When Contractors Become The Bank With Aaron Dearborn

Reece sits down with Aaron Dearborn, president of Amerail Systems, to talk about one of the strangest cash flow problems in construction: why GCs and subs often end up financing the project before owner money arrives.

They get into delayed progress payments, deposits, retainage, paying subs early, and how clear expectations can protect relationships without draining your business.

https://www.amerailsys.com

Show Notes:
00:53 Aaron’s Background
02:44 Building For Growth
04:08 Contractors Become The Bank
07:07 Paying Subs First
10:44 Deposits And Retainage
12:57 Owner Payment Delays
14:39 Customer Fit Matters
19:23 Negotiating Brand Scope
21:30 Reading The Market
24:06 Advice And Relationships
29:30 Connect With Aaron

Find Our Hosts:
Reece Barnes
Matt Calvano

Podcast  Produced By:
Motif Media

Transcript

0:00

We normally pay our subs before we get paid. We understand they're the ones doing the work, we need them there, not worrying about money. We can get them to concentrate on the project, get them done faster, and move on to the next one. Welcome to Builders Budgets and Beers. I'm Reece Barnes, and I started this podcast to have real conversations about money in the building industry, the wins, the mistakes, and everything in between. I believe builders deserve to feel confident about their finances, and that starts by hearing from others who've been through it too. This industry can be slow to change, but the right stories and the right tools can make profitability feel possible. Let's get into it, do Alrighty, Aaron, mics are hot, we're rolling. Thanks, thanks for jumping on the podcast, dude. Yeah, no problem. Thanks, thanks for having me. Of course, of course. Okay, sweet. Well, like we always do on the podcast, go ahead and give the audience a little background on yourself, your experience in construction, what you're doing now, the company that you're with. We can just start from there. Yeah, no problem. Again, appreciate the opportunity. My name is Aaron Dearborn. I'm the president of a company called Amorail Systems. We are a hotel general contractor specializing in renovating hotels across the country, but I kind of started off in the insurance world, disaster restoration, owning a few businesses here and there throughout my time, transition into general contracting and specializing in hotel renovations. Okay, beautiful. And what drew you into the hotel renovations with considering your background, just, you know, just random phone call from somebody one day, about eight years ago, and kind of led to this, and you know, Amarilla, you know, we don't have the greatest name for hotel renovations, like the actual name, yeah, but we started off as a railing company in 1985 that makes sense. Amerail, Amerail, and we specialized in doing railings in, they're called exterior corridor hotels. It's the old hotels where you walk from the outside into your room, of course. They all have balconies, so we would do the railing on all those. Those went away with time, as everything does, and we, we, we transitioned into doing all the exterior facade work of hotels, and then, you know, about five six years ago, we transitioned into a full blown GC, so love that's kind of our growth, and you know, has followed, and you know, we've kind of went with the industry as things change, we have, and and pivot and continue to grow. Totally, okay, cool. And I just got, I got to ask, like, what was, what was the opportunity, or what was like the moment, I guess, where you guys saw going full blown GC instead of just exteriors making sense. Um, it was Covid, you know, early on in Covid, we hotels got crushed, so we had lots of time, and we, we decided to inject some, some capital into the company. We introduced a whole bunch of technology, hired a whole bunch of people that were, were ready, and I'm a big believer of build it, you know. So we kind of built the foundation of the company, or what we wanted, and then that led to the increase in work and revenue, you know, and that's kind of the way we've kind of approached things, is each level we want to get to, we kind of build out the infrastructure of the company, and then go after the work, so instead of this going straight up and being scattered and going after and failing, we want successful, you know, stage growth, so totally okay. So, you were, you were prepared, and it's like, it's like my, it's like my, my good friend Cole Meir over at Adaptive, his saying is the best ability is availability, and that's where that preparation is big, right? You guys were available for the opportunity, you saw it, you were prepared, you had the foundations framework in place to do nice healthy growth, and you took advantage of it. That's great. Yeah, exactly. So we took with a, you know, the hands that we were given and went with it. I love it. Good on you. I mean, I think that's going to be great for our audience. And okay, so we're gonna, we're gonna switch things up a little bit here on the podcast. I'm gonna ask you a question, okay, that will drive the at least the beginning of this conversation, we might, we might bird walk a little bit, but the question here is, is what is the one topic from your perspective that needs the most discussion in the industry that isn't getting