Episode 126 Podcast Transcript

Speaker 1 (00:00):

When someone says, “Hey, while you’re here,” or, “Can you check this out? ” It’s often an example of when someone’s going to ask you to do something extra and it’s not about saying no, it’s your ability just to go, “Hey, yeah, we can do that, but just let me check if that was included or excluded in the quote.” And then you just go back to them and go, “Hey, we can do that, but just letting you know it wasn’t included. Are you okay if we just quote that up for you and you can make a decision if you still want to go ahead?” You’re being firm and fair and you’re standing by what you’re included or excluded on the quote at the end of the day. G’day everyone. Rob Kropp and Dan Stones here from Pravar Group and welcome back to another episode of The Trade Den. Welcome back, Dan. Good to have you on.

Speaker 2 (00:44):

Good to be back, Rob. I love this topic today. We’re getting under the hood about margins and some of the biggest levers we can find in variations. And really starting off with a conversation today I’m looking forward to is why variations are the hidden profit slayer? Because so many clients we’ve got missed this point. They just don’t join the dots. But when we start to talk about the real cost and that every untracked variation is work that you end up paying for, the pennies start to drop. So it’s a really, really meaty topic, another one that has a real material impact when guys really understand it and start to get to work on it.

Speaker 1 (01:18):

Yeah, it is. It’s one of those things that like we talk, we’ve spoken around holes in your financial bucket and some of those holes can come in the form of not pricing correctly or just poor labour management or just poor job management and not doing job costing or overheads that are leaking out. So there’s plenty of little holes in the financial bucket that do exist. But one of those ones that, as you said, is that variation management, it is very common in pretty much every trades business until they get to the point where they’re like, “I’m sick and tired of getting smashed with variations of doing work that the customer gets the benefit of that I’m wearing the cost of. ” And it’s not until that you plug that hole that more money just drops to your bottom line because you plug that hole of margin erosion.

(02:02):

So yeah, margin erosion’s a real thing and it’s a cost that gets attributed to that job because you haven’t got a process around it. So that’s why it’s so important.

Speaker 2 (02:11):

Yeah. And as you said, you went through that little scenario about what you’re sick of hearing or what the clients are sick of hearing from clients about changing their mind and doing all this sort of stuff and they get the benefit. The sneaky thing about this I think is where it all starts. It doesn’t start when the client first comes in and goes, “That’s not what I thought it was. ” It starts with the scope definition, the quoting stage. It all sort of falls from a place that’s way earlier in the process that that’s where it was seeded, but now you’ve got to deal with it later on. And if you haven’t done the steps along the way, that’s where you run into trouble.

Speaker 1 (02:44):

Yeah, correct. Because when you do a quote, if you haven’t been really clear on what’s included or what’s excluded in the job, then it’s very hard to know or for your team to know, I should say, is it actually a variation? Because if the team don’t have really clear scope definition, if they don’t have really clear documentations around sets of plans, what’s included, what’s not, what’s specified, what materials, what has been actually quoted, it’s very hard and it’s actually not your team’s fault that they miss variations or when a customer says, “Hey, can you do this whilst you hear their common signs that it is a variation, by the way, but your team are just trying to get the job done at the best of their ability. It’s not their fault when things are missed. It’s potentially your fault as the owner because you clearly haven’t defined what’s included, what’s excluded, and then communicated that to your team efficiently enough for them to know when to raise the flag to be able to go, “Hey, this might be a variation.”

Speaker 2 (03:46):

Yeah. And most of the time, you’re right, your team who’s operating with a poor scope is all they’re trying to do is satisfy the client or make sure that relationship’s healthy and we’re not putting the client off side. So if they’re not bending over backwards, they’re at least leaning a long way towards making the client happy. But that’s where those variations do start to get missed. The second part where they get missed then becomes that most variations rather than being a formal agreement of a process are loosely based on some sort of verbal exchange that happens between whoever is on site or in part of the conversation at the time. And this is where the disputes that happen after the fact are really brutal because you get stuck in a he said, she said sort of scenario every single time.

