Compliance Is the Floor: How Construction CFOs Use Data, Tax & Tech to Win

Rishi Srivastava (00:41)
Today our guest is Lee Klein. Lee, welcome.

Lee Klein III (00:43)
Hey man, appreciate you having me brother.

Rishi Srivastava (00:45)
First, the first section here is on your career and perspective. You spent over 15 years serving contractors across the Gulf South. What first drew you to the construction industry and what keeps you passionate about it today?

Lee Klein III (01:00)
Man, I think it’s the people. The people drew me into the industry and the people are keeping me in it. Just the network in itself, just the nature of a general contractor or any of the subs or anything like that. We have a common interest. A lot of them love the outdoors. They love hunting. They love fishing, sports, getting their hands dirty. And I think when I first got into the accounting world, I dabbled in banks and I dabbled in manufacturing companies and…

Rishi Srivastava (01:02)
Mm-hmm.

Lee Klein III (01:25)
Realized that I only had one suit, so I didn’t have to have a suit going to a contractor’s office and I could talk hunting and fishing and things like that. So I think just the common interest and just being able to be super relatable with them. And then right now it’s just all the things that they’re being inundated with with technology and you see new construction all over the place and just what they’re building before our eyes is incredible. And they’re so busy building that.

Rishi Srivastava (01:30)
Mm-hmm.

Lee Klein III (01:52)
all this tech is kind of getting them, you know, to me, would overwhelm me. And so I think my passion right now is to help these good old boys, you know, kind of understand the tech, what’s all going on, you know, what are the best options out there that I’m seeing and things they need to be mindful about, you know, as they continue their journey and grow however they want to grow. So I think that’s, I that answers the question, brother.

Rishi Srivastava (01:52)
Mm-hmm.

Yeah, as a principal at BDO, how do you balance the compliance side of your work? Assurance, bonding, and reporting with the advisory role contractors increasingly expect from their CPA firm?

Lee Klein III (02:30)
Man, I think the way I balance it, I have a great team. I’ve got folks that are on the assurance side that handle the audits on my clients, know, to handle the review level financials, compilations. And then I’ve got my tax team and leadership there that, you know, while one’s doing the financial statement, my tax team is gathering up the financials in draft form so they can start working on. So it’s just a really efficient process. And that’s kind of freed me up to really

dive more into that consulting realm of things. I’ve been in the industry for 15 years. I’ve done the audits. I don’t like auditing. I don’t think contractors like to get audited, but it was a necessary evil. learned a lot through that process, but I’m really grateful for my team at BDO, Legacy Horne folks that I grew up with. And I think they’ve allowed me to kind of get outside that box and start exploring different arenas we can help our contractors.

Obviously, all keeping in that vein because we are a CPA, we’re a CPA firm, we have to maintain independence. So there’s checks and balances to ensure that our consulting clients, they are bearing the ultimate responsibility for all decisions, but we’re advising them. But they bear that responsibility just to make sure that we’re staying above board on the independence front.

Rishi Srivastava (03:43)
It’s a tough line.

Lee Klein III (03:45)
Yeah, yeah

it is. I’ve got clients, man, they’re like, Lee, I don’t want you to be independent, So we’ll just outsource the audit or the review and we want you to be full in and helping with the decisions. And those are easy. It’s like, all right, cool. And just contact one of your local firms. And with BDO, we have a BDO Alliance group of firms that we can do that kind of stuff with if need be.

Rishi Srivastava (04:10)
The next section here is on compliance and assurance. Many contractors view financial statement reporting as just a check the box exercise. What are the biggest missed opportunities you see when leaders don’t leverage these reports strategically?

Lee Klein III (04:27)
Yeah, you know, first off this check the box. Mine said it’s a product of the industry. know, it’s contractors. They need financial statements for state licenses. They need it for bidding and for performance bonds for lines of credits and all of those different users have different, you know, metrics that they’re assessing. You know, one state might only require $50,000 of equity to get it. So you can just fire off an internal and get it right.

Rishi Srivastava (04:36)
Okay.

Lee Klein III (04:52)
⁓ But sometimes they require a review or an audit level type financial statement. But then a surety, they’re wanting to see strong working capital. They’re wanting to see strong equity. So I think it’s just understanding the user of the financial statements that it is not just to check the box to get the license or to get the bond. know, there’s some things that I’ve seen in my career that, you know, just with internal financials, sending it to the surety off the cuff.

that within their QuickBooks or whatever ERP system they’re using, they might have a current asset mapped as a long-term asset or vice versa or current liability mapped to a long-term and it needs to be current. And all that does is skew working capital. So they may submit a financial to Assurity and on paper, it’s showing that they’re negative. If they have a deficit of working capital, well, it’s because they just misclassified and presented some things wrong.

on their internal financial statement that the year end review of the audit firm, whoever’s doing it, they would go in there and remap all of that kind of stuff and get it to the right spots. So it’s just being careful of not losing out on an opportunity to go bid on a job, to get that bid bond and performance bond because of just lackadaisical – – – errors. And that’s happened before. We’ve had sureties tell our clients no or no call Lee.

and he needs to put the job schedule together for you and we need to get this balance sheet right and presented correctly. You know, so I’ve done that several times and what that ends up being is a rat race because they got to submit it. They got to get it approved and they got 24 hour window. So it just puts everybody in the bond versus just doing it right the first time and having a system in place that you know what your working capital is, your equity is, and you know it’s right. You got it blessed by somebody, by your CPA, whoever it is before shooting it out there.

for the world to see.

Rishi Srivastava (06:39)
These users, like you said, banking has different requirements compared to surety

Lee Klein III (06:43)
Yes, yes indeed. Different metrics, different ratios that they’re looking at. So yeah, it’s very different.