talked about enough? Yeah, like from our perspective, you know, being a commercial GC, it's why is the general contractor and the subcontractor the bank for the project, you know? Why are we financing it through delayed payments, delayed labor, material payments? It's always baffled me. There's no quick solution to it. You would have. Change the mindset of the whole industry. Yeah, you know, it'd be an uphill battle, but why? You know, if you think about it, you know, we're, you're lucky if you can get a deposit nowadays, and everything else is based on progress. But if you progress bill, you know, on day 20 of the month for the end of the month, and then you get paid 30 days after that, and then if you pay your G or your sub right away, or whatever the terms are with them, you know your subcontractor isn't getting paid for 60 to 80 days after the project started, you know, most of our projects are three to six months, so why are they carrying the burden of of the owner, you know, totally not willing to make the payment, or not. I mean, they're willing to make the payment, but the way it's structured is very pro owner versus pro the guy doing the work. Totally, totally okay. Well, and so I think this is a great topic, and you like laid out several areas that we could dig into, but like from my perspective, or at least the perspective that I've built, having been an adaptive, is like a reason why this, like, why does the GC and sub have to be the bank, is because of the amount of hands that money has to pass through, and the proper accounting and visibility that has to be taken in order to follow that is so brutal and manual, right? And, like, we're, I mean, we're an AI native construction accounting platform, it's like the vision was, is like you position yourself in the GCS world, right? You automate those flows, and then you start to work with the subcontractors, the developers, banks, all of that. So then it's a much faster process for the sub to get the AP or their AR to the GCS AP, they can track it, they can understand it, they can request for it to the developer bank, whatever, and then it starts to pass back through, right? So you can clean out that line. Would you agree that a lot of the challenge is the GC needs the money to cover the sub? The sub has to wait for the GC to get the money to get them paid. Would you agree that it's that like operational challenge that's the headache, or where do you think that, like, the biggest room for improvement or opportunity is to prevent GCS and subs from being the bank. Yeah, you know it's it's really the customer of, you know, who you're dealing with. You can lay it out in a good way, where you know we have some customers that will, you know, once they get to know us, they know that, you know, we'll get a deposit from them, and that's mostly just for mobilization, making sure our sub gets paid that first month, and kind of walking them through our process and understanding why we require or ask for this, and they can see it then, but you know, with banks involved, the more people involved, the worse it gets, and you know, we're fortunate here, where we are able to, we normally pay our subs before we get paid. Okay, you know, we understand they're they're the ones doing the work, they're the ones, you know, we need them, they're not worrying about money, you know, of course. And so we can get that thought out of their head, we can get them to concentrate on the project, get them done faster, and move on to the next one. Totally, so we try to wear the burden of that, but it's, it's such backwards thinking with just, you know, if you're dealing with large conglomerate corporations, you know, or even or publicly owned companies, you know, they always use, you know, well, we're, we have, we're, we have to worry about our shareholders, you know, yeah, and you know, well, you know, you should worry about the project getting done on time and on budget, and, and money moves things, you know, of course, okay, well, so, and that's, I mean, I hear, and you guys are commercial, obviously, right? Do you mind giving, like, a ballpark in your top line, or you can even be units, just like, so the audience knows, like, the size of organization you are up to, yeah, 25 to 40 projects a year across the country, you know, renovations run anywhere from two to 789, million, so okay, sizable organization, yeah. And the reason I wanted to ask that is because, like, I even, like, I, so I've talked to a lot of, like, residential contractors, as well as commercial industrial stuff like that. And the reason I want to understand your size, because even a contractor of your guys' size have the same or similar problems, right? And where I'm really going with this is, you made the comment, like you guys pay your subs early, right? Even if you don't have the receivables to cover it, so that's where this conversation of the GC now becomes the bank, because you're funding the product, you're front loading it to keep your subs happy, assumptively, right? Oh, yeah, they're still on the hook for, you know, any liquidated damages, or to keep it on schedule. Yeah, so it's such a double-edged sword that it's, it's just to me it's one of those things that you just think about all the time, you're like, how do you even change the mindset of of the industry, you