Austin Gray: Hey, welcome back to another episode of the OWNR OPS podcast! I'm your host, Austin Gray, and in this episode, we have Steven Day joining us. Steven is the owner of Armor Excavation down in Central Texas.

Steven's also an investment banker and owns multiple other small businesses. What I love about Steven's approach to building his excavation business is, as you can imagine, it's financially sound coming from the investment banking world. He brings financial principles to his excavation business while also focusing on listening to customers and their needs, then providing them with what they need. It's something I really loved talking to him about.

I learned a lot from Steven here, and I'm sure you guys will learn a lot if you listen to the whole episode. If you are building an excavation business or trucking business, you'll probably want to listen to this one because he shares a lot of good financial information.

Finally, if you guys enjoy these episodes, would you mind leaving us a quick five-star review? We would sure appreciate it!

I'm going to encourage you guys, if you own and operate your own local service-based business, to go ask your customers for five-star reviews. That is, if you feel like you are doing your absolute best in delivering five-star service. I'm going to encourage you guys to do that because that's how you're going to get the most out of your SEO.

When you have a Google My Business that has multiple five-star reviews—10, 20, 30-plus—Google's going to start serving you up in their algorithm, and you're going to start getting more online leads. Podcasts are no different! We would sure appreciate that five-star review on YouTube.

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Alright, let’s jump into the episode.

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Well, we've got Steven Day from Armor Excavating joining us from Texas. Steven, welcome to the show!

Steven Day: Good morning, thank you!

Austin Gray: We had a couple of scheduling conflicts going back and forth here. We were just talking about the perils of being an excavation business owner.

The other day, I knew exactly the look on your face because I've been there many times. You mentioned something about having to figure things out for culverts and that your guys were calling you right at that moment.

What happened that morning? I'm just curious from an operational standpoint.

Steven Day: Well, we have one construction road access into the site, and we were trying to lay two culverts across that access road. When we're putting in the culverts, it shuts down entrance into and out of the site.

So, we were trying to get those culverts set. One of them—actually, two of them—are 40ft culverts connected together, and they got damaged with an excavator.

So there we were with a trench opened up, a road closed, and no pipe to put in because we had damaged it. But anyway, we got through that crisis, got some more pipe, put it in, and closed the road back up.

Austin Gray: Those of you listening to the podcast who own and operate businesses in this industry know exactly what he's talking about. But it’s probably not the best time to record a podcast when that’s happening. So, we rescheduled here for Saturday morning, and here we are.

Steven, thanks for joining the show. I'm really interested in this conversation because you've got a unique background. You mentioned to me that you came from investment banking and then started this business, I believe either with your son or with your son alongside you.

Could you just tell us a story about your background, your professional work history, and how and why you got into starting an excavation business?

Steven Day: The one thing is that excavation is not that far from my background in terms of growing up on a working farm in Indiana. We were around equipment and operated it at a very young age, so for us, that was not something that was intimidating. My wife has a similar background, so she understands the business very well herself.

Armor Excavating actually started in 2017 with a John Deere compact track loader 333G. My oldest son, Aaron, I think he was in roughly seventh grade at the time.

We had purchased it to begin a development project for ourselves on our own property. Then we had a discussion with Aaron about how he could take this machine out and make some money with it—start a business with it—and that’s how Armor Excavating was founded. He named it Armor, and we got started.

He was clearing cedar for a local farmer—a sustainable farmer who had some ground he was looking to clear. We started out operating this compact track loader for $100 a day. For a kid at that age, he thought he was making real money!

It just grew from there. We began taking on larger, more complicated jobs, and of course, we were doing that own development for ourselves as well.

Then, when we purchased the ranch in Hunt, Texas, a lot of development needed to be done on the ranch that we recently purchased, so the projects became even larger. Additional equipment was needed, and that’s really where the trucking need started.

We needed to have road base, crushed granite, and other materials hauled to us. What we found was that for this smaller, middle-market segment, there just weren’t any reliable local hauling companies.

You'd schedule your hauls, plan your equipment, and plan your crews around it, and then the trucks would just not show up or would break down. That’s when we realized there was a real need in the market.

There are a few really large players locally, but they are largely focused on very large commercial development, whether it be building an interstate or another significant project. They’re not interested in hauling 20 or 30 or 40 loads to somebody, and so that’s the part of the market that we saw open up.

That’s where Armor Excavating began to grow and became what I would say is vertically integrated. We developed local relationships with local quarries directly and began hauling material for ourselves initially, then began to do it for others. From there, we grew to where we are today, doing million-dollar-plus projects of all types of sizes and complexity.