Rishi Srivastava (06:50)
Right. Bonding capacity is often tied to financial health. What’s the most important advice you give contractors when preparing their financials for sureties?

Lee Klein III (07:01)
Yeah, bond capacity is everything, I would say make sure your WIP schedule reconciles to the financial statements. You know, there’s a lot of times you’ll see the contract assets, the under billings and the over billings, that number at the bottom there. Well, then that balance sheet doesn’t reflect that number or those numbers. So right off the bat, that just starts the thing off on the wrong foot with as far as credibility. And they may view it as a red flag. Why doesn’t this reconcile? Well, this job schedule may not be complete or it’s not correct.

So that’s a red flag and something I’ve seen. know, being ready beforehand to explain project fades is critical. I mean, you got to know what jobs are trending down in profitability and know that the sureties got all that. They’re keeping logs on that. And so every time you give them a WIP they’re analyzing, they’re putting it in their little nerd database and they’re looking at profitability measurements over time. And

be ready to explain why it might just be weather. It may be things that they can’t, know, the contractor really can’t control and that’s something that the surety said that makes sense versus it just being a blown estimate because our estimator didn’t do his job right. Right. So I think all of those different things over time, you know, ⁓ another thing that I see a lot, you get an interim financial statement done and you’ve got the completed job schedule section and you got the progress at bottom. Well, when it comes time for the year end,

the job that was marked as complete up top, all of a sudden has $150,000 more cost on it when it was supposed to be completed at the interim. So I’ll have securities call and moan and complain. So that’s one of those checks before we issue anything. It’s like that has to be completed. If it’s complete, it’s complete. So when we do that year end reporting, we need to, that’s something that happened after the fact. And it is a process or a system conversation with the client.

Why is that happening? Well, it could be warranty. It could be something like that, that the job was really closed. There’s some warranty. Well, we’ll just separate that out, keep it closed. We’ll just, you know, disclose that separately on the financial statements as warranty cost But one thing, you know, bonding is the lifeblood of a contractor. know, working capital, current assets minus the current liabilities. know, working capital definition for sureties is different than what GAAP says it is. Prepaid expenses are allowed.

Inventory is allowed for GAAP to be in current asset and part of working capital. The surety discounts that stuff. They may discount prepaid 50 percent. They may discount it 75 percent. They may discount inventory 50 percent. So there’s almost an adjusted working capital figure that the surety does that’s off that balance sheet. And whatever you’ve got not tapped on your line of credit, they might add that back to the potential working capital because that’s excess cash that you have access to.

So that’s not showing up in my working – capital calculation, but it is for them. So I think it’s just understanding if you’re meeting regularly with your surety on, okay, hey, what is my bonding in single and in aggregate? And knowing what those thresholds are, then it may help save some time in the back end. If you’re trying to go after a $25 million job, but you’re bonding in aggregate, which is based off equity times a multiplier.

says that man, you’ve got a $30 million aggregate bonding capacity and you’re going after $25 million job and you already got $20 million on the books or $25 million on the books, that’s open still, don’t waste your time on that. There’s no point in bidding it or estimating and getting involved, all that pre-con type stuff, wasting your resources, your time and energy.

when it’s probably gonna be a long shot. So I think that’s a real critical is understanding the multiplier, understanding how that surety is calculating that single number and that aggregate number. And I think that goes a long way and it helps with just shooting for goals too. Hey man, what do I gotta get to, working capital wise for me to lose my personal indemnity Because I don’t like signing off everything that I’ve ever made and gained in my life and letting the surety have it if a job goes south.

And those numbers just go up. mean, there’s not a set number of what that working capital must be to drop the personal indemnity. But it’s important to have that conversation with your agent, with your surety, and just everybody be on the same page and let them know that’s your goal. That’s what you to do. And that may be a different strategy on keep retaining your cash in the company and how you do that every year and not going to buy a $500,000 boat or taking a $500,000 distribution out because you had a great year.

and retaining that stuff so you can lose that personal indemnity and achieve that for the surety.

Rishi Srivastava (11:34)
So many good pieces of advice there,

What are some common pitfalls contractors face in audits and assurance that could be avoided with better processes?

Lee Klein III (11:44)
Yep. One thing about, about audits in our world, we think about it as a compliance measurement, right? It’s a something that has to get done, but in the surety world, in the banking world, it’s a credibility measurement. It’s a level of assurance. That’s the grandest level of assurance. So it’s something that has to get done. Right. So with that, I told you, I didn’t like doing audits I hated doing artists. It’s just a lot of work. You got to go in there and you’re opening up the lid, man, a Pandora’s box. And there’s some times when you have.

you see an error in job cost and okay, well this one wasn’t coded, well then you gotta dig in more. You gotta select another sample and you gotta keep digging. So it just starts unraveling. But a lot of areas that we see is just around the WIP schedule. You know, not updating contract amounts for change orders. You know, the WIP, we do our contract test and we pull it, we’re like, the contract’s $575,000 more than what you’re showing on the WIP schedule.

You know, so then that creates having to redo the WIP schedule because then you got to add that additional cost on that change order and your estimated cost complete. So it just changes up things, man. It just causes some red flags. And a lot of times that’s that’s because the people in the field have not or the project manager has not relayed that information to accounting yet. That is a bottleneck in itself versus it being some kind of a system of automation where change order happens within the ERP.

it’s automatically updating that contract value on the WIP schedule. That’s in a perfect world, and I think we’re getting there. But that’s something we see a lot. We see, and sometimes we’ll find it when your billing’s to date exceed your contract value. So there’s different checks that I look at, just doing simple math. If that number’s negative, then okay, we gotta look into this one. And then let’s think of some other ones. ⁓ retainage.

