. So we promote to our own database of 15,000 builders. We promote on social media where we have a huge following. We work with our industry partners like Buildertrend, Buildxact, Builda Price, Xact Accounting and CBUSA who work with us to promote it to their builders as well, to make sure that we get as many builders participating as possible so that the data that we are going to be producing is accurate.

Russ Stephens:

Once we go through that data collection stage, it really is a case of then tidying up the data. This is where Peta Muller comes in and does a fantastic job of making sure all the data that's included is valid. I'll be looking at the data as well, prompting more questions where Peta will be going away and producing more pivot tables with answers that either verify, or pose even more questions to a hypothesis we might have about something happening. We'll then create a commentary as to what we see from the data so that someone can then read through, they can see the data, but they get a good summary. We share the data with our partners as well, so they can provide their own commentary. Then finally, we go to print and distribute.

Bosco Anthony:

I've had the pleasure of actually interviewing the CEO of Buildertrend. I've also interviewed Ryan from CBUSA as well. These are massive partners. These are industry known partners with their own massive network of builders as well. What's really impressive is that this is not just an Australian insight. This is a global insight, coming from different parts of the world.

Russ Stephens:

Yeah, and it's very, very interesting as well because too many times we hear, "My building company's different because I'm in a small town,” or, “I'm in Brisbane,” and then it's, “I'm in Queensland” and then it's, “I'm in Australia." And yet, when we look at the data and we analyse it by country, we can see that in most cases, not all, but in most cases, the data is very, very similar. This is what we've always known. It's why we teach the same process to builders in the US, in Canada, in New Zealand, the UK and Australia, because we know it works. And we know, most importantly, it works in all those countries and I think the data that comes out in the SORCI report backs that up.

Bosco Anthony:

I would say one of those similarities would probably be everyone's facing the same supply chain issues. They might be different types of supply chain issues, but they're all facing it in different parts of the world.

Russ Stephens:

Yeah, a hundred percent, Yeah. We see sometimes it's a bit more extreme. I think timber comes to mind where it increased 100% to 150%, but in the US it went up 300%. But the bottom line is the challenge is still the same and increase is going to destroy your margin.

Bosco Anthony:

It's interesting because when we interviewed previous builders, they had to rely on their systems on how they ordered, how they bulk ordered or how they had to prepare and work around it try to manage the situation. They can't change the situation, but they have to prepare for it in many ways too.

Russ Stephens:

Yeah, yeah, completely. One of the things that was great to see was how many builders have referenced construction slots. The construction slot training and templates that we provide our members with have been pivotal in helping them to plan over the last 18 months.

Bosco Anthony:

Now, when we look at all these changes, where do you think the industry is evolving to from the insights you've gathered? There's a lot of insights there, but looking at the data, where do you feel is the compass pointing to, moving forward?

Russ Stephens:

It's definitely pointing towards a more professional industry. We still look forward to the day where these unprofitable building companies that are allowed to continue operating year after year are technically trading insolvently, yet they still get their licences renewed. We still look forward to the day where those companies won't be allowed to trade at a loss, because that will really help this industry take a giant stride forward. At the moment, professional builders are facing unfair competition from companies that are not making money and that is putting pressure on their whole pricing model. So, the sooner we can remove those building companies from the industry, the sooner we can raise the level for the remaining building companies, the professional building companies that are left.

Bosco Anthony:

For the people, the DNA of the people who actually made up the SORCI report, did you find that there were more people on the second report, because there were more partnerships and newer people? What was that ratio like? And you have plans to do more of these?

Russ Stephens:

It was very similar, but we targeted larger building companies. The profile of a building company for APB is a new home builder or a remodeller. For remodellers, they’re typically doing jobs of $100,000 or more. New home builders could range from $1 million to $100 million. But what we consciously did was not include data from the smaller builders who don't fall into that category.

Russ Stephens:

They might be handymen, guys doing decks, very small renovations, bathrooms and kitchens, et cetera. We removed that data to keep the information even more accurate and relevant. Because if it gets skewed with some very small operators, the data starts to become meaningless. To answer your question, overall numbers were similar, but the data was a lot more accurate, I would say.

Bosco Anthony:

And is this going to become an annual process now moving forward?

Russ Stephens:

Yes, this is here to stay. This is part of APB now; we look forward to it. It feels like no sooner do we complete one year and focus on getting it out there in the marketplace than we are preparing for the next year. So it's become an ongoing project for us.

Bosco Anthony:

I've seen a little bit about the SORCI report online, but for the new builders out there, how can they access the report and how can they get involved in being part of future reports as well?

Russ Stephens:

The easiest way is to go to our website. If you just Google ‘Association of Professional Builders’, there you'll be able to download a free PDF. There’s also a link in the show notes Bosco, where the guys will be able to download a free PDF. We also have a limited number of hard copies that are being given away. All we ask is that you cover postage and packaging. But depending on where you are actually listening to this, those copies may have all gone. But you will certainly be able to download the free PDF.

Bosco Anthony:

Russ, it's been a pleasure speaking today. I love seeing your and Sky's vision come to life. And thank you for taking us behind the scenes to really give us an insight into how this particular report came to life.

Russ Stephens:

Thanks so much for having me, Bosco. I really enjoyed chatting with you.

Bosco Anthony:

Cheers.