Speaker 1 (04:30):

And a lot of people don’t understand the cost of a change and especially when it’s a client led change order where the client’s like, “Hey, can we change this? ” Or, “Hey, can we change that? Can we do this or could we do that? ” Or, “Hey, while you’re here, do you mind?” That’s my favourite when that’s a leading indicator, that’s going to be a variation. If it’s something that they’ve changed their mind on and you’ve just gone, “Yep, we can do that, ” and you work it out later kind of mentality, that’s when you get bitten in the ass, isn’t it? Because it’s like a, “Hey, I’m just going to be the nice guy.” And sometimes you got to do things on the fly, but it’s just not good enough these days to do things on a handshake. You’ve got to get things in writing and you’ve got to get it formally approved and signed off, especially when there’s costs involved of making that change.

(05:16):

You got to agree on that upfront, don’t you?

Speaker 2 (05:18):

Yeah. And I think the big thing that you said there is the costs involved, like your team that’s agreeing verbally to these things loosely, it’s bad enough because it’s going to cost you a bit more labour, a bit more materials, things like that. But when it gets really messy based on some of these verbals is when people don’t understand the full cycle of the engagement, you’ve got to go back to a planning stage or that change now means we’ve got to go back to get planning approval change, those sort of things. There was a client, Tim that I used to work with, he had this problem in spades when we started work. It was always like the client wants to change. We’re always saying yes, but they don’t understand the ramifications of that even upstream. So even though it’s not a big material impact, the time we lose in terms of planning and administration going through councils, all of this sort of stuff that has to be done is costs that you’re paying for still.

(06:07):

So it’s not even just the material change or the change of a little bit of a design or a decision. It’s way more than that and people underestimate that and that’s why the impact to margin is so great often.

Speaker 1 (06:18):

And people just don’t understand it. It’s in someone’s minds like, “Hey, while you’re here, could we do this? ” Or, “Hey, could we change this? ” Or you’re working on a job site and say, “Hey, can you just move that from there to there?” And in the customer’s mind, they just think it’s a little job, but they don’t understand the complexities of construction or what it takes to actually run a trades business. And the cost of materials, the cost of labour, it’s not just easy to go, “Hey, move that to there and there.” And in the customer’s mind, it’s like, “Oh, it’s only two hours.” But sometimes that could be a whole day for one or two people to get that job done, plus the materials, plus the organisation, plus the liaising with this, plus the change and everything. Things take time and little changes add up a lot.

(07:02):

And I remember dealing with a trades business and he was based in Sydney and we worked out that he lost about a hundred grand a year purely just on poor variation management. And he was in that position where his bottom line net profit margin was just taking a hitting. He had constant cashflow problems. He wanted to be able to hire people, but he couldn’t because he couldn’t afford it. And so he was just stuck in this space and a lot of it just came down to very poor job management and it wasn’t until we started to go back and back cost a few jobs that he’s like, “Holy hell, on the last few jobs that I’ve done,” and he checked a few, he’s like, “Well, I’ve lost 10 grand on that job. I’ve lost 15 grand on that one. I lost eight grand on that one.” And all this, it seemed insignificant at the time, but the amount of money that he eroded from margins of jobs over a 12 month period was 100 grand and that’s just poor job management because the guys on site just didn’t pick up these variations because they didn’t know about it.

(08:07):

And so it’s not their fault. It was his fault. And it wasn’t until he brought this whole variation management process in place all these things got captured well, they were quoted correctly, they were signed off and bang, that money now started dropping to his bottom line. So it’s like that. We see this, I would say dare say, Dan, that this variation management is a lever that we pull in every one of our clients’ businesses as a whole they’ve got to plug to. It’s a real profit improvement play, isn’t it?

Speaker 2 (08:38):

It really is because there’s so many different elements to it and that’s what we want to go through now is this scrape framework that we talk about, this six steps to variation control. And as we go through these, they do sort of flow in an order, but it’s not like they’ll apply to you in an order. You might have a couple of these that are okay, but you’re falling down somewhere else. So this is just a mental framework to audit yourself and your business to see where you can start plugging the holes even within variation management. We’ve already talked about how that can happen at the end with verbal agreements, the difference between that and scoping. They’re two different ends of the spectrum, but it could be either one or both that’s tripping you up. So let’s go through scrape framework and work through this methodically in terms of what they are, not as a list or a numbered list of one to two to three to four, but just let’s go through them one at a time and explore them in their own right.