You’ve got a lot of your smaller contractors that don’t bill retainage until it’s finally done. Like the job is done, then they bill everything out in the system where that needs to be recorded as they’re completed and stored to date and the payouts are issued. That 10 % or 5 % needs to be hitting that bill to date, every single payapp That’s part of the revenue and it should be going to retain as receivable. A lot of times they’re just booking the net AR and then at the end they book it and that’s just not…

And so, I’ve seen that a ton that you have to kind of go in there and fix and making sure that they’re pulling the right number off the pay app. That’s just the teaching moment right there. Inconsistent labor and equipment burden allocations. Every contractor has their way of doing it that works. And if it’s consistent, awesome. If it’s all over the board and you just decide one day you’re going,

Rishi Srivastava (14:05)
Mmm.

Lee Klein III (14:15)
You’re going to throw 25 % burden over here and then on this job it’s killing it. I’m going to be 50 % over here. This job over here is killing them. I’m throw 40 over here. And you kind of just, there’s no rhyme or reason with it. Well, all you’re doing is shooting yourself in the foot. So when we see this kind of stuff, if it’s not based off of utilization or hours per piece of equipment at a job site, and you can kind of take that compared to the whole, that piece of equipment to the whole entire hours.

for the year on all jobs and you kind of allocate that bucket of repairs and maintenance and depreciation, know, ⁓ insurance, all that stuff, you allocate it based on utilization hours. That makes a lot of sense and it’s consistent. And that’s something you can do from here on out. ⁓ and labor burden should just be a calculation in general. mean, I mean, you’ve got certain policies like GL workers comp. sometimes GL is based on revenues. So there’s a way to make it consistent across the board.

that I really challenge my contractors. I sit down with them. We understand our policies with our insurance is doing. What is our fleet doing? How do we get a most consistent approach? And the reason why it has to be consistent. I want to know what my true overhead is on a rolling 12 month period. I want to know what I’m truly doing. if I’m just accelerating revenues on one job and this one over here decelerating, I’m really never knowing where I’m truly at. And especially down the road when we’re going to have

these UDFs, these user defined fields through like the Intuit enterprise systems and the sages of the world where they’re going to allow us to track this kind of stuff. They’re going to allow us a field that we can track, you know, project manager, our engineer, architect, whoever that is to a job and track profitability over time. I want to see who, I don’t want to fluff anything. I want to see it as it truly is consistent across all my jobs. And that way I can say, well, we got to stay away from this owner right here.

we lose every single time. Or this guy’s gotta get fired, we gotta fire this dude. Or you may wanna start tracking horizontal builds versus vertical builds. Well, user-defined field, if you’re doing your job costing right and your allocation methodology is consistent, then you’re allowed to say, we really, we don’t do very well on horizontal, but vertical would kill it. I wonder why. know, things like that, I feel like, with that in the future, and I think we’ll probably get to that.

It’s so important to have a consistent way that you’re recognizing revenues on your WIP schedule. And it’s all based on cost, right? That’s how drives revenue.

Rishi Srivastava (16:44)
Actually, when you go into an audit, what percentage of transactions you actually end up looking at usually.

Lee Klein III (16:52)
You know, I have not, it’s been a while. I’ve got two audits to my name brother and that’s on purpose. I would say we have certain calculations of materiality, like we have thresholds and I do not want to speak for BDO because I’m not in that assurance division anymore and I don’t know how they’re doing it. But basically we had a system where you would plug in the total assets, total revenue, working capital. First of all, identify who’s the users of the financial statements.

if it’s mostly the surety or the bank, right, requiring the audit. And then, so what are they going to be looking at? Working capital, right? Or inequity. So then you’re kind of setting your sights that those are the high test areas. So we’re really going to hit receivables hard, really going to hit the whip hard, really going to hit cash hard. And it may just, and basically there’s a materiality threshold based on numbers that this system that we were using would tell us. So you can randomly select X, you know.

and it would actually tell us. I’d be lying to you if I told you what percentage, but it is driven. The bigger the contractor, typically you’ll be testing more and first year audit procedures, you’re testing a lot more than what you would in subsequent audit periods because of first time audit procedure rules. So you hit those pretty hard. think over time, kinda like the surety, as you get confidence and you start understanding the processes and there’s no material deficiencies in controls,

And the financials, you’re kind of, you issued the management letter at the end of it and it tells them everything that they need to improve upon, which I feel like CPA firms would do a lot better job. That is a moment right there of value to me, that management letter, after you issued the financial statement, everything that you saw. A lot of times that is just a boilerplate template and it’s issued. Segregation of duty issues noted. What does a contractor gonna do with that? Nothing. So to me, if we want to try to,

make an audit valuable, it’s selling the management letter at the end and saying, is what you’re get out of it, brother. Like, I know this right here, you don’t care about it. The numbers are important, but you’re having to do this because the state’s making you, the bank’s making you, or the surety’s requesting it. this is the meat and potatoes. This is how you’re going to

What’s the plan we’re gonna put in place in order to not make that a significant risk next year going into next year’s audit? Let’s put those in place.

Rishi Srivastava (19:09)
Management

has only limited time and attention.

Lee Klein III (19:14)
Yep. facts

Rishi Srivastava (19:15)
The next section here is on tax and strategy. Tax planning often feels like an afterthought in construction. What proactive steps can CFOs and owners take to better integrate tax strategy into their business decisions?

Lee Klein III (19:19)
Okay.