could, I guess, one job at a time, but you know, it would take a lot of momentum, of course, yeah, and that's like anytime you're. Changing, like a society, right? You can say, like, as large as the construction vertical is really like a society, right? Like, that's a lot of change, but, like, you're taking the approach, and you made a comment about deposits, we'll get into that, but you pay your subs before you get your receivables, or whatever it is, again, to keep them happy, to lessen the stress on their end, so they're not worried about money, they can focus on the work, they can deliver the quality that they want to, right. How did you make that decision, instead of like essentially like guaranteeing deposits, or like a more like fast or faster AR process? How did you land on getting paying the subs faster? Go ahead. Yeah, well, we, we've always done it here, you know, in 40 some years. It's just been our MO, and that's how we, you know, we keep the subs that we, we like, is by taking care of them, and, and you know, they'll go above and beyond for you, because they know they're money every, you know, two weeks or four weeks, whatever. We come to an agreement with, I mean, our contracts still read, will paid upon payment, you know, we will like retainage and stuff like that across the country. We will withhold that until the final payment, but that's usually minuscule, you know, compared to the large size of the project, five 10% is that what you guys do on retainage? Yeah, and then usually upon completion, half of that, and then once the final payments received. Okay, you know, but it's, you know, owners, as in anybody, they don't like to give up their money, you know, of course, customers, so it's it's always a nice dance to get, and you know, we found with communication, open communication, laying out like the needs of the project, because most people don't understand what really goes into it to get a project started. So all the materials you have to purchase, everything that needs to be on site, day one, and if you can lay that off or lay that out in a good way to the customer. Sometimes they're a little willing, or more willing, to kind of release some funds up front, and then start the progress payments, you know. Totally, okay. Well, and so, yeah, we're getting into the deposit conversation, and that to me is like, I've, like, I grew up with a contractor, my wife's family is in construction, like all my friends are in construction, right? So I'm like familiar with it, albeit I've never like really worked in the business of a construction company, so it makes a ton of sense to someone that's outside looking at him, and like that's only obvious that you guys capture a deposit, but where do you like, and like for the customer, of course, they don't want to give up the money, but they want the project done, right, so it's like, shouldn't there be an assumption that they have to pay for this stuff on the front end? Like, it's like, snap your fingers, construction starts, there's permits, there's planning, there's precon, there's materials, like you said. Why is that a dance? Why isn't they just assumed by the customer? Maybe that's where we should start to change the conversation. You know, I mean, if they don't have to, they're, if you don't ask for it, they're not going to give it, you know, because it's the more, the longer they can keep it in their pocket, the more money they can make. We deal with a lot of publicly traded or REITs, or, you know, so they're very sticklers and watch every penny, and they need to get their money as long as possible. So, and then we know we have to follow all the AIA guidelines, and you know, all the billings per AIA, and all that fun stuff that comes with commercial construction, and you know, they'll even like the fun ones are the ones that will kick it back, we're like, well, this doesn't seem right, or this, this pro, we don't agree with the progress on this line item, you know. Let's revisit it, and they've delayed another week or two, and yeah, it's a game, right? Yeah, yeah. Okay. Usually, once you build a good relationship, you know, they're.. it.. it's usually takes care of itself, and they understand that, you know, from their standpoint, they don't want to give any money upfront, no, not knowing the product's gonna be what they were buying, so yeah, they're always had on their end, of course, of course. Okay, well, and so a little earlier you mentioned, like it would have to be like changing the industry, right, or the conversation of the industry, and like you could start to pick it apart and be like okay, maybe the customer, like it's just like better expectations of the sales process, right, and when we're winning the work, outlining expectations, being like, hey, this is how we do things, deposits, this is what it should cover, but is there anywhere else in the process that you're like, if you could just like wave a wand and like solve this problem, like, where do you think it lies, or is it just in the customer, and like getting the money from them, and everything else would run smoothly. Um, I mean, there's, there's, you know, financing involved, banks involved, you know, other investors in the property, you know, our niche in the last few years has been, you know, hotel owners that own, you know, 