(09:32):

So before we start breaking this down, let’s start with we talk about the scrape framework. It’s an acronym S.C.R.A.P.E. So the first thing is scope That’s the S. C is capture, R is review A is approve P is plan and E is execute. So that’s what Scrape stands for. That’s why it’s in there. So let’s now break each one of those down. As I said, S is for scope. So Rob, talk us through what we mean when we say scope as part of variation management or variation control.

Speaker 1 (10:06):

Scope to me is what’s included, what’s not included on the quote. Like before you even pick up the tools to be able to start it and it doesn’t matter if it’s a $100,000 job, a million dollar job or a thousand dollar job, it’s really important that it’s clearly documented in the quote that got signed off around what is and what not is not included and then that is then clearly communicated to the team so the team know that when they’re starting that job, they’re 100% clear on exactly what is it involved and down to..

Speaker 2 (10:42):

Specs on materials.

Speaker 1 (10:43):

Specs on materials, specifications, everything. It’s so important that they understand the intricacies of that job so that when a customer then says, “Hey, can we add an extra downlight or can we change that downlight to something else?” It’s like, yeah, we can, but just letting you know that that’s a change order from that. So it’s really important that those things are documented well in the scope.

Speaker 2 (11:08):

Yeah. I think there’s two parts to it as well. There’s the documentation, the definition of what’s in and out. Then you’ve got to get agreement to that before you pick up a tool, as you said, you’ve got to have the definition right, but get the agreement. Don’t just think that, well, I put it in, that’s all there is to it. You’ve got to get that absolute agreement between both parties because any ambiguity is where the problems start in this scoping phase.

Speaker 1 (11:31):

Yeah, correct. And when you’re in that scope phase, like for example, where we’ve recently got our pool dug and we live in Bayside of Melbourne, which is just full of sand. The suburb next to us is Sandringham. And so there is a sand everywhere and it wasn’t until, and in the scope they were very clear to be able to say that just letting you know we’ve allowed this for your footings, if once we start digging that if we need to be able to add extra reinforcements to be able to get your pool safely into the ground and stable and secure, then we might need extra concrete for extra footings. And so that was clearly written in there and then obviously recently we got our pool poured and then on our next invoice there was a variation in there to be able to go, we needed extra concrete for extra footings as per the original scope.

(12:17):

And so there’s a clear example where sometimes a variation can be different latent conditions. It could be a time change, it could be a client change, but getting that scope clear upfront around what’s being allowed for, what is included, what’s not included is super important because what it does is gets everyone on the same page and then that triggers either a change order or a variation or it eliminates any confusion or any arguments down the line once the job started.

Speaker 2 (12:49):

Yeah. Nice. So that’s scope. Now let’s move on to the next bit, which is capture. So this is as you go through your process and a variation happens, capture talks to the idea of documenting every single change request no matter how small. You’ve got to treat it almost as if it’s not written down, it didn’t happen, or you’re going to have troubles. You’ve got to have that mentality about we must capture. That’s the next little piece of this.

Speaker 1 (13:13):

It is. And a lot of guys go, “Oh, couldn’t be bothered. It’s going to take me more time to be able to capture this in writing than actually get in and get the job done.” But variation management is a habit. It’s a process that needs to be in… It’s a culture within your business. So it doesn’t matter if it’s a tiny change or a big change. It’s about creating the habit and culture within the business that anytime something’s out of scope that it gets captured. Now, you don’t want to be renowned for that business where you go become a variation hunter because you don’t want to be like that. And sometimes there’s got to be that little bit of give and take where you give a bit and they give a bit, but you’ve got to get in that habit and educate your team around the importance of capturing it so it can be documented well.

Speaker 2 (14:00):

Yeah. And this is where we split it, right? This is where you’ve got to be really clear. So capture is the documentation of it regardless. Every single time, no matter how small, the R stands for review. So if you write everything down, like you just said, Rob, you can then review and assess the impact of the cost. Is it going up by too much? What’s the time it’s going to take? Before you commit to the variation, review it and assess the impact, because this is where you get to price it properly. You don’t have to say sorry for it later on. And similarly, like you said, you can add value here and go, “You know what? We’ll wear this one. It’s not a big one. We’ll look after it, all right? But you can make choices, but you’ve got to have that timeout, that review period as part of your process.