Yeah, this is a great question, So the first thing I think about is owners and CFOs understanding that the type of entity that they’re working in, what’s the tax and is it a C Corp? Is it an S corp Is it a partnership? And then what are the tax implications? There’s high level from that, you know, with the C Corp, it’s a double tax thing. It’s tax at the C Corp level. And so there’s strategy at the end of the year for tax purposes.

to drive down that C Corp earnings to next to nothing so you’re not double taxing the future when you take a future distribution that’ll be 20 to 25%, right? Well, I see, we see a lot of guys getting in business, they’ve been in business for probably five years and they’re sitting there as a partnership. And then I’m pulling up their returns and I’m like, man, why have y’all, they’re taking a salary, they’re doing all the right things, but they never made the S Corp collection. So.

What they’re being, what they’re subjecting themselves to with the partnership is that 15.3 % self-employment tax that’s on top of ordinary income. It is capped. I’m not saying that that’s on a million dollars. There’s a cap on that number, but it’s still an additional amount that they’re paying that they could save if they just elected S status. So I think just understanding your entity and making sure that all the different makeup of all the affiliate entities and

the how the money gets moved back and forth. You know, getting with your attorney, where should the all the equipment, where should the real estate be best held for liability purposes? And then making sure that you’re not getting taxed in an entity that’s subject to self-employment tax. And you’re just pushing income from your construction company into this one because you’re renting from this entity over here and you’re causing a lot more of a tax burden than what you need to. So there’s just a high level look just at that. And

I would say too, if you’re a 31 million, I think the IRS rule is 31 million average gross receipts for the last three tax years, then you’re required to use the percentage of completion as your tax method of accounting. it makes it easy because there’s not really that many book the tax differences because you might be deferring out just jobs that are less than 10 % complete during a year.

Maybe that, and you’ve got depreciation differences and all that. But, you know, for those bigger contractors, to me, if I’m looking at the job schedule, if I increase my estimated cost complete, or if I’m making sure that my estimated cost complete has contingencies built in for the unknown, if not going in there and adding those in there, because what that does is drive an underbilling down or an overbilling up. And in turn,

it decelerates revenue recognition and defers it into the next year. So that’s just the tax strategy right there. That’s really simple, but it just, it’s having the contractor think just differently on their estimated cost complete by adding a contingency to that deal. That makes sense, you know, that we can future measure against. And at the end of the day, if it doesn’t come to fruition, well guess what? There was not a fade. There was a gain, profit gain at the surety sees They’re never gonna ask about that, right? ⁓ If something…

Rishi Srivastava (22:35)
Yeah.

Lee Klein III (22:36)
made more money than they thought. And then, you know, as a small guy, not small guy, but you know what mean, just underneath that, the IRS’s definition of a small contractor, there’s so many different ways you can elect to file. You know, it can be accrual, accrual less retainage, cash, completed contract method. There’s all these hybrid methods. What I would say is really truly look at your collection cycle, you know, from bill to depositing that money.

What makes the most sense for your company? If you’re a government contractor and you have to get approval in order to even issue the bill to say, you know, like here, I’m mailing it off and that takes 30 days, but then there’s another 60 day turnaround in order from cash collection cycle. Well, then I’m probably, you know, I’m definitely not going to want to elect the accrual basis, right? It needs to be cash because I’ve got a 90, 180 day payment turnaround and

I don’t want to be paying tax in a year that I’m not getting the cash. That’s just common sense, right? Another little thing that contractors don’t, they really don’t know a lot of contractors is when you’re looking at that job schedule, you know, especially the big ones that they, that they’re on the percentage of completion method or the smaller ones too, they’re not looking at that individually by jobs. So there’s some tricks that look, you know, don’t just say, well, here’s all my, contracts that are going to be subject to this method of accounting when.

You might have some residential contracts on that job schedule that are taxed differently with IRS. Residential is treated, if it’s condominiums, if it’s multi-unit housing, it’s dormitories, senior living facilities, things like that, those are not subject to AMT taxation. So that’s that alternative minimum tax that bite people in the butt sometimes. Those kind of get carved out. So you can show a huge underbilling at the end of the year if you’re under percentage of completion.

knowing that it’s not going to generate any kind of negative AMT on the company. So that’s a cool little trick. And then another one is for the IRS standard, if jobs that are started and finished in the same year from a cost perspective, so started, ended, that is considered a short-term contract for the IRS. So it’s not a long-term contract. So just because long-term requires you to do percentage completion, this one right here,

is a short-term contract can be carved out and be treated at your original filing method. So if it was cash, if it was accrual, that specific job can be taxed at the accrual or the cash method. And so what that does is, if I’m finished in December from a cost perspective, I may hold out and not bill it until January 1, if it’s significant enough. You might have 10 or 15 of those types of jobs, which those can add up. So I’m showing a huge underbilling.

end of the year, still get credit for bonding purposes, but I’m deferring it into the next year for tax purposes. Where I would have picked it up if I just lumped it all into it as a percentage completion, a percent complete job under that method, right? Does that make sense? So I would encourage, and I think this goes back, this goes to the data and the tech industry and just what these folks are.

Rishi Srivastava (25:25)
Yeah, yeah, it does.

Lee Klein III (25:35)
what they’ve got, what they’re sitting on right now, we just use our defined fields of being able to track this kind of stuff, being able to designate a job, you know, if you’re anticipating to be a short-term contract in nature, being able to designate it that, and making sure that those, so you can kind of budget for that, or what you’re gonna be deferring and tell your team, hey, we’re gonna hold out on all bills January on these lists of jobs. And you’ve got, you’re leveraging data to aggregate that information to make that decision. Same thing, residential versus commercial.

You know, to really differentiate those from the other ones. So you’re just not saying all is, we’re going to tax everything same. That’s lazy. That’s lazy. Let’s just look at it, but let’s leverage data to compile these little subsets of data for us to make better decisions.