10 to 50 hotels, so they're one decision maker, which is the key to. A success, you know, having less people involved in decision making has always been been easier for us, you know. If there is no good way, it's just finding what works for that individual customer of yours and trying to figure out what makes them work and how does the deal work for them. Sure, sure. Okay. Cool. Well, and so even if we just go back and like the the hotel renovation space, like what you mentioned, like internet or publicly traded REITs, stuff like that. Like, are you like doing deals with like Hilton or you mentioned Niche? Like, how do you pick and like identify those opportunities? So actually, hotels are all franchises, or 99% of them are franchises. So, they're owned by individuals or large investment groups, or large banks, or investment firms. And so, the brands, you know, with a franchise, you buy a business in a box, they tell you what to do, how to do it, how to run the business, what's it supposed to look like? The products inside of it, and so you know, we work mostly with Marriott, Hilton, IHG, and all their brands underneath their, their umbrellas, and so you know, their own, you know, if you had the funds, you could go build your own, you could go buy one, you know, pay the franchise fee, pay all the royalties, the advertising fees every, every month with them, but it's, it's, it seems to be the cost lately, it's very cost prohibitive, you know, to build a new hotel's 20 million bucks for a Hampton Inn in the middle of nowhere, you know, yeah, wild, yeah, it's just crazy, but it seems like, you know, most ownership groups own five to 50 hotels, the larger REITs own, you know, 50 to 500 so yeah, and so they have a little more power with the brands, you know, it's a question of quantity over quality, you know. You want to work with a, you know, you're guaranteed work by working with a large REIT, but it comes with a price, you know. Of course, I'm financing it for them, of course. Well, okay. And that's where, so, like, when you mentioned, like, these are all franchises, right? It's like they're typically owned by individuals, you mentioned that, like, the less people you have to deal with, typically means it's easier to get your billing, right? So then you can take care of your subs, but, and, but then, on the other hand, like, there's there the larger REITs, the larger organizations are owning multiple of these locations, right? That to me sounds like it could be like a repeatable process when it comes to like setting expectations on the front end of the deal with the deposits, but it doesn't sound like that's the case, because like if you're going to be doing like you're going to go in with a REIT and they have 50 hotels, right, and you win the work to do the renovations on all of them, that could be obnoxious, but let's just use as the example, right, couldn't you go in at that point, it's like this is repeatable, like they're the same Hampton Ends. We know what we're going to do to the rooms, exteriors, and then we could bake all of this into a pre-com process to get accurate deposits, and then have that negotiated before the contract signed. Yeah, and that's once you get in with a new customer and you can kind of build a good relationship, they are more willing to do that initial you know, cracking the door, getting in, is always the difficult dance, you know. You don't want to seem like you're too much of a pain, you know. At first, so it's that delicate dance of what are you trying to accomplish, and you know, do you want the work or do you want to get paid to, you know, they do have a lot of power within the brand, specifically, you know, meaning like Hilton, or based on their purchasing power and how big they are. Sure, and so they, you know, they, and you know, with the franchise, this, you know, they have to renew their license every 714, 15 years or so, and at that time the brands make them renovate, so if you do good, what's good about our business is if you, if you do good, you're gonna have a repeat client in seven years, usually. So, totally, yeah, that's awesome. Yeah, okay, that's great. I gotta ask, like, what is it like negotiating with these brands, like when you're like getting in, what is that like? It's not bad. What we negotiate with the brands like, so if you, you know, we're a design build firm, so we'll do the design architecture, interior design, and then we submit it to the brands for their approval. That's where you're negotiating, is you're trying to find waivers to get reduced scope, you know, a lot of the big push in the select service hotel world, the Hamptons, the courtyards, Holiday Inns, has been converting rooms that have bathtubs to showers. Okay, and it's, you know, most business travelers prefer. Hour, so these old hotels that were built for, you know, traveling soccer teams with kids and all that stuff are now business hotels, and so, you know, one of those conversions costs five to 7000 a room. Yeah, and so you're doing 100 200 rooms at a hotel, it adds up really quick. And so what we like to do is we'll try to negotiate with the brand to reduce that down to, you know, 10 rooms or something like that, or, you know, we know what the limit is of what they'll allow, so we're able to, you know, negotiate with the brand. It's a