Speaker 1 (14:41):

Yeah, correct. And it gives you that review that it’s that momentary pause. Now, I appreciate that when you’re on a job site, you just don’t have time to be able to… Sometimes there’s critical timeframes and things that got to get moving. So you just got to push ahead. But more often than not, you just got to be able to create pauses in there to be able to go, time out, let’s review it, let’s make sure that we do this properly because if you review it correctly, it saves so many arguments or missed payments down the line because someone’s disputing an invoice that you send in a couple of weeks or a couple of days.

Speaker 2 (15:17):

So as we keep building now, let’s go to A, which is approve. Now this one’s all around nothing moves forward without client sign off. You’ve got to get two party sign off on your variations and it’s not a distrust thing. I think most people think, if I do that and I’ve got to get it done this way, I’m trying to protect against fights and my client and all this is because it’s just trying to say that they’re not going to be honest about their dealings. But the approval’s more than that, isn’t it? It’s more than just a sort of a protection mechanism. It’s a really important part of variation management.

Speaker 1 (15:47):

It is because you got to get to the point where you get things in signing. You don’t start a job until you got a quote signed off. You don’t start a job until you’ve got terms and conditions in place. You don’t do a change order or a variation unless it’s signed off and approved to actually go down that line because you’re going to have a conversation with someone’s like, “Hey, can you change this? ” “Yep, no worries. We’ll get that done. “And then a week down the line it’s done, you’ve paid for the hours and you’ve paid for the materials and then you turn around to the customer and go, ” Okay, that’s a $5,000 plus GST. “And they’re like, ” Whoa, hang on a second, five grand. I didn’t budget that. “And then you’re like, ” Well, we spoke about that. “And they’re like, ” Well, yeah, we did, but I didn’t realise it was going to be five grand.

(16:30):

“And so the whole approval process is it gets it in writing, it clears all the ambiguity out of the way. It gets everything out in the open and there’s no recourse then because you present a quote, you obviously add margin to the cost and it’s a fair and equal for everyone. They sign it off and you move forward because they’ve approved that change.

Speaker 2 (16:54):

Once it gets through to approve, we’re now on the home stretch, but we must remember to plan. Okay. P is plan in our scrape framework. So that means adjust your schedules, adjust the expectations with the client, adjust what’s happening on site for materials, delivery, subbies, whatever it is. An unplanned variation that happens on the spot is often a recipe for chaos, which then adds more cost to it as everyone scrambles to do things and puts in their bill to you to go, ” Well, you did it. Now I’ve got to charge you for it. “And it’s just a lack of planning at that point that’s letting you down.

Speaker 1 (17:29):

Yeah, it is. It’s a thing where a trading might be doing some work for the builder and the builder’s like, “You got to be done by next Friday. “And then a customer changes something or the builder changes something and they’re like, ” Okay, well we can do that, but that’s going to add another two days to what we need to get done. “And then the builders turn around going, ” Well, you still got to be done next Friday. “It’s like, ” Mate, it’s like physically impossible we cannot get all of this done in that timeframe. So that’s what we mean by plan where when change orders come through or latent conditions or time pressures or whatever it is that’s creating a variation, you’ve got to readjust schedules and readjust expectations, communicate movements in those things. So again, everyone’s on the same page, it eliminates or reduces the amount of conflict and issues that are going on because you’ve reset expectations and got on the front foot and planned accordingly.

Speaker 2 (18:22):

Nice. The last one is E and this is execute. This is a bit of a tricky one because this is the reminder that you must execute and do the variation according to the scope you said, the agreements you’ve made, what’s been signed off and don’t trip yourself up with your own scope creep, for instance, where you decide you’ll do something a little bit extra, you’ll put something on it because you haven’t gone back to the variation process that you’ve just been working so hard on. And we’ve seen that with guys all the time. They put all this in place but then they don’t follow their own plan for the variation that was agreed in the first place.