Austin Gray: That’s incredible! So you've basically used the trucking aspect of the business to grow into the market that you wanted to be in on the excavation side, correct?

Steven Day: Yes, there’s a lot of synergy and interdependency between the two. I think that’s why we have a lot of great customers who are running their own forms of businesses, whether they be concrete, site development guys who understand the relationship between material delivery and coordinating your equipment and your crews.

We’ve had a number of customers that have come to us and stayed with us because of the reliability of having the materials on the ground when they need them.

The other thing too is we found that a lot of companies would only specialize in one type of hauling—they might only have small tandem dump trucks or only have a flatbed.

We have one of the most diverse fleets with tandem dump trucks, quad axle dump trucks, in-dump, belly dump, flatbed, and low boy—there's almost nothing you can’t get hauled by us.

We have contractors who have their own lowboys to do their heavy hauling, but if their truck is down, they know that they can call us. We have a great crew, and we have really hardworking guys.

They’ll jump in and haul on the weekend or haul in the evening to get something done for somebody. That diversity of trucks has also been a great asset for us in terms of being responsive to our customer needs.

Austin Gray: So, when you identified this need for the trucking market, a lot of our listeners are either just starting out or they've started out, and they’ve got some business going. I’m very interested to hear your perspective on how you go about building that.

A lot of people have great ideas, right? And a lot of people can see the opportunity, but actually executing on it is completely different from seeing the opportunity. What’s step one?

Steven Day: Well, step one is to talk to your customers. That sounds cliché, but we really just began talking to our customers and asking them what they needed. That’s really what led us to a lot of these different opportunities.

It wasn’t some type of insight, genius, or risk we took. We simply asked them.

So start with a core of something you know how to do and that your customers value, and then just simply start asking them what more you can do for them. Listen to the customers and their pain points.

I’ll give you another example: what we found is a number of our customers were complaining that if they wanted to put in a ranch road or a driveway, they’d have to call one vendor for the chip and seal, one vendor for the concrete if they had a concrete entryway or concrete safety sleeves on their culvert—they’d have to call someone else to do some drainage or erosion control and clear cedar.

What they were dealing with was multiple companies and having to coordinate multiple companies and getting everybody on the same page with the project.

That’s another need we listened to, and we said, “Hey, we’ll do all that for you, one-stop.” It’s become a great lead generation for our customers in the hauling business.

We don’t want to compete with our customers, so we’ll call someone in the landscaping business, a concrete business, or a chip and seal business that we do hauling for, and we’ll give them the opportunity to work on that part of the project.

The difference is we’ve become the interface with the customer, delivering the entire project for them. They have one voice, one person to coordinate with, which makes it much easier for them, but then we’re also able to generate business for our customers, which we like to do.

Austin Gray: That’s incredible. So, that’s a whole different side of the business as well. But is that you interfacing with the customers, or have you hired staff, like project managers, in place to be able to divide those up within your customer base?

Steven Day: Yes, we have two leaders in the business. One focuses more on the hauling side, and one focuses more on the excavation side. But they closely coordinate with each other.

We do have two primary leaders for those two different key parts of the business because they have different requirements in terms of management with the customer, pricing, and staffing.  

Austin Gray: So you have one on the actual excavation side and one on the trucking side of the business, is that correct?

Steven Day: Right. The title of that person is either operations manager or general manager for trucking—manager of excavation or manager of hauling, or director of operations.

There’s really one director of operations who oversees everything, and then, of course, you have the person who leads the hauling side and leads the excavation side so those pieces get the attention they deserve.

Austin Gray: Definitely! So getting to that point is what I want to talk about. I think a lot of our listeners are going to say, “Okay, I’d love to hire to get to a point where I have cash flow to support making that hire.”

Let's take it back here: you have the 333G with your son. What’s the next piece of equipment that you guys end up going and purchasing? Or what’s the next opportunity you see from the compact track loader?

Steven Day: We moved into excavators, so that was kind of the next logical move for us. We have some larger ones and some smaller ones.

We also believe in terms of keeping the business model a little bit virtual. Sometimes business owners get into the mindset of thinking they have to own it all, lease all the equipment, and hire all these people, but I would challenge you a little bit to think about creating an organization that’s a little bit more virtual.

For example, we have a very close friend who is one of our hauling customers. He has a Barco 930B, which grinds up trees and mulches them. It’s a very large unit, and we offer that service to our customers, but the person actually doing it is truly a separate business owner.

We provide that as an integrated service, and again, it’s one phone call, one project management. But we haven’t invested that capital in that machine. It’s a very expensive piece of equipment to buy, operate, and haul around.

That’s a good example of what I mean where you can offer a number of services to your clients without having to invest all the capital. That gets you a good foothold into the overall project.