Rishi Srivastava (26:19)
Brother, you put so many factors together. I love it.

With cash flow so critical in construction, how can tax strategy be used as a tool for liquidity and growth instead of just compliance?

Lee Klein III (26:33)
Yeah. So what I tell my guys all the time is a contractor is not promised. They’re one bad job away from having to close the doors. So there’s a way for us to leverage current tax law, like the big, beautiful bill with Trump. You know, last year it kind of stunk, man. We were kind of capped out at 1.2 in asset purchases to be able to write off. And then 40%, I think, was bonus depreciation. Well, with the big, beautiful bill this year, it’s like free for all, man.

Rishi Srivastava (26:40)
Thea Sarelli.

Lee Klein III (26:59)
no longer like you can just go give what you want or whatever you need. And the beautiful thing about that is you don’t have to pay cash for it to get the full deduction. think that’s a lot. That’s a big misconception in the construction industry that you have to pay cash to get that full write off. That’s not the case. You can finance it and still get the section 179, the bonus depreciation. So I would leverage those types of laws and don’t surrender working capital for it. Don’t pay cash for it.

to save on tax? Don’t do that, finance it, because guess what? Whatever the term of that loan is, only, if it let’s just say the 10 year loan, 1 10th of the principal amount is gonna actually impact your working capital negatively versus you paying that full thing upfront. Because that’s your current maturities of long term debt, that’s the only thing that’s gonna impact your working capital. But guess what, you bought a million dollar asset, say you’re in the highest tax bracket, you save 37, let’s just say 40 grand.

you know, in tax by buying something that’s going to make you money.

And so there are times where my contractor’s like, man, I don’t want to buy any more equipment. Well, man, let’s look at alternative things. Like, what else can we do? know, employee retention is critical right now. Share the love, If you don’t want to go buy a bunch of assets, well, man, pump up your people. Go give them some Christmas bonuses and share that and see what happens. See what happens to their employee morale when you start dishing out a couple of hundred thousand dollars of bonuses at Christmas time.

But that does help you, it helps the owner from a tax perspective. And it just makes sense. To me, it’s easier to swallow when I’m doing it of the love of my heart. I’m trying to retain my people, knowing that it’s a dog-eat-dog world. And Jack Smith contractor or whoever, Joe Smo contractor, is trying to steal my people every single day. Well, guess what? If I’m doing stuff like that, they’re not stealing my people. They’re not gonna steal my people. you know, it’s just understanding that you’re not promised next year, you’re one job away.

Rishi Srivastava (28:20)
Mmm.

Mm-hmm.

Yeah.

Lee Klein III (28:47)
Defer, defer, defer. There’s no magic wand that says tax go away. You’re gonna eventually have to pay the man. I don’t care who you are in this world. There’s a lot of these guys that could tell you that they could save all this stuff. Yeah, there is cost seg studies. That’s legitimate. Those are things we got firm, we got a focus group within BDO that does that. It’s amazing. I’m loving now that I don’t have to go outside and hire consulting firms anymore to help my clients on those types of things like cost seg, R &D, tax credits.

I’ve got all that in-house BDO now, which is beautiful. But those are the type of things, they’re legit, you just gotta know about them, right? But there’s no way to ever avoid paying tax, but there is always a way to defer it. And keep kicking the can down the road, who knows, you might have a bad year two years from now, you kick the can down the road, and all that gain that was coming over gets offset by the loss you had that year, because you had a bad year, and then you end up paying minimal tax.

Rishi Srivastava (29:38)
Yeah, yeah man.

Lee Klein III (29:39)
It’s timing game, man. That’s all it is. It’s just a timing thing.

Rishi Srivastava (29:42)
It

I think about contractors, they take constructability risk, you know, making with these buildings, you know, these highways, it’s very complicated work, but they’re also taking all this financial risk. Their business is so risky.

Lee Klein III (29:55)
Yep, it’s super risky, man. It’s super risky.

Rishi Srivastava (29:57)
And I’m glad that you’re giving all this advice because we need these guys succeed in the field. That’s how you and I succeed.

Lee Klein III (30:03)
That’s why I told you in beginning, like my heart with contractors, I love to see dudes just working their tail off and building something from nothing. I mean, that’s amazing to me. you know, God gave me a brain of, know, I never, I didn’t want to choose a ccounting I think accounting chose me. I got married when I was 23 and I was sitting on the steps. It was my junior year in college and I was just looking out at the list of, you know, what’s, what is the major that’s going to

put me in the highest paying job right out the gate. You know, I was probably 20, 20 at the time or whatever. And it was accounting. So that’s why I chose accounting. Got through all the hard classes and everything like that. But what it’s opened my eyes to is it’s not about the compliance, man. You start getting diving into an industry and becoming an industry expert and knowing enough to be deadly with ERP systems and how stuff works and can speak that language. And then knowing enough to be deadly with tax and then know how to connect dots with an ecosystem like a BDO.

That’s when things get crazy. That’s when you can start adding some tremendous value. When you can understand all the different factors that make up, that a contractor’s dealing with, and who is using what and for what, and what are the measurements. That’s what’s so fun about this. And you’re dealing with dudes that love to hunt, love to fish, that share the same passions as you. I mean, come on, dude. It’s a math made in heaven.

Rishi Srivastava (31:17)
Die.

There’s

also some very good ladies construction owners out there, so we want to recognize them too.

Lee Klein III (31:24)
I

absolutely want to recognize the ladies and I apologize for that. Yes, we have been actually members of the national, it’s called NAWIC, the National Association of Women in Construction. So we’ve had several team members in the past that our firm has been involved with and it’s a very, very good organization and I appreciate them. So yes, I apologize for that. Thanks for correcting me though, buddy.