Speaker 1 (18:56):

Yeah, they sprinkle a little bit of extra on top and then it’s just like, let’s just get in and get the job done and complete it, square away that little bit, invoice for it and move on. And yeah, you got to get in and obviously you want to do a great job and have a really good finish, but you got to be careful that you just don’t do extras at your expense when a customer may not even appreciate it at the end of the day.

Speaker 2 (19:19):

Yeah. I remember Dave talking about this all the time, our client Dave, and he used to be like, “Well, I know I can see that little bit extra that would make this job just so special.” And all these little extras where it was a variation that had already gone in and there was like a little extra on top of a variation. So that was the surprise that then happened when you add it all up. It’s like, “Where did we lose margin?” “Oh yeah, I added that little bit extra when I was doing that variation because I thought it’d be a nice touch. It sounds nice, but it’s going to cost you money.”

Speaker 1 (19:48):

And it’s one of those things that I know we say it to clients all the time is that whenever you are going to be that nice guy and go over and above something, you don’t want to do it for the recognition, but you’ve always got to, if you’re going to cop a hit for something or go over and above, you always got to let them know because if people don’t know, they don’t appreciate it. And it’s almost as good as just saying it’s going, “Hey mate, something’s happened here, don’t worry, we’re going to go and fix it. Just letting you know it normally would’ve cost $1,000, but we’re going to wear the cost of that today.” But if you just go ahead and do that and it costs you $1,000, the customer doesn’t know and they don’t appreciate it. So you don’t make a big deal about it because sometimes in business, you got to give and take a litle bit.

(20:29):

There’s got to be that little bit of argy barge along the way. But when you do do something for one of your customers and you’re not going to wear the variation around it, you’ve got to communicate that and just say, “Hey, we’ve done this. We’ve gone over and above there. We’ve changed this. That’s on us.” Normally it would’ve been a thousand bucks, but Jay just say, “We’ll wear the cost of that and let’s just keep moving.” So that little communication piece goes a long way for building good rapport, doesn’t it?

Speaker 2 (20:56):

It really does. In stakeholder management terms, you’re talking about reminding the customer of the value you are providing along the way. So it really does go a long way in that sense. I’ve got a challenge, but I know there’s a story. I’ve heard you tell it before and I thought today is before we round now to be a really good one. This is you being, instead of being on the side of the tradie, this is you being a cheeky customer looking for a variation. Do you want to tell the story about the, never about the Arbourer story that I’ve heard you tell before, because I think it’s a really good example of how this works both ways. It was just really cool.

Speaker 1 (21:30):

Yeah, I love this story. Whenever we teach variations, I always tell the story and this is, you’re right, he wasn’t a client and this is me getting schooled around this. We’ve got a big tree out in front of our house and every year it drops its leaves and it’s a huge, big tree and we love it. But yeah, there’s times where I have to get in and get an arborist into trim some branches so they’re not hanging over the house and everything. And we got the arborist in and obviously they quoted their job and they came out, quoted the job, job to trim the tree and do a little bit of stuff out the back as well. And then classic is when someone says, “Hey, why are you here?” Or, “Hey, if you got a minute or if you don’t mind, can you check this out?” That’s a pretty clear indication that a change is coming. And so I said that to the lead climber and I said, “Hey mate, why are you there? Do you reckon you could just see that big branch there and blah, blah, blah, do you reckon you could just knock that out for me and blah, blah, blah, blah?” And he goes, “Yeah, I reckon we could, but this is where he got me. ” He’s like, “We can, but just let me go and check the job before we agree to that. ” And I went, “Oh, okay.” And then he went and checked the paperwork and obviously he went back and rang the office and he goes, “Hey, Rob, just letting you know we can definitely do that, but just letting you know I spoke to the office and that big branch there that you’ve asked me to do, we can do it, but just letting you know we’re going to have to quote you for that because that wasn’t part of the original quoted job.” And there’s a great example around in sales, that’s called posturing and it’s just like, “Hey, we can do it, but just letting you know it wasn’t included in the original quote, would you like me to go ahead and quote that for you?” And obviously I wanted it done. I just went, “Yeah, while you can. While you’re up there, you might as well get that done.” He priced it and that was a change order from my end, a little variation done. They got the job done into the end of the day, it cost me a few hundred dollars extra. And so there’s a great example where most people would just go, “Yeah, the customer’s asked us to do something, let’s just look after them.” But you’ve got to think a couple of hundred dollars on a number of jobs per week for this arborist. Dan, it adds up to a lot of money every month, every quarter, every year, doesn’t it?