We don’t really mark up or make any margin on that, and it doesn’t bother us. What we want to do is have the entire project and the pieces that we do well—we’ll do those well; for the pieces that we don’t, we find trusted partners—who often are clients of ours—to handle those other aspects.

Like I said, we don’t want to compete with our clients, and that’s how we look at it. I’d encourage business owners not to always think about whether they have the cash flow to go do X, Y, and Z, but could they partner with somebody to share the profits, revenue, and project risk to deliver it.

That’s one of the things we’ve done that helps reduce capital outlay and make things more efficient. You’re also helping other businesses in your community and by creating that network, working together, and solving project problems together, you’re building a stronger fabric between you and your customers and local businesses. We like doing that as well.

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Austin Gray: You guys do own some excavation equipment, but there are certain pieces that you partner with other people who specialize in specific areas, like the clearing side of things.

Now, what about the trucking? Have you guys invested the capital to own all of that in-house?

Steven Day: Yeah, that’s the one part that you cannot partner with or rent, like you can on the excavation side. On the excavation side, there are a number of companies that will arrange for heavy equipment rental, and that can be a very cost-effective solution.

Sometimes, there’s a lot of bragging rights in this industry about the size of your dozer or whatever, but from an economic standpoint, it really doesn’t make sense to own some of that stuff. It makes sense to rent it and pass on those costs to the project.

If you are utilizing something enough and you need the flexibility to have it all the time, then ownership becomes critical. For smaller basic pieces of equipment like a mini excavator, midsize excavator, or compact track loader, you’re just using them all the time, and you can’t be running back and forth to a rental yard to pick one up every week, so those basics are necessary.

Now, on the trucking side, that’s not true. You can’t just rent a dump truck for the most part; I haven’t found that as a viable option. So, for all the dump trucks, we own those, and all the tractors.

We have a combination of tractor semis hauling big trailers and, of course, the dump trucks. Now, one thing you can do is put those on lease payments to spread that cash flow out. You can match the cash flow, so that’s one option.

You can finance out your purchase over three, four, five, or six years, depending on what type of revenue you’re able to make per month, and you can really match that investment. If you take care of your truck, you can largely sell that truck for what it’s worth, pay off the remaining note on that truck, and exit it.

That’s the strategy there where I would say to take it slow—buying a truck at a time and putting it to use to ensure that you understand the economics behind it. If that works out, you can prove that out for six months or so, then go ahead and consider making your second purchase.

Is that the route you would recommend our listeners to take? Have you gone the financing route with every truck?

Steven Day: Not every truck, some we purchased, and some we financed. I’d say for the newer units, we did finance them. Those are very expensive trucks—talking about $250,000 to $275,000 for a truck.

It doesn’t really make sense to lay out all that capital up front, so financing those very expensive pieces makes a lot of sense.

The one thing too in terms of timing that we took advantage of was under the initial Trump Administration tax bill that he implemented. It offered what was called bonus depreciation, where when you purchase that truck, you would get to depreciate 100% of that truck in the first year of its operation to offset your profit.

That’s a real advantage for business owners because it allows you to get that truck put to work and build a customer base while sorting out the profitability.

Now, you take that bonus depreciation into account as it is phasing out. It’s no longer at 100%, but with President-elect Trump potentially coming back into office, people expect some of those items to be extended. Whether this bonus depreciation will be extended or not, I don’t know, but I would clearly keep an eye on that because it has a significant impact on your cash flow and profitability.

Austin Gray: Let’s dive into depreciation. That’s been a big question of mine. So when you take that depreciation, does it ever come back to bite you later on?

Steven Day: What do you mean by come back to bite you later on?

Austin Gray: Okay, so for our listeners, could you explain how depreciation works?

Steven Day: Sure! In terms of depreciation expense, there are two ways to think about it. One is from an operational perspective and pricing perspective, and the other is from a tax perspective.

Let’s clarify and say at the moment I’m talking about from a tax perspective. Let’s say you had a business generating $500,000 in revenue with $250,000 in profit. You’d be taxed on the $250,000 in profit, and if you’re an LLC like myself, you’d be taxed at your personal tax rate. Let’s just say that’s 40%.

At the end of the year, you file your tax return showing $500,000 in revenue and $250,000 in profit, so you’d pay 40% of that $250,000 in taxes.

Now, if you buy a semi, like a large dump truck, quad axle or quin-tex or whatever, it costs you about $250,000. If you bought that truck, you can finance it, so that’s still considered buying it—whether you pay cash or finance it doesn’t matter.

Let’s say it cost you $250,000 under the Trump tax legislation; you’d be able to depreciate the full $250,000 in that year.