Rishi Srivastava (31:29)
Yeah.

Mm.

No

issues. We knew your heart was there. Advisory and CFO partnerships. You work closely with CFOs and project leaders. What separates a good financial leader from a truly great one in construction?

Lee Klein III (31:50)
Alright.

Great question. I think a good CFO can sit behind the desk and punch numbers and delivers everything that’s needed, right? They can get the sureties what they need. They can get the banks what they need, timely. I think what separates a good one from a great one is how that person engages with not just the accounting department, but with the owners, with the field personnel.

the project managers, the superintendents, taking that extra step to going out to the job sites and seeing with their own eyes the equipment that’s out there, the issues that they may be encountering. Just stuff like that, man, that I feel like goes a long way. I think once that person is, the CFOs typically got their head wrapped around a lot in the company. And that right there, that greatness I feel is what opens the doors up for ops and accounting to work together.

and to really to break that mold of them not talking. I don’t think it’s a matter of them not wanting to talk. It’s never that. It’s they’re building something. Their measurements are linear footage and things like that. And they’re seeing progression as things are produced. We’re looking at numbers as they’re getting produced. And I think there’s just a common misconception that, you know, but they go, they both go together. So I think the more insight the CFO has of how the job is actually running the morale.

all these different things. And he can almost probably answer the question of why is this job fading by just the one job site visit and talking to some of the folks out there, you know, seeing the conditions, is it muddy, it, you know, whatever it is. So I think that’s what separates greatness with the CFO. You gotta be smart, obviously. You gotta understand the industry. You gotta be able to negotiate lower interest rates, rates, premiums, and really challenge

in a really thoughtful way, the market and try to drive that overhead down. But then driving technology is another thing, I think. So being willing to like be involved with the environment, the entire ecosystem of the contractor and all different ways, shapes or form, even the shop guys, but being willing to embrace technology, because that’s where it’s going. And so I think the great ones right now.

They can do all that. Well, that’s now going to be kind of like expected to be able to do all that. Now it’s being able to take the knowledge that you’ve learned from all that and saying, okay, well, how can I bridge the technology gap now? We’re talking finally, ops and the accounting and the field, we’re all talking now, but now I see the problem. They don’t have internet on the job site and they can’t put their time in. You know, they have to their laptops up and manually do it. Overdoing manual time sheets. Well, that’s the problem.

Rishi Srivastava (34:17)
Yeah.

Lee Klein III (34:35)
We got to automate the timesheet process where it’s mobile. And Elon Musk, we’re his little satellite thing. We got that thing posted up out there so it’s never an issue of getting my time in. And then guess what that opens up the doors with? You start tying in time with production. Okay, whatever Foreman, how much linear footage of pipe did you lay today? ⁓ I had eight hours on this job and selecting it and then over here on the ERP side of things when it comes over.

Rishi Srivastava (34:45)
Hmm.

Lee Klein III (34:59)
We’ve identified that unit of measurement and what that unit was, and we’ve already tied a cost component and a billing component to it within the system. So guess what we’re able to build now? We’re able to build, like we can see a snapshot of that job in the production that day. So I think that’s kind of where the CFO operations guy, that’s where it’s eventually gonna, if he can adopt and get his people to adopt it.

Rishi Srivastava (35:13)
Yeah.

Lee Klein III (35:24)
Cause you got a lot of legacy mind thinkers, male and female out there. They love their spreadsheets. They love the way that they’ve been doing it. They love their estimating platform that they built out when they were a foreman in 1985 at a big GC and they’ve been using it forever. You know, they don’t want to break away from it. Well, it’s going to take a bold leader to say, no, we buddy, George, Sally, you can’t use that anymore for us to maintain.

the level of growth and where we’re seeing the future of this company, you can’t use it anymore. I love you, man, but you can’t use it anymore. We got it, we got it, and I need your help to embrace this. I need you to help me rally, you know, the rest of the, whatever that generation is, what’s the oldest one right now that’s out there? Not Baby Billers.

Rishi Srivastava (36:08)
Baby baby,

I think it’s genetics No, anyways, baby was yeah

Lee Klein III (36:11)
It’d probably be Baby Boomer. Yeah, maybe Baby Boomer.

But like helping, man, rally the troops, man, and get the Baby Boomers going. Tell them it’s gonna be hard, but we’re gonna embrace it, man. You know, my Gen X guys, hey, let’s go. Millennial guys, you already want technology, great. So I know you’re gonna be our cheerleader. And then the next generation, you know they love tech, they grew up with tech. You know, they’re gonna be the ones that’s gonna be connecting these systems, which I don’t think contractors need to sleep on that generation.

Rishi Srivastava (36:17)
Yeah, yeah.

Yeah, yeah.

Right, right.

Yeah, yeah.

Lee Klein III (36:36)
They’re

the ones that have been inundated with it since they’ve a little baby. Which is really cool. I didn’t think I was going to talk about generational stuff. But anyways, it’s true.

Rishi Srivastava (36:40)
Right, right.

It’s OK, I’ve

answered. It’s a heart-to-heart conversation. What’s an example of a client who made a small financial or operational adjustment that unlocked major gains?

Lee Klein III (36:56)
I wouldn’t say this was, I guess over time this could have been considered a major gain, but I had a client that leveraged their telematics data within TENNA, I believe, is what it was. And they leveraged AI kind of combined and they ended up calculating fuel consumption rate at idle time for their equipment. So they pulled up the idle time from TENNA on a given day on their whole entire fleet. They got the hours, they got the consumption rates.

and they were able to kind of back into the dollar amount that they were spending in one month on idle time fuel consumption. And it was something crazy. I can’t remember off the of my head. I want to say it was somewhere between 50 grand to 150 grand in one month. just people like sitting in the thing just having air conditioning McDonald’s probably, I don’t know. Well, that data, what they were able to do is put a process in place like we were talking about earlier.

