Wednesday, May 21, 2008

From Two Men in a Garage to Successful Drywall Business: How Ernie Pearn Built Cutting Edge Drywall One Wall at a Time

In 1992, Ernie Pearn, aged 28, and his business partner launched a commercial drywall business in San Diego, California. With minimal start-up cash, Cutting Edge Drywall operated from Pearn's garage and experienced some common contractor challenges over the years. Today, with an average payroll of 50-60 laborers and annual revenues close to $4 million, the company is a formidable player in the region's commercial drywall market. Here, Pearn talks with Fred Ode about his construction experiences, observations, and strategies for success.

Fred: So, you are the founder of Cutting Edge Drywall? How did you come to start your business?

Ernie: Well, we had visions of grandeur that it was going to be so easy and we would make so much money. Then reality hit us and we learned that that's not the way it really works in the business world. All the people we thought were going to come over with us, didn't. Both customers and employees.

Fred: Wow, that's classic.

Ernie: So, the first few years were definitely lean. They were tight, and we spent a lot of time trying to figure out how to make it work. At that point in time we were doing all of our accounting on a three-column notepad. Job costing, people's hours, and everything else. After approximately two years, we purchased a Peachtree accounting program, and the reason we picked them was they had a real strong job costing report. And we were with them up until 2006 when we signed on with Foundation Software.

Fred: What were some of the biggest problems you had in those first few years?

Ernie: Cash flow. That severely limited our ability to go get larger work. We were definitely pigeon-holed into the small-contractor category with a lot of the general contractors we worked with. They were very limiting on what they wanted to give us because they didn't know how much we could financially afford.

Fred: So, what size jobs were you doing back then?

Ernie: When we first started, a big job for us was 15-20 thousand dollars.

Fred: And how many people were you running in the company?

Ernie: Well, myself and my partner were out there doing most of the work ourselves.

Fred: Okay, so the business was all hands-on then, like "Two men and a truck," so to speak.

Ernie: We worked out of my garage. The typical start-up business, I guess, if that's how you want to look at it.

Fred: Knowing what you know now, what would you have done different?

Ernie: Boy, that's an interesting question. I would definitely say I would've done a lot more pre-planning on what I wanted to accomplish, and how legitimately we were going to do it. Fortunately for me, my business partner had experience. He's older than I am, and he had experience enough to keep my head grounded. I wanted to go lease office space and hire people on right away because I thought it was going to be a straight transition of exactly what we were doing. But had we leased space at that time it probably would've put us out of business within the first few months, because we just were not getting all the work we thought we would. So the old adage "don't count your chickens before they hatch" was definitely applicable.

Fred: I've seen new businesses spend all this money only to fail, exactly for the reasons you're saying. So can you tell me a little bit about your company now. For example, how many employees do you have, what type of work do you do, that sort of thing.

Ernie: We are typically running between 50-60 employees right now, in that range. We are a non-union, middle-step commercial drywall contractor. We do very little residential. On average, we do about $3.5 to $4 million in annual revenue. Fred: Your business is very labor-intensive, obviously.

Ernie: Correct.

Fred: What about your individual background? Can you tell us a little about your educational, training, or work experiences.

Ernie: I graduated high school in 1982 and immediately went into junior college. At that point in time I wanted to get into electronic technology. I wanted to be an electrical engineer. But I decided that I wanted to do it from the ground up, I didn't just want to take book knowledge and figure it out. I wanted to have practical experience, so I wanted to become an electronic technician and then become an engineer. After taking all the courses required to get my AS degree I went to get a job as a technician. However, nobody would hire me because I didn’t have any experience. I had a friend who was working for a construction company and I needed work, so I went to work there as a laborer. I began driving the truck and cleaning up jobs. And from there, within a year, I was the warehouse manager. A couple years later I moved up into estimating, and I soon became director of estimating. That's what I was doing when we started Cutting Edge Drywall.

Fred: So you pretty much just fell into construction and drywall. Do you know how common that story is? Almost everyone I interview, no matter what their profession is, they sort fell into their careers; it was never planned. As far as your company's growth pattern, is there a point when you really started to take off. Because 50 - 60 employees is a pretty decent size contractor.

Ernie: When we were running it out of my garage, I felt limited because we never really made the commitment to take me out of the field and put me in the office where my job was just sales. When we finally decided to do that, when we leased a space, that's when our company took off.