Using the example we gave, your $250,000 in profit would be reduced by that $250,000 of depreciation expense. You’re allowed to depreciate 100% of that asset in year one, so your taxable income goes to zero. You would literally pay zero taxes in that year.

Now, you fast forward to the next year—hopefully, your revenue would go up because you’ve got that truck, and let’s say you make $600,000 that year with $300,000 in profit. Then you’d pay taxes on the $300,000.

So, what this does is accelerate what could have been a five- to seven-year depreciation period. So if that $250,000 were divided by $50,000 per year, historically you would have had a $50,000 deduction per year for five years to reduce your profit over those five years.

So what this bonus depreciation does is pull forward five to seven years of depreciation expense all to day one, reducing your taxable bill today.

So that’s how depreciation works for tax purposes, and that’s extraordinarily advantageous for people. This is where with tax policy, there’s a negotiated agreement that we’ve come up with in society for what we want to do.

I’ll tell you in the heavy equipment industry, where equipment is so expensive, that tax policy is a real incentive for purchasing that equipment and taking risks.

I’d say that tax policy gave me more confidence to grow faster because of the benefit it brought. Now, let’s just say you had—in the earlier example I gave—$100,000 in profit. If you bought a piece of equipment and depreciate it, that’s $150,000 to offset that profit, resulting in a zero tax year for you.

The $100,000 loss from the additional $100,000 of depreciation gets rolled forward into next year’s tax return.

So, it’s something to focus on as the new administration comes in and what happens to that tax bill. I believe it’s an area likely to be renewed because it's such a powerful motivator for people to purchase equipment. As you know, this is a big business and generates lots of income for our economy.

Austin Gray: Yes, thank you for giving that overview. Let me dive deeper into this question now. Let’s use your example of $500,000 in revenue, $250,000 in profit, and you purchase a $250,000 quad axle dump truck, claiming all of that.

So right now you’re paying zero taxes, but you’ve now put a lease payment or a finance payment on your books for that $250,000 piece of equipment.

What would that payment be over rough five years?

Steven Day: Roughly, that payment will be about $5,000 per month over five years.

Austin Gray: So, about $60,000 for the next year of cash outlay—over what, five or six years?

Steven Day: Yeah, call it five.

Austin Gray: For the next five years, you’ve got a $60,000 payment on that vehicle. What do you need to do as a business owner to ensure that doesn’t catch up to you in a negative way?

Steven Day: Haul a lot of loads! You’ve got to be running that truck almost every day.

The trick in trucking is to note that there’s very low margin in trucking. I think sometimes people think, “Oh, if you have a dozen trucks, you must be making a killing.” Trucking is a very low margin business.

You really start to make your return on that truck after you’ve paid it off—after you’ve earned that first $250,000.

Profitable trucks are when you really start to see the benefits. So, I would say the following things for somebody who wants to get into trucking:

Number one, don’t do it—it’s a hard business and a low-margin business, so think about doing something else.

For us, it’s essential to what we do; we couldn’t have that piece without it, as it supports our existing projects. We do a lot of self-hauling and internal hauling.

If you’re starting out with your first truck, I’d say have a very long-term perspective on getting that truck and getting a return on it.

If you buy it new, expect a very long-term return, which will really kick in after five years. If you’re getting into trucking at a starting point, I would not buy a new truck. I would definitely buy a used truck.

Get something in the middle of the road—something in the 10-year range, 7 to 10 years of use—where a lot of the value has come out of the truck, but it still has a lot of life left in it. So, I’d start there.

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Austin Gray: You mentioned needing to sort out your mechanic piece right away. I’m not a mechanic, nor do I have the time to be one.

So, getting that sorted out—who’s going to work on your truck? Heavy diesel mechanics are in high demand, and they make good pay when they’re good, and they’re busy.

In my region, there aren’t many, just a few good ones. They have a line at their door in terms of getting your truck serviced.

We have our own mechanic on staff, and that’s been a big help, but it’s expensive. Taking care of the truck and knowing how to care for it is crucial.

Conducting pre-trip inspections, doing preventative maintenance—all those types of things are really important!

Know your costs! It’s really important to know your insurance, fuel, maintenance costs, cost of operations, and cost of tires.

What happens is you start running and pricing, making money today; but if you’re not putting money back every single day for that next set of tires, a single tire on a truck—a good tire—is going to be $500 to $600 per tire.

Putting a new set of tires on a truck is really expensive. If you don’t have that $8,000 saved up, it’s going to be really difficult to make that work.

The same goes if a part on the truck goes down; if a main cylinder breaks on that truck, the part alone is going to cost $1,500 and another $1,500 to put it in.