lot of back and forth over a month or two of trying to prove your case, but it goes a long way with the ownerships. Okay. Okay. Interesting. Now, and you said you guys started, or rather you pivoted into becoming a GC during Covid, and, and like you're saying, like a lot of these, that makes that example makes a ton of sense, like hotels 1520 years ago was like traveling soccer teams, families, like maybe, like you know, whatever, right, and we're going to showers, but How did, how did they, how did you like see this opportunity with Covid, knowing that, like, people weren't traveling, and, like, the bulk of people that are staying at these hotels are business people. Like, what was kind of like the vision there? Because I feel like it was all remote, all remote, all remote. No one's traveling for work, no one's doing this stuff, and now you've like kind of found yourself in this great opportunity where it's like we're doing all these conversions, we have the relationships we've got essentially like guaranteed pipeline if we can like keep the relationship strong. How did you see that coming, or did you, you know, we say dumb luck, but it's kind of, you know, you kind of put, you know, I, we have a good knack here at Amarillo to kind of put ourselves in the owners, or you know, or like, the what's the customer, the end customers like foots, you know, or shoes, you know, how do they look at things? How do they, you know, what are they going to anticipate at this hotel? Kind of look at the locale of it. If you're, you know, we've done a lot of work up in Wyoming lately, and it's a, you know, since Covid, that's a major stopping off point before people got to Yellowstone. Sure, so a lot of these hotels that were, you know, dogs, they weren't performing well, are now performing well because everyone's traveling to Yellowstone, because you know, it was more a couple years ago, because they were trapped in their homes, they needed to get out after Covid, sure, and it's kind of morphed into, you know, you know, everyone's kind of back to traveling, you know, full time and trying, you know, more of the, they want an experience type of lifestyle versus a, you know, a materials type of lifestyle. Sure, so that's really driven the travel sector, and with that you kind of take that in the back of your head and kind of what do we need to make this hotel room accommodate to now so as as people's tastes change or trends change you just got to stay on top of it sure sure okay and you said that these renovations are happening like every 715 years call it do you ever get like these larger brands following these trends of what the consumer wants and pivot earlier, or is it almost always like we've got seven years of data, we're following consumer trends, we're making it then, and how does that work? All their research R and D teams are constantly tracking what's going on in the world, and think about these large brands or global, so you got to keep track of, you know, what's going on in China, the US, Canada, and how does it affect their product and their end user. So, it's they have great teams, you know, they're they're constantly reinventing themselves, you know, every 10 years or so, they come out with a new design scheme or a new prototype that you know is going to have to be seen, you know, within the three to five years, you'll see it, you know, a lot of these brands, you know, reinvent themselves and change, you know, the color scheme, so yeah, of course, yeah, I love it, I love it. Okay, well, and so you've been, how long have you been in construction, Aaron, 20 plus years. How long? I'm sorry, 20 plus years. 20 plus. Okay, so like, and obviously we started the conversations like, why is the GC the sub bank, you know, we're talking about like pipeline relationships, all these different things. What's we got? We have a lot of young listeners in our audience. What would be like the biggest win advice that you would give yourself when you started your career that would have like changed how it went, or that you wish you knew. Don't be too proud or prideful, or you know, don't think you know everything. You know, take advice, look at things from every angle, talk to you know, older people in the industry, they, you know, they have been through everything that we're going through, maybe, you know, maybe not as fast as the world is right now, but you know, most of the time they've seen what we've seen, we're seeing, and just a different, you know, maybe $1 amount or or thing, but usually the. Problems are, are usually the same, so you know, be open to advice, you know, admit when you're wrong, you know. We're here at Amarillo, we're willing to try anything once, and if it works, great. If it doesn't, you know, figure out a way to make it work, or figure out a different strategy, so you know, take some risk, you know, with technology these days, and information that's out there, your risks, your risk making, or risk taking is very calculated. You know, you can find information on anyone when it comes to customers, you know, did they ever have a bankruptcy? What do they own? You know, what's all this stuff? So you can qualify your customer, you know, nowadays a lot easier. Totally, okay. Well, okay. And so you talk about, like, like, don't be too proud, right? Like, seek advice, except