Maybe the Associated Press and other economists were being a bit dramatic when they chose to label the recent downturn as the “Great Recession”. I’m sure if my Grandfather was here today, he would tell you that 2007 through 2011 was a walk in the park compared to the 1930s and early 1940s. Or maybe “Great Recession” is the perfect title given the impact it had on businesses, industries, currencies, stock markets and all of the individuals who lost their jobs. Regardless of the similarities and differences, a large percentage of today’s American population is still recovering from the recent recession. Some are trying to reclaim their previous status, their previous salary, their previous life. We may not be stuffing our cash in mattresses or hoarding our assets as our grandparents taught us, but the pain is still fresh.
And what sector of the economy felt more pain than the home building industry? Recall the intro "Victim Or Survivor" piece in our series where we cited the 400,000 home building employees that the industry lost between 2006 and 2011. Many assume that most of these employees will return now that recovery is underway however the results so far indicate that this is simply not the case. The NAHB’s “Eye on the Economy” reported in November that total builder employees in the U.S. increased in October to 678,000. However, we still remain approximately 300,000 employees short of 2007 employment levels and are currently averaging only a 7% growth rate since 2011.
Despite this sluggish growth in employees, many home builders across the country are starting to plan for growth coming out of the downturn. But in an industry where the talent pool is dry and the availability of resources is low, these builders will quickly find that growing staff will remain an uphill battle for the foreseeable future.
Take the issue one step further: if you do have access to new hires, what position(s) are you recruiting…superintendents…sales agents? Both of these positions are critical to growth and are needed by builders across the nation. On the other hand, what if I were to tell you that an Estimator should be your highest recruiting priority?
The Often Overlooked Value of an Estimator
In 2010, Continuum Advisory Group saved a single division of a top 10 production home builder approximately $200,000 through accurate lumber takeoffs and proper implementation with the framing trades. This does not include the cost savings that were later realized through reduced Variance Purchase Orders (VPO’s) as a result of accurate takeoff quantities. In addition to cost savings, a strong Estimator can also impact your velocity by improving pre-construction cycle time and construction cycle time.
Consider the lost production that is a result of a Superintendent writing numerous VPO’s, waiting for additional material to be delivered, and rescheduling trades. A recent Continuum analysis (break out box) shows that a standard lumber VPO of 100 2x4x14’ sticks results in one half day lost in production for office employees and one half day lost in production for field employees.
The total cost for the lost time, in conjunction with the cost of this particular VPO, is approximately $830. While this main seem minor, consider that lumber VPO’s alone can reach the thousands of dollars for some builders. What if this builder suffered similar lumber VPO’s on only one third of the 300 houses they built in a year? That would result in $83,000 of cost and 50 days of lost time. The half day lost per VPO adds wasted days to your construction cycle time, pushes back closings and reduces working capital turns. There is plenty of variability built into the typical process of building a house without adding the chaos of VPO’s. Fortunately, these pitfalls can be avoided through accurate estimates and effective material management.
A strong Estimator that is trained to accurately estimate a house and understands material management at the field level can be a home run hire for any homebuilder. Unfortunately, in-house Estimating functions were largely eliminated during the downturn. Most builders outsourced their estimating needs, allowed the trades or suppliers to do their own estimates or transitioned from direct buy to turnkey. Choosing to recreate an estimating function and finding space for it in your budget may seem unrealistic. Keep in mind that the $83,000 in direct savings from the example above would likely cover the total cost of the estimator and the increase in velocity would add more value to the equation.
As 2014 draws to a close, roughly two to three years removed from the end of the downturn, the market is approaching 1 million starts again