Fred: You decided to become a business instead of "two men and a truck", so to speak

Ernie: It was almost more of a mind-set that people looked at us differently because we weren't a garage business anymore. And it was my own mindset to handle it differently. When it was in the garage, I always felt that I was never really away from the office Getting that separation back between your home life and your office life was huge.

Fred: So, that's obviously the turning point. How would you evaluate your success and profitability? Do you consider yourself a reasonable player out there?

Ernie: Definitely. I do not have any desire to be the largest or the biggest. We're very comfortable where we’re at. Our growth model has always been slow and controlled.

Fred: And are you going to continue the growth?

Ernie: Absolutely. I wouldn't say I have a business plan that states I want to do this much within this timeframe. It's more, looking back at what we've done, we never bit off more than we could chew, financially and work-wise. We have always tried to increase our volume annually by 5 to10%.

Fred: Which is a good, healthy growth. Because you don't suffer much growing pains at 5-10% a year.

Ernie: Yeah, and it's been a long time in coming, looking back 15 years. I would’ve liked for it to be like this in the first year but obviously that wasn't practical.

Fred: So what do you think are the key reasons, the critical decisions behind your success? And what do you have in place to help ensure that you're going to continue to remain viable?

Ernie: We really try - and this is a constant ongoing effort – to place customer service as our number one priority. Because if we don't have the customer, we don't have profits to make. So we have to keep the customers happy. And secondly would be quality control. It's definitely an on-going effort. I don't think it's ever something that's achieved; I think that you're always working and striving to better

Fred: So basically you're saying you're never satisfied, you can always do better. I mean, that's a principle that we operate on You can never be comfortable with where you’re at.

Ernie: I'm a firm believer in change. I think if you become comfortable where you're at, you're stagnant. You always have to be trying to do something differently, better. Not huge changes, but you always have to be looking ahead, that something's going to change, the market's going to change, the competition is going to change, there's always a different element involved in business.

Fred: Can you give me some examples of that? I mean, the accounting system is an example, just saying okay, we needed better cost controls, etc. Do you have any examples of the sort of changes you've gone through?

Ernie: Well, in our office, like you say, putting in an accounting system, putting in an estimating system, were changes that we had to make.

Fred: What estimating program do you use?

Ernie: Quick Bid. It's a big system that you can purchase different modules, per se, for different trades. So you can use it under general contracting, you can use it for drywall, you can use it for ceilings. We implemented that about 5 years ago.

Fred: And what kind of benefits did you see from it?

Ernie: Oh, it's huge. I'm a very detail-oriented person, so I don't believe in looking at a drawing and saying "Well, it's two pages so it's a $20,000 dollar job." We go through and we break it down into how many screws we think we're going to use, how many pins, how many pieces of stud based upon what the framing requirements spacings are. We also break down our labor into all the different categories like framing, hanging, taping, supervision. If we're doing doors or anything like that, we add those add in. And the materials are always at correct pricing so we're constantly updating our material prices a much as possible. So it's in the details that we remain competitive.

Fred: Okay. Now have you aligned your job costing with that yet?

Ernie: Our job costing, yes. What I would like to do - and this is one of the things that we just haven't taken the time to get into it yet - is transfer data from our Quick Bid system directly into Foundation. Right now we are manually entering the data.

Fred: Okay, so your doing it, but you’re just spending some time you shouldn't need to spend.

Ernie: Correct.

Fred: I would suggest that you give our client services department a call so that you can get that set up. Now, regarding the competition in your area, is it a tough market?

Ernie: It's always changing. It's never been a "we feel we hold the market" in any way, shape, or form. I would say in the field of work, based on the size of jobs that we go for, there's easily 15 - 20 competitors. And as one or two go out of business, there’s always one or two new ones coming in the door.

Fred: How do you separate yourselves from the competition?

Ernie: I would say that the majority of our business, being 80-90% of it, is repeat business with the same customers that we've been working with.

Fred: So it all goes back to customer relations then, and service.

Ernie: It goes back to both those items again, exactly. We don't necessarily go after the hard-bid market where we're just a name that they see on the proposal. We want them to know who we are. Fred: So you might negotiate, you might put a bid in and then negotiate, if you're a little high.

Ernie: If we have that relationship with the contractor, yes.