Speaker 2 (23:55):

It does. That nice little bit of goodwill for you that multiplies ends up in more tipping fees, more rubbish removal, more rectifying what happened on this job in terms of why are we losing margin, there’s more accounting time on the backend. The ripples of doing that over and over again can’t be underestimated. I love that story because there’s so many teaching points around it from both sides. It’s really, really cool.

Speaker 1 (24:17):

And I was trying to put it on. I kind of knew I was asking the question because that’s why I’ve said it a few times. When someone says, “Hey, why are you here or can you check this out? ” It’s often an example of when someone’s going to ask you to do something extra and it’s not about saying no, it’s your ability just to go, “Hey, yeah, we can do that, but just let me check if that was included or excluded in the quote.” And then you just go back to them and go, “Hey, we can do that, but just letting you know it wasn’t included, are you okay if we just quote that up for you and you can make a decision if you still want to go ahead?” So you’re still saying yes in the end of the day, but you’re being firm and fair and you’re standing by what you’re included or excluded on the quote at the end of the day.

Speaker 2 (24:57):

Yeah. Love it. Love it. All right, challenge time.

Speaker 1 (25:01):

Let’s do it.

Speaker 2 (25:02):

All right. I want you to look back at whatever it is. Rather than look back, let’s just call it what it is. Let’s identify one job where variation wasn’t handled well. There’ll be one in there probably, you’ll have it, you’ll know what it is. So look back as far as you need to to go back to it. And what I want you to do is a Scrape audit. So think about that job, go back over it and work through that scrape lift we gave you. So go back and ask yourself the question, was it scoped correctly? And if it’s a tick on that, great. The variation wasn’t a problem because of the scope. Go back then and say, did we capture it in writing? Tick, yes, we did. Did we review and assess the cost? No, we didn’t. Cross and try and identify where in the Scrape framework you’ve got that hole in your variation management and your variation control.

(25:49):

And if you’ve got multiple of these and you’re like, “This is a big problem in my business,” do more of them. Do like three, four, five, try and find the pattern and then you can do something about it. Then you can start to plug it and you can start to change the way that your business is running when it comes to variation management. Really important.

Speaker 1 (26:06):

And what they might find, Ian, is there’s tens, $100,000, $50,000, $20,000, $80,000. You never know, but it’s not until you go back over old jobs and sometimes you don’t want to know, but you’re better off just copying the lesson and going, “No wonder I’m busy, but I’m not making the money that I kind of expected.” This is one of those things where unless you just go looking for this here, you don’t know what to fix until you go looking.

Speaker 2 (26:34):

Yeah, absolutely. Now let’s add that. I love what you just said there. Extra bit, bonus time. Try and estimate the cost that that whole in your variation management was for you. What were you out of pocket on? And then add that up for all the jobs where you found that because that’ll give you that impetus, that idea and that motivation to really do something about it. So attach the dollar value on it as well. Make sure you put that in there. So that’ll be another sort of face to facts moment around you need to do some work on this sort of stuff.

Speaker 1 (27:04):

If you know that there’s a number of holes in your financial bucket and variations is one of them and you’d like some support to be able to get this right because you know you are busy but you’re just not making the money that you expected from your business. Then jump across to strategysession.com.au, fill out the application form, book in a time that suits. Let’s start the conversation to be able to talk through these financial management systems that you’re obviously missing in your world that we can help you with. This is our GM all day long with trade specific businesses. So yeah, jump across, booking a time, let’s start the conversation, see if we can help you out. Hopefully you’ve enjoyed today’s conversation. It’s one of those meaty ones where there’s a lot to it and it may take time to implement this over a period of time, but you’ll thank yourself because going forward, then you’ll plug one of these holes in your bucket where you’re eroding margin on jobs.

(27:54):

Looking forward to coming back to you next week with another episode here on The Trade Den. Until then, take care.

Speaker 2 (28:00):

See you soon.