Rishi Srivastava (37:31)
Mm-hmm.

⁓

Lee Klein III (37:49)
they were able to put a process in place that they mandated a five minute shutoff. So once that unit or that piece of equipment was in idle for five minutes, it would completely shut off. That shutoff prompted a trigger to the fleet manager, which now he is taking tabs of John Doe or Sally Deer every time that they’ve been pinged.

for it going over that five minute threshold so that it can go in their scorecard for the end of the year and they can discuss it. So is it a multi-million dollar win? No, but it’s significant money and it could have, let’s just say that happened over a 10 year period, you’re talking multi-million dollars, right? But I think what they did there, it forced them by just taking data that was already there, it may have not have been something that the system calculated for them.

Rishi Srivastava (38:26)
Hell, know.

⁓ yeah. Yeah.

Lee Klein III (38:40)
They leveraged another platform to pull in said consumption rates and then just pulled up the cost of diesel that day and made a spreadsheet config made the cost. They calculated the cost and guess what? They got their number. That’s all they needed to see. And so then from that action happened, they contacted TENNA They got this in place or it’s TENNA or SAMSARA I may have misspoken. Either one. They contacted the

Rishi Srivastava (39:03)
Yeah.

Lee Klein III (39:04)
their fleet software, their fleet management software, and they implemented a strategy and a process. They put it in place and it’s not happening anymore. And now they have a performance metric that they can weigh and look at all their guys, all their operators at the end of the year and who’s their rockstar and who struggled a little bit. And they’ve got a scoring system now, which I thought was genius. It’s genius, man.

Rishi Srivastava (39:22)
Yeah, yeah, yeah.

You can’t improve what you can’t measure.

Lee Klein III (39:27)
I’ve got another story. this was one, you know, the, payroll system was not talking to the ERP. So there was manual journal entries that had to go back and forth between the two. And we were looking at different crews and I could see from the payroll system that we could create these automated, like these, these, ⁓ custom reports and basically build out like each crew, like, okay, this crew is Joe.

And he’s got 15 people up underneath them and kind of segment that data there. And then from that, I wanted to see overtime per crew per month over rolling 12 months to see kind of the fluctuations. And, and then I said, I even want to go further. I want to look at what, what region are they in in the United States? Okay. So then if they were in the East coast, Midwest, know, Southeast, whatever it was, I was able to kind of look.

Rishi Srivastava (40:10)
Mmm.

Lee Klein III (40:18)
at the different trends and then pull profitability in volume metrics from the P &Ls looking at the geographical region, you know, gross, you know, what are they putting out? What kind of revenues have they generated and how profitable are they? Well, come to find out there was, I’m not even going to state what the division it was or anything like that, but they were accounting for pretty much

80 % of the overtime that was going on and they were the least busy group from a production standpoint, but had the most overtime.

Rishi Srivastava (40:50)
Mmm.

Wow.

Lee Klein III (40:53)
So that’s an insight right there that, like I said, piecemealing data, but then getting creative. Like how can I take this data and look at trends over time to really show where things could be getting overstated or there might be a broken process or something squarely going on somewhere that I need to fix. So that was a cool story.

Rishi Srivastava (41:10)
Yeah, yeah, think

getting a story from data, it’s not easy. And someone like you, who has seen all these stories come out of these data points, you’re so valuable to the industry.

The last section here is on future outlook. Looking ahead, what financial or regulatory trends should contractors be preparing for in the next three to five years?

Lee Klein III (41:33)
I would say AI adoption. They’re going to have to embrace that. They’re going to have to look at their current state of their ERP system, their ecosystem, and what is, who’s adopting AI just in that ERP platform. know Sage is. Sage Intact is 100 % doing it. You got Intuit that’s adopting it. Things that can have machine learning and different things as…

you’re working in it, but then also giving you the flexibility, like I said earlier, to use user defined fields, user defined dimensions, and really be able to chop slice dice data in the future, however you see fit. It’s just whatever you can dream up. I feel like that’s, that’s where the industry is going very, very soon. And I think folks that aren’t using and leveraging AI within their ERP system, they’re to be missing out on some serious learning. They’re going to be five years behind on their learning because

We’re not going to be sharing these contracts are going to be sharing like your global chat, GPT where everything you pump into it, everybody’s got access to that knowledge. Like it’s going to be enterprise safe to that contractor, right? It’s specific to them. So we can’t waste any time. You know, the learning of this has to start happening within the organizations. Even if we don’t really fully know what it’s capable of yet, we got to start rolling with it, you know,

Rishi Srivastava (42:37)
Mm-hmm.

Yeah.

Lee Klein III (42:50)
And I would say right now I’m not a Sage salesman, I’m not an Intuit salesman. But from what I’ve seen from demos right now, those seem to be the most user friendly with the biggest upside right now for construction. And that’s just my two cents, my personal opinion. So I look forward to seeing how they continue to improve and build upon what they’ve already created, which is really big to see. Yep.

Rishi Srivastava (43:12)
So

for the ERPs like Foundation, Viewpoint, Vesta, we provide AI capabilities to those ERPs.

Lee Klein III (43:19)
Yeah, yeah. I’m not, can’t speak to what, if they are or not, I would think this would be, mean, Trimble is kind of one of those that stays ahead of the game. That’s one that, you know, I think when I went to the CFMA Dallas conference a couple of years ago, they were like the only ones in that out of 350 vendors that had everything in house. Like you didn’t have to go and get a third party payroll processor, like ADP or Paychex, Paycom in order to bring it in. Like they already had that in there. They had the estimating software.