Fred: I understand you are involved with ABC out there. Do you want to talk a little bit about that and any other associations or organizations you're involved in?

Ernie: We got involved with ABC about four years ago and I'm on the board here in San Diego. I think this is my 3rd year. Everything's been positive and it's been mutually beneficial. I support them financially whenever practical, and I definitely look forward to a long-lasting relationship with them.

Fred: What do you like about your end of the industry, and what do you like the least or what do you struggle with most?

Ernie: I would say what I like the most is the challenge to dig deep in this, business; that's kind of what gets your blood pumping and keeps you excited. Just being a business owner.

Fred: That excitement. That's how I look at myself, also. I happen to be in software, accounting, technology, but it could be anything. What do you like the least?

Ernie: I would say government regulation. One of our big issues here is illegal immigrants, and every time we turn around there are new laws being passed. It seems to be transferring the issue back to the employers. It first it started with the I-9 verification, and I-9 has just changed again. Now they're talking about the card-check type thing where they're going to be issuing certain cards for people. There's no formal training on any of this stuff; suddenly a law is passed and that's what you’re required to do and you’re fined if you do it improperly.

Fred: What kind of trouble can you get in if you make the mistake?

Ernie: Typically if it's the I-9 I think it's like $2500 per person. The fees can just get astronomical. OSHA can come out on a jobsite and fine you for things that you're required to know, but again, there's no official training on it. You supposed to go search all these things out. Which is great, but how do you know if you haven't missed something.

Fred: Right. Does ABC help out with this at all?

Ernie: ABC did offer a class that I sent our superintendent to which was an OSHA 30 hour course. It was extremely eye-opening for us, letting us know how many things we were doing wrong. And these are old OSHA regulations, not anything that's just come out. I mean I have been in this industry since ’84, ’85, and these are things I would never, ever have been made aware of working for anyone else, including much larger contractors than me. What I am saying is, these are things you're supposed to know. The law says "Ignorance is no excuse" but there's really nothing that helps contractors to understand the regulations unless you just happen to stumble across it. And I think that's one area where our government is seriously lacking.

Fred: Yeah, and I don't think that's changing. So it's something as a business person you have to accept it and learn to educate yourself I guess.

Ernie: Yeah, whenever we get mailers that come in from some of these companies that provide manuals, we generally get them because there's always something that we learn from them that we didn't know we were supposed to be doing.

Fred: Right. I think that sort of answers my earlier question: How has the industry changed since you started? Based on your observations, it seems like government regulations are getting worse and worse.

Ernie: I'd point to some other things too. Our labor force has changed dramatically. The production rates have probably gone down by almost 50% from what they were when I first started.

Fred: Are you serious? What's your theory on this?

Ernie: Back when I first started there was always a pride in the competition amongst the employees to better themselves, you know, it was "Well I got up 25 sheets today" and the other guy would say "Well I got up 40 sheets today." There was an inner competition, there was a pride in being the best guy out there. Nowadays you just don’t find that anywhere. If you tell a guy, hey on the other job they guys are getting up half again as much production as you, and they shrug their shoulders and "Oh well."

Fred: Do you ever consider paying a piece-work rate?

Ernie: We do that on a limited basis due to the fact that our quality control goes down when you do that. You might get more production out of it, but then you spend more time going back and fixing it, and the excuses you're going to get is, "hey, to get that kind of production this is what I had to do."

Fred: Now, is this since you started in business, or in the 80's when you started in the industry, seeing this happen?

Ernie: I would say since I started in the industry.

Fred: Okay. Now, obviously as a software developer, I'm always curious about contractors' use and attitude about technology. Can you talk a little more about that, how your company approaches new technology and how it utilizes it?

Ernie: We don't necessarily have any formal programs. I'd say if there’s something that I feel would benefit the company, I'll bring the idea into a manager's meeting and if everybody likes the idea then we'll look into it further, do some more research on it, to the point where we decide to purchase it. For example, we've run Nextel radios for many years, and Nextel offered a GPS product that went along with it. We wanted to have the ability to track where people were at what time, because we were having a lot of problems with improper information on timecards. And it seemed like a good idea. But after implementing it, I think it caused a lot of bad blood, and we felt that there are better ways to have done that, so we stopped using them.

Fred: Well, that's a side issue to change; When you take risks on change sometimes you have to say "okay it didn’t work" and it’s good to just back away from it if it doesn't work. So I commend you on that.

