By Joe Stoddard. Callbacks, defects, warranty work, omissions: Call it what you want, it all amounts to a much greater impact to the bottom line than most builders realize. In fact, few even add up the total cost, which includes loss of productivity of the builders' staff and lost referrals.
"In the real world, the responsibility for warranty service is usually passed on to trade partners, or swept under the rug by the construction division and not tracked," says Daryl Spradley, a customer service consultant in Maitland, Fla.
But the impact is undeniable. An informal survey of large builders who do track callbacks puts the annual average hard cost at 1 percent to 2 percent of sales, and the typical soft costs to administer warranty work at roughly $500 per home. Arvida, in Florida, beats the averages, with $415,000,000 in sales and a warranty service budget of $3.7 million last year. "We processed some 20,000 odd warranty service requests, representing approximately 40,000 line items, slightly more than one per home in Weston, our 16,000-home community," says Bill Frey, Arvida's director of warranty service. "We've boiled it down to an average line item cost of $98.05, which is way down from where it was a decade ago."
Frey credits Arvida's decline in warranty service costs to its approach to performing service. The company maintains its own warranty technicians in-house who often are the first people the buyer sees.
"First, we want to make it easy for residents to schedule service, so we have implemented a seven-person call center that can route service requests and dispatch technicians," says Frey. "We've found that we can respond faster with our own people, often within hours, and can often fix everything on the list in one trip. Plus, if we need to bring trades back in, the service techs can evaluate the situation and help us get the right people there on the first try. We survey our buyers on a regular basis, and customer satisfaction is up significantly since we've taken this approach."
Logistics are the most strategic part of service work, he says. "We live in a world of two-income families with busy lives. If we can get our warranty techs and trades correctly scheduled with the buyer, we can complete the entire service request on the spot 28 percent of the time, reducing our overall warranty service costs considerably."
A production builder's average completion time on a warranty call should be less than 10 days, according to several consultants, including Emma Shinn, of The Lee Evans Group in Littleton, Colo. That range takes into account small repairs that can be completed in a day or two as well as expensive items such as cabinets and millwork that could take weeks to correct. More often than not, big builders' average turnaround time is more than 30 days, Shinn says, which suggests that the small items aren't being fixed quickly. That has repercussions for companies that rely on referrals.
Keeping buyers content isn't the only reason for moving quickly on repairs, but it's a crucial one. It's cheaper to maintain the call center and dispatch immediately no matter how small the problem than to make customers wait and lose the referral, according to Frey. It's false economics to force buyers to follow a prescribed schedule to report defects, he says, drawing a parallel with the luxury car dealer who "makes you wait for your 30,000-mile checkup before they'll rub out the key scratch on the door handle. You're forced to look at it for 90 days and get madder about it every day it's not fixed."
Dig into a serious customer complaint and chances are it was little things, gone unfixed, that kept it fueled: a chipped sink, a poorly adjusted window, a leaky door sill. Mistakes that would have cost peanuts to make right can cost millions in the end because it leaves the door open for scrutiny on everything else.
Loss of referrals, in turn, affects sales velocity. Spradley established a straight-line relationship between the percentage of referral sales and the time required to sell out a typical project. "Everybody focuses on beating down subs and suppliers, when they should be focusing on building up customer satisfaction, which ties directly to how they handle warranty service requests. You can build a perfect home and do everything right, but if you're not responsive with your warranty service work, you've blown any goodwill you may have developed, and that translates directly into lost referrals."
In Orlando, where Spradley is based, the typical builder has a referral rate under 10 percent, and it takes 60 months of intense marketing to sell out a 300-unit community. According to Spradley, a 40 percent referral rate represents a 28 percent reduction in sell-out time (17 months), because it takes less time and effort to close a referral than it does a lead generated by your marketing efforts. "That reduction in sell-out time is the key to adding to the bottom line. It's not unusual for the maintenance of model homes, the sales department, and supervisory labor to exceed $15,000 per month. If you're on to the next community 17 months sooner, that's $255,000 saved, or an additional $850 per house. Try to squeeze that out of your trade partners--you can't."
As part of its quality improvement initiative, Colony Homes in Atlanta, has studied how callbacks affect its trade contractors. "It's hard to quantify how much, but bottom line, if a subcontractor has to go back, whether they were at fault or not, the builder is going to pay," says Jim Stetson, Colony's vice president of product development.
"Subcontractors have to maintain their already-thin margins. If they're away from their paying job, we found it either increased our cycle time, or just as bad, they tried to make up the time by cutting corners, which created even more callbacks." Furthermore, if the callbacks are the result of chronic poor management on the part of the builder, says Stetson, trade partners will be forced to raise their rates in order to maintain their margins.
Shinn says the key to reducing callback costs is to limit the variables that can cause mistakes in the first place. "The example I like to use is changing the swing of a door: The buyer thinks 'no big deal--all the same parts,' but that one change has to be communicated to the project manager, the framer, the electrician, the trim carpenter, the millwork supplier. If that one 'no cost' change generates a callback because the light switches wind up behind the door, the true cost to the builder could exceed the entire margin on the house."
George Casey, president of Arvida's South Florida operations agrees: "We finally figured out that custom options were the root of all evil. Today, we still have 99 pages of options, but they're all perfected in our system, meaning that if something is selected from the options catalog, all the right people will know about it, and it gets built right 100 percent of the time. And, we absolutely refuse any changes after construction starts."
Whatever level of changes a builder allows, Shinn recommends re-stating project goals with each buyer. "Make sure they understand that any change after construction starts substantially increases the odds that the house won't close on time or that a mistake will be made that will go unfixed," she says. "And that always spells trouble for both the builder and the buyer." And, one might add, the builder's pocketbook.
Joe Stoddard is based in Elkland, Pa.
BIG BUILDER Magazine, April 2002