They had all this stuff just built in the Trimble package. So I’m sure they’ve got some kind of AI in the works. know, foundation, you know, do not know about the AI piece of that, but I do know that the fields are limited within foundation. Like the user defined fields that I keep talking about that you can start tracking and make it personal to your company, whether it be project managers or warranty or just using them however you want to use them.

Rishi Srivastava (43:50)
Yeah, yeah.

Lee Klein III (44:11)
But I think those are limited within foundation and the ability to use those. Not speaking bad about foundation or any or better of one or the other, but that’s just what I’ve observed. I may be totally wrong.

Rishi Srivastava (44:23)
So Trimble has a platform called App Xchange, and they’re open to partnering with somebody like us. We’ve signed partnership agreement with them to be able to provide the capabilities to their customers. So the very last question for you, Lee, is if you could leave construction CFOs and owners with one message about seeing beyond compliance, what would it be?

Lee Klein III (44:33)
cool, that’s awesome man.

I think it would be that compliance is the floor, not the ceiling. That financials aren’t just a report. I mean, it’s a roadmap. And you got to use them to drive strategy, to improve margins and leverage technology for growth. I think that’s critical. We got to leverage technology for growth. We got to challenge this legacy mindset within our organizations in a loving, in a very encouraging way, in a mindful way, right? You can’t just adopt something and roll it out and…

You you might get a lot of mean smirks and maybe some turnover from that, but it’s really being able to show the value of it and what it could free up potentially and the ROI on it. What’s the ROI of what we’re doing? Because if there’s no ROI on any tech adoption that you can’t see out the gate or say, man, once we do this, we’re going to save X amount, then it is just noise. It’s hype. If you have this shiny little object that’s

I mean, all of these tech companies are coming to a contract and saying, hey, this is what we can do. And we, I promise you, we integrate, we integrate with that solution right there. Well, they don’t tell you that yes, they have a built-in integration feature, but there’s an also another middleware that’s in, that’s involved in this to connect it. And you’ve got to engage with them. And that’s not in the statement of the work, you know? So it’s very kind of, it integrates, they’re not lying, but then they’re not telling the full truth either.

You know, so I think the two biggest things is finding one with the AI driven, is making sure that, you know, you’re really making sure your core system for accounting, project management and everything has that AI or AI component in the near future put in place, making sure that your time and labor tracking in the field is mobile and it is that’s going straight to the ERP automatically. It’s no more paper. We got to get away from paper. I’m sorry, but

I love me a good sheet of paper too, but you know, we got to get away from paper and those that in itself, just getting the time from the field, the entries we’re trying to capture populated over here into the ERP to run a daily production report tied to what did we make today? And we’ve got all this other stuff built in to the system for overhead and we can really see what we truly netted out today by region, by crew, by whatever it is. That is insight.

You start talking, you’re tackling fades before they even become a fade. You know, if you’re measuring units of production and you’ve got goals put in place in the system of linear footage that’s laid for a week and then you get out to the end of the week and you laid 50 less, why? And having root cause analysis, really leveraging data for root cause analysis, let the system generate the fade analysis for you.

and start documenting and start having a trend analysis and having a look back on all of this data, you know, just like we do. We did it at Horne and I’m sure that we’re going to do it at BDO. After an engagement, we have a spotlight. You know, if it’s a really big client or a really big audit or whatever that is, man, we bring everybody in the room that was involved on it. We do a client spotlight of what could we have done better. And it’s really looking back at it. So I think going back to the CFO,

and what separates good from great. I think the great ones do a look back analysis. Then they’re only going to look back for one day, right? I mean, they should always be thinking forward, windshield view, not rear view. But it’s good to learn from those moments, I feel, and to really engage everybody, estimator, project manager, superintendents, the accountants know, whoever it is, let’s all come here. Why did this job kill it? Why did this job not kill it? Let’s figure it out.

You have enough of those conversations, you’re building data points for the future that can help you with future estimating, budgeting, what to stay away from and what to keep going at.

Rishi Srivastava (48:29)
Yeah, one story that comes to my mind is I was talking to one of our construction CFOs customers.

He was telling me the field person, they were calling the office for the time and the office wasn’t putting it in. was, they didn’t like to use the time tracking system, know, whatever, you know, iPad or mobile. People don’t like the change.

Lee Klein III (48:51)
Look in my brain. I say well, then you just don’t get paid and it but it’s not that simple You know, that’s easy for me to say outside looking in that’s you know But you want to keep your best people that are digging the ditches and doing all the hard stuff, man You don’t want to just slap something in their face and then lose that person That’s been there forever because of tech so I get that I mean I think that’s gonna be the biggest hurdle is the legacy mindset of thinking and

tech adoption that doesn’t rub people the wrong way or generate turnover. So it kind of goes back to the tax thing. Use great years as a way to retain your people. Bonus it out and give them some money. Bonus some money’s out to them, man. It helps save on you tax, but then also, man, you’re keeping your good people. And then who knows, man, you start building that goodwill. You’re not going to lose them, but then they’re going to be more receptive. guess they’re going to be…

more so be prone to adopting tech than not adopting tech with you treating them that way, right?

Rishi Srivastava (49:48)
Yeah, they’ll believe you that this change is going to benefit them. Lee, this was a fantastic conversation. I enjoyed having you on the show.

Lee Klein III (49:52)
That’s right.

It’s a pleasure, man. I appreciate you having me and you know, I’m hoping you have a Merry Christmas and it’s a good time off, brother.

Rishi Srivastava (50:03)
Yeah, Merry Christmas to you too.