It’s easily a $3,000 repair for just one cylinder that goes bad. Sometimes, you can reseal them, and sometimes, you can’t.

Those are the types of things where you have to be putting money away all the time to be ready to maintain that truck. That truck has to be on the road every day, so you can’t be holding off on maintenance.

Austin Gray: What are the margins on trucking? You mentioned slim margins in trucking.

Steven Day: I’d put it in that 5% type of range. I think we’re on a path to be able to make a 10% margin—that’s our goal.

The key is having those trucks running every day. Having a mechanic and a maintenance plan in place where you can get the work done in the evenings and on weekends is absolutely critical.

If you’re starting out with your first truck, that’s crucial! Being down for three to five days will literally kill your month, especially considering weather issues and seasonal issues with holidays.

There will be months like December, January, November, where you won’t get four weeks of hauling—period, full stop. Sometimes, July can be slow, depending on high heat or vacations.

Austin Gray: So, many moving parts in this, and I keep bouncing around, but I’m interested in it. You heard it from him—Steven comes from a finance background, and I hear a lot of guys throwing around numbers on margins or people asking about profit margins.

I want our listeners to hear it from him because, if you can’t tell already, Steven knows his numbers—5% to 10% on trucking of actual profit margin.

One of the next things we’re going to jump into here—you’ve mentioned mechanics—like in business, you always have the chicken and the egg problem.

It seems like, “Okay, now I bought this truck, but now I need to recruit this mechanic, but I also need to make sure that truck gets on the road and find jobs for it.”

How do you think about that as you are building the business? It seems like you’ve come into this, Steven, with a lot of experience; you’re very sound and calm about this.

Tell our listeners how you approach that situation.

Steven Day: For us, in this particular market, the difficulty of finding a mechanic allowed me the time to prove out the need for a mechanic. What I mean by that is I looked at my mechanic bills, like engine overhaul or transmission overhaul. My mechanic may not be able to do that, so I set those repairs aside.

There are a lot of other repairs that are no-brainers that a normal everyday heavy-duty mechanic would be able to complete.

We just looked at the math and saw that at $165 an hour for outsourced mechanic services—or at the cheapest, it was $130 an hour—that was kind of the range we were working in, depending on the project and complexity.

Then you just simply look at, “What if I get a mechanic for something less than that? How much savings would it take to pay for that person?”

Now, given the size of our operation, it became very easy to break those mechanic bills down into two categories and show that it was a no-brainer if we could find somebody.

The first mechanic I hired thought he was a good mechanic—he took the hydraulic box apart on an excavator, put it back together, and tore up all the valves, sending metal throughout the entire machine.

I paid $20,000 in cash to Caterpillar and another local mechanic who knew what he was doing to fix that whole situation.

You’re going to make mistakes, and you have to be prepared to make those mistakes. You may have a mechanic who claims he knows what he’s doing.

It started out as a simple project—he was going to replace a gasket; gaskets aren’t generally hard to replace—but he pulled off the central hydraulic unit to replace that gasket.

That’s a unit that only Caterpillar should touch. We had to let him go—not just because he made a mistake but because he doesn’t know what he doesn’t know.

When I explained the problem he created, he began to object and disagree. Well, that’s not a coachable person; that’s not a teachable person.

He made two mistakes on two projects, costing us $225,000 in cash to fix the very problems he created. It can be very expensive to make a bad mechanic hire, which we did.

Now we have another mechanic on staff who’s doing great, and we’re delighted to have him, as he’s been instrumental to our uptime.

Austin Gray: So that’s the other way we measure it—is by tracking downtime. At the end of the month, you want to really understand, “Hey, this excavator was down for five days.”

Whatever you build that out for per day, think about rounding it to $1,500 per day. Multiply by five; that adds up as real revenue.

That’s a real number that affects your business. Start looking at your downtime along with your mechanic bills—that’s the other thing.

We often think just about the mechanic bills; that’s easy for us to see. But think about your lost revenue; that became a real issue for us.

We had a quad axle in particular that had so much downtime that it was costing us so much in terms of revenue that it almost justified a monthly mechanic.

That goes back to my trucking examples I said earlier about that 20-year-old truck—we actually let it go because the maintenance costs were more expensive, and the downtime was killing our productivity.

So I just encourage you to look at those two factors together when you consider the mechanic aspect.

We clearly grown into it; it was just a matter of time for us to find the right mechanic.

Between those two numbers—lost revenue and actual cash out of pocket—it became a no-brainer for us to hire.

That may not always be that clear-cut for everyone in terms of when to hire, but the other thing is some heavy-duty mechanics also know how to operate equipment.