acknowledge when you're wrong, right? Take risks, calculated risks. I'm just curious, like, what would, like, what would you advise the younger generation of contractors do when it comes to getting in the room with the people that they want advice from, because there's so many like easy ways, like LinkedIn. Like, I'm pretty sure we got connected with your marketing team, and it was just like,"Yeah, sure, let's do this, let's line it up. Do you advise, like, these contractors just like reach out to the leaders that they're looking forward to, and just like put time on their calendar, or how would you go about doing that? Yeah, I mean, LinkedIn's, you know, in our industry very popular, so it's, it's great for, you know, the commercial, commercial construction, you know, hotel renovation, or hotel construction, you know, industry forums, conferences are always good events, anything local regarding building or construction, you know, any types of, you know, local groups that can, you know, kind of put you in those rooms, you know, and most of the time these, these, these people are willing, are they, you know, they love it to give their advice, because it kind of, you know, feel passed over sometimes as their careers progress, and totally looking, looking for somebody to help mentor protege type situation. Yeah, so you know it's timing and luck, and just trying to figure out where they're going to be, or the best way to approach them, you know. Totally well, as it goes back to, like, you know, the best ability is availability, like, you got to go to those things, you got to go to those networking events, you've got to be like talking to individuals, and know that it's going to take 50 or 100 conversations before the one that's like really meaningful is going to stick. So, what conferences would you say, like, these people should go to or events with our, with our industry. There's, you know, there's several. There's some deal-making conferences where people are buying and selling hotels, called the Hunter Conference, that's in the spring in Atlanta. There's some design conferences regarding the hospitality industry, called Alice, that's in LA in January. There's a HD Expo in Vegas, which is hospitality design, and then the big one's a BDNY, which is boutique design New York, and that's in the fall in New York City. The conference is called the Lodging Conference, which is very hotel owner driven, so they're out there. It's just, you know, which one's the best for what you're trying to accomplish. They're all kind of geared towards something specific within, you know, hotel renovations and construction. Okay, and that was gonna be my next question. So, these are conferences full of contractors that specialize in, like, hotel renovations, um, designers, architects, contractors, owners, you know, customers, so, and vendors, all the vendors that supply into these, into these fields. So, yeah, I had no idea that hotel, I mean, it makes a ton of sense. Yeah, yeah, it makes a ton of sense, right? It's like we got, we got 200 rooms in a hotel, times however many hotels in a metropolitan, right? So it's like, of course, there are contractors that are doing this. I had no idea, though, that there were that many conferences and opportunities. Yeah, there's a lot. I mean, you could find one a month, and then you know, think about everything that goes into a hotel, material wise, you know, the amount of flooring, vinyl wallpaper, all the furniture at, you know, on a typical renovation, you know, an owner spending a million to a million or half just on FF and E. Yeah, so yeah, that's crazy. That's crazy. Okay. Well, Aaron, I appreciate you jumping on the show. Is there anything else that you want to leave the listeners with that we haven't covered already? No, it's just, you know, you know, they're having interest in Amarillo. We're always looking for, you know, good people. We're looking for customers, you know. You can always check us out at amarillasys.com/insights hotel insights if you'd like to find some more information, but it's a cool industry. You know, I, I get jacked up about it, which, you know, is hard nowadays to actually find something you're really passionate about. And what's great is it's construction, you know, you can. If you don't like it, it's going to change tomorrow. So, totally, are you guys hiring? We're always looking for good people, you know. We try to find the smartest, most talented people in the industry, or in construction, you know, we're always looking for people, and, and you know, it's a fun industry, because you're always, you know, you're in a different city every few months, and you know, you never know what, what projects are going to lead to. Totally, do you have any like open roles right now, or are you just like taking general applicants? You know, we always look so project managers, site supers, sales, you know, we're always looking for people. Okay, okay, sweet. Well, for the listeners out there, if you're wanting to get into the world of hotel hotel renovations, Amaral is the number one hotel renovation contractor in the country, so you should certainly reach out to out to Aaron. I appreciate you again. Thank you for the conversation, and there's anything I can do for you, let me know. No problem, appreciate it. Appreciate it.