Ernie: It was more than "it didn’t work." It did work for the purpose that we thought it was going to work, but then there were other things that came up because of it that ended up outweighing the positives. It was almost too "big brotherish." There has to be a camaraderie and trust between employer-employee, and we thought that it was better to try and develop that approach rather than say, "we're watching you."

Fred: Yeah, rather than chase after the symptom, look for the cause and try to improve the relationship.

Ernie: Right.

Fred: What kind of advice, would you give a young, 28 to 30-year-old who wants to start his or her own new construction business?

Ernie: First of all, you're going to need a lot more money than you think you do. And that's due to the pay cycle of the contractors in the commercial industry. We do the work and we turn in our bill for it at the end of the month. Meanwhile you've been paying for your labor all along, and our philosophy in our company has always been we pay all of our material bills early to get our discounts on them, whether we've been paid for the job or not. And I look at that as a philosophical theme that, I bought the material from the material house, it wasn't the job that bought the things. So my reputation is based upon this and I always pay all my bills. So they've been paid regardless of whether or not I've been paid, and if I have to fight out in court to get paid, that had nothing to do with the material house, that was my doing. Some people do it differently and I know big business and that whole philosophy is you owe the money, but that's where I draw the line and I say this is my business.

Fred: So your advice is you need to start out with a cushion of cash.

Ernie: A much larger cushion of cash than what you would think. Because when we started the business we said "okay we need x amount of money, but we'll never use that much up." And boy we went through that amount of money in a heartbeat. It doesn't take much work, paying for the labor and material, and all that money is gone. But then you sign the next job and you're doing that one, and then you sign the next job and you're doing that one, and it’s 45, 60, maybe even 90 days from invoice date before you get paid for the first one. So that rollover of money is huge.

Fred: Any other advice?

Ernie: Definitely, it's an organizational business. You have to have all your paperwork right and read your contracts. Fortunately, I came from a company that had an in-house attorney who went through and read all the contracts and marked them up. And then we would send the contracts back to the generals with "we want to make these corrections" and they would be mutually agreed upon and moved on from there. Most people, at least in my industry, don't even read the contracts.

Fred: Really?

Ernie: They look at the dollar amount and they sign them. And I can't tell you how many times I'd get a phone call from a contractor and say "you know, you're the first person who's ever asked me that question. Why does it matter?" And I'll say "because it's a contract between me and you and this clause or term or whatever in unacceptable, that's why it matters. Before I endeavor to do this job this needs to be fair."

Fred: That's funny because I recently interviewed a construction attorney and he basically said the same thing. He said contractors do not pay enough attention to the contract, the scope of the work - what's included and excluded - and limits of liability. From his perspective, that's the number one mistake contractors make.

Ernie: As I said, I can't tell you how many times I've been told "you're the first person who's ever asked me that" when I've questioned a contract.

Fred: Now, you do this on your own, do you have a lawyer that you consult with?

Ernie: Most of it I do on my own. If there's something that I'm very unfamiliar with or I have questions about then I'll get on the phone and either call the insurance broker or the attorney. In most cases it goes back to insurance items, because that seems to be one of the things that's changing on a rapid basis is what are the insurance requirements on the job, they keep changing. Now it's waivers of subrogation.

Fred: What is subrogation?

Ernie: That is the liability on a project used to be shared and when you sign a waiver of subrogation, the general is subrogating his liability to you.

Fred: Which you don't want, obviously.

Ernie: Which we prefer not to have, exactly. But if they require it, our insurance company then charges us more because they're taking on more risk.

Fred: Right. But you make sure you're covered.

Ernie: Exactly.

Fred: Looking ahead, what are the greatest challenges that a contractor should be aware of?

Ernie: The greatest challenge that I see coming up in the future here is going to be our manpower situation. I think, if the government truly tightens the grip on illegal immigrants in our industry, it will have a severe and negative impact on construction. Right now, I would say 50% of the manpower that's here is probably illegal.

Fred: Really?

Ernie: And we have all our paperwork in line. But how do we prove that our paperwork is legitimate or not? If they truly crack down on that, that's going to be an issue, and we're just not going to have the manpower to do the work.

Fred: That's interesting. It does present a real potential problem. Do you have anything else you want to add?

Ernie: Just this: never be satisfied, and never stop learning.

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