A lot of them came from operating backgrounds. So, in instances where you can put them in the seat and let them do operating and a little bit of mechanic work, there are ways to be creative sometimes and multitask until you fully grow into the need for the mechanic.

Austin Gray: So think about that in terms of one of the questions. What can one expect to hire a mechanic for in terms of salary range?

Steven Day: That’s very region-dependent and dependent on three things:

One, are they just the mechanic, and you provide the tools and the shop?

Two, do they provide their own tools?

Three, do they provide a service truck?

That’s basically where you are. In our region, a mechanic is probably around $30 an hour. They’re probably $40 an hour if they provide their own tools.

If you have a service truck, you can pay them a mileage fee to use that service truck. That’s kind of a general range of what a mechanic would cost in our region.

Austin Gray: Do you know the mileage fee that you would pay off the top of your head? Do you have that model built out?

Steven Day: Yeah, we just use the IRS reimbursement rate.

Ad/Sponsor: That is a good starting point, and I’ve sort of just taken that at face value whenever I made decisions on reimbursing people for their personal vehicles.

But what you're saying is for a personal vehicle, I would never go above that rate.

And I actually would never go below that rate; that’s a non-negotiable item with a service vehicle. If there’s something different—like they have to go into incredibly rough terrain and pop a tire—we want to work with our guys and be reasonable, but that’s a starting point.

Austin Gray: Another thing you mentioned here was downtime, but I want to ask about your rough number of $1,500 per day for the excavator.

Have you come up with an equation for billing out your equipment? Have you used any sort of framework for figuring that out?

Steven Day: We have, and I’d say that I don’t have that finalized in my head, so I'd say it’s a work in process.

But I’ll share with you two models that we use:

If you’re going to have an operator in an excavator every day running that machine full-time, I think about one full rate per day.

Going back again to $1,500 a day for an operator and the equipment to run it for a full day—that would be one model.

A lot of jobs we run right now, we have probably seven or eight pieces of equipment on site, and a couple of those are not being used every day—they’re support.

So right now, our 333G is on the job site but just in a support role. It’s not being used every day, so I’d think more about a weekly rate.

The way we thought about that weekly rate is something like $750. The way I think about that is twofold. One, what does it cost to rent that piece of equipment for that week?

When charging a client for a piece of equipment, I always had trouble charging a client for more than a rental rate.

It seems unfair to the client to charge more than what we could just rent it for. Nor do I think as a businessman, it makes sense for my equipment to cost more than I could rent it, because in that case, I should just rent it every week.

That’s one of the anchor points—it’s kind of a ceiling.

The second way I look at that is I consider that piece of equipment has a four-year life. How many hours per year realistically can it work?

A piece of equipment that’s fully utilized literally might only be working 40% of workable days—that’s a fully utilized piece of equipment.

Think about 40% of the working days per year, how much diesel it consumes per day, and kind of the depreciation of that piece of equipment.

What we like to think about is recouping our cost of that equipment within four years. If it’s a new piece of equipment, we want to get that done in four years.

If it’s a used piece of equipment, depending on how much life it has, we may want to recoup the cost right away.

I’ll give you a funny story: we bought what we call a ranch truck—it's a dump truck, not licensed to go on the road. The crew nicknamed it Old Yeller.

It’s an old piece of equipment. We expected to get that paid for immediately—literally within a month it paid for itself.

That’s one extreme where you accept that, but something in that range fits that piece of equipment.

If we bought a used piece of equipment and it’s 75% through its useful life, then we wouldn’t want to recoup it over four years; we’d want to recoup it in one year.

And the model would work within that one year.

So I say think about all those costs—what it costs to have that piece of equipment.

When we worked it all out, it largely came out to the rental rates, which kind of makes sense—that the guys who are equipment are wanting to make the same kind of return off their equipment on the same time frame that you are.

That all held together, but there’s some people who run wild.

This is where I’m saying it’s controversial. Some people say, “Oh, Steven, your excavator is going to last 10 years.”

You’re right; it’s going to last 10 years. From an economic standpoint, I want that to be paid off within four years, so that for the second tranche of its life, the second six years—when there’s going to be more maintenance, by the way—I want that to be making me more money at that point.

That’s really where you get the return on your capital—once it’s paid off.

Austin Gray: I’m going to ask your next question for you: Where’s the greatest cost leakage?

That’s something I just want to share with everybody. When you think about cost leakage—here’s where we found cost leakage in our model.

We’ve worked hard to try to get that. The fringe benefits on top of payroll.

You think, okay, I pay a guy $25 an hour. I want to get some markup on that of $30 an hour, and that’s what I’ll bill him out at.

Your payroll taxes—if you provide any kind of health care, which we do—all those costs are about a 20% load rate.

Any labor cost of $25 an hour, you take that times 1.20 to get your all-in break-even cost, and then add your profit on top of that.

So that’s one example. The second example is your service truck.

We have an F-350 that we use; they burn diesel, they wear out tires. When you don’t factor that into the cost of your job, you’re so focused on your job.

It’s going to require a dozer, an excavator, a skid steer, and blah blah blah. What about the F-350 to get to the job site every day?

We started layering that into the cost of the job. How much is going to be dedicated to this job versus job B?

So that’s another example of cost leakage. The other is somewhat unique to our business: we’re buying dirt and reselling it to the client.

It’s super easy to say you’re going to pass that through, but when you’re hauling many loads and you have some dirt that you’re buying and not passing through, it’s really important to get all those costs incorporated.

There’s a lot of areas of leakage, so I just warn everybody when you’re thinking about pricing and bidding, really think holistically about all costs in your business and make sure you’re allocating some level of that.

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The final point I’d say on this cost leakage is thinking about what we call direct cost and indirect cost. The indirect cost could also be called corporate overhead cost.

That’s the cost of running my website, phone service. We often don’t think about that when bidding out jobs.

Now we have a much better sense of what our corporate overhead costs are as a percentage of revenue. Right now, it’s too high, so I can’t bill that through honestly.

As we grow and scale, and grow into the infrastructure we built, it will become more manageable.

Somewhere around 20% of your revenue is in this corporate overhead, maybe as much as 30%. That’s your director of operations—those indirect costs, all these telephone marketing costs—so really layer that into each of your jobs, too.

Make sure that each job is paying for some of those overhead costs.

So that’s where you run the risk of doing a job for a week for $5,000, you factored in costs for your skid steer, labor, fuel, and voila!

Did you really? Did you pay for your fringe costs that week? Did you pay for your corporate overhead that week?

Those kinds of things are what I encourage people to look at.

Austin Gray: It’s such a good word! I was fortunate to have a friend of one of my fathers who runs, I think he owns three different businesses in the trades, and they’re all either right around or above $10 million.

His main thing when I was starting out was: you have to allocate overhead costs to every single job that you do.

He said if you ever want to get to the point where you have an office operations manager or want to get to that point where you have a website generating leads, you’re going to have to pay for insurance one way or the other.

His point was that in the beginning, you need to allocate a certain percentage to that overhead, and the last thing he mentioned was profit.

You're in business to generate a profit! It’s funny because I see a trend among Millennials where they say, “Oh, it’s not all about the money,” and “It’s not all about the money.”

While it's not all about the money, we are in business, and that is the game. If you’re generating a profit, you are winning the game.

None of us are in business because we’re not competitive; the goal is to win!

So, you have to generate a profit on each job; otherwise, what’s the point? I can just go work for someone else and have them pay my paycheck and leave at 5:00 PM.

How do you approach profit on each job, right?

Steven Day: There’s a saying I learned a long time ago when I was working in investment banking with Goldman Sachs: it’s the importance of being long-term greedy.

By being long-term greedy, it means to focus on what the customer needs and doing the right thing for them.

I don’t like that word “greedy,” as I don’t like to think of us that way at all. That’s not a motivator; it’s misleading. But the meaning behind that saying was to focus on what the customer needs, give the right advice, and do the right thing.

In the long run, it will all work out and you will make a profit.

In business with heavy equipment, it’s about profitability and money because you will be out of business in a very short period of time if you’re not.

People doing site work with heavy equipment by definition are not greedy—this is not great margin work. It’s hard work, capital intensive, and it can be dangerous work.

This is not a “get-rich-quick” scheme; it takes decades to build a business, franchise, and profit.

The way we think about it is we do a lot of project costing after the project is finished. We look at profit by project and do a detailed debrief on what we did right, what we did wrong, and what lessons we want to carry forward.

If you don’t have the discipline of tracking costs by project and doing that by project, you will regret it!

A year or two or three down the road, you’ll realize you left a lot of money on the table.

Over the last couple of years, we completely overhauled our pricing model and cost accounting model.

After each job, we look at, “What did we do right? Did we get the bid wrong? Did we execute wrong?”

We have those honest conversations with ourselves about how we can improve. We’ve changed as a result.

Like I said, on a large job, you’re just always going to need two guys, not one. It’s just not practical to have one.

Austin Gray: That’s fantastic.

Steven Day: We put in one, and we learned that's just not efficient.

But that project-by-project cost analysis is critical to making the next one better, but that’s how we think about it.

So, if we made a mistake on the job and have to take a loss to fix it, so be it. If we have to return to fix something on a job, we do it at no expense.

By doing that, we’ve built a reputation as a premium service provider, and that’s the final topic I want to talk about.

How do we think about profitability and the customers? In all my experiences with every business my wife and I own, it is a premium product and a premium service.

I truly believe if you have that, you will have long-term success and customer loyalty.

When you think about how you want to compete in the marketplace, think about how you want to compete.

Do you want to be the low-cost provider, or do you want to be a niche provider with a narrow offering at a premium price because it’s excellent?

Some things, like welding, are real arts and crafts—they are hard to find. You could build various structures if you’re a welder.

We have some guys we know locally who do both: they weld and truck. So, just find your niche and how you want to differentiate.

We don’t differentiate on price; we differentiate on service, and that means more costs to provide that premium service.

More expensive maintenance and upkeep, so just figure out what your business model is going to be and what your customer values. Find your segment and align your pricing and costs to what that segment is willing to pay.

Austin Gray: That’s a fantastic word for all our listeners. I appreciate you sharing that.

I love that you and I are aligned on that philosophy! I’m curious to hear your thoughts on this: the reason for being a premium product is that it challenges us to be the absolute best we can be as a team.

Steven Day: Yes! It’s got to be in your DNA that you want to be the best, right? That’s where it starts!

Austin Gray: Thank you, Steven, for taking the time to be on this morning. You’ve shared some great knowledge, especially with your financial background, on how to approach coming into an industry that requires a lot of equipment, hard work, and grit.

To your point, I believe there’s opportunity in these types of trade businesses right now, and I think our listeners will gain a lot of value from how you approached it with a sound financial mind, so thanks again for being on the podcast!

Steven Day: Thank you! I really enjoyed it. Appreciate the invitation.

Austin Gray: Is there anything else you’d like to share with our listeners? What advice would you give people starting out in the excavation business or any business, really?

Steven Day: I’d say number one, it has to be a family commitment. I’ve been blessed to be married to my wife for 28 years, and she’s incredibly supportive of entrepreneurial activities.

She also is involved in one of our other businesses. It takes a lot of work and long days. You have successes and failures, but you must keep moving onward and upward every single day.

I’ve been blessed with a great business partner in the investment banking side. I’ve known him since 1996, the same year I got married.

So, I think having great business partners and spouses is really important. So many times, I meet people where they don’t have that kind of support system around them. It creates a very difficult work-life balance.

That’s number one.

Number two is just a personal opinion: faith over fear.

Really, having faith to lean on is important. There will be days when you’re very concerned about what might happen financially or with a project.

Trying not to be anxious about tomorrow is key. Stay present and focused on today, being faithful in your strategy.

I think it’s vital to have that. I can share that it’s helped me through difficult times.

There are indeed difficult times for every entrepreneur!

I sell a lot of companies, and I always marvel at how some entrepreneurs who are on stage or on a panel talking about their experience don’t want to share their hardships or failures.

There’s something about our culture that shames that and makes it embarrassing.

I’d be happy to do a whole podcast on all my failures, so people can learn from them. I think it’s from our failures that we become smarter, wiser, and more equipped to handle the next situation.

We need to embrace failure and be honest about it. I think humility is key.

I share with our crew: there’s nobody who knows all the answers, starting with me. I don’t act like I know all the answers. I love brainstorming.

I just had lunch with our customer yesterday. He’s a customer but does similar types of work.

He was sharing so many great ideas, and nobody’s too old to be mentored or to learn. I think that kind of attitude is something I try to carry every day—continuous improvement and learning.

We can't get stuck in our ways. Small businesses can become very “Mom and Pop” and stuck in their ways, so using online marketing and current business practices—you’re really able to grow!

By adding ELD devices to our truck, we reduced our insurance bill by $122,000 in one year.

Most people think you can’t change your insurance bill; sometimes you can, sometimes you can’t. But by having confidence in our drivers to track data, we can show them their results every month.

If everyone works together as a team toward one goal, you can really make a difference.

Austin Gray: Those are all incredible words of wisdom, Steven. Thank you so much for sharing!

We’ll have to have you back on to talk about some of those failures, if you’re open to it. I believe there are valuable learning lessons there.

Steven Day: Sure thing!

Austin Gray: Thanks again for being on, Steven. And listeners, thanks again for tuning in to another episode of the OWNR OPS podcast, where we talk all about strategies, tips, and tactics for building locally owned service-based businesses.

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I encourage you to go ask your customers for reviews.

Podcasts are very similar, which is why I’m asking you guys for reviews here!

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We’ll wrap this episode up. Don’t forget: work hard, do your best, and never settle for less. We’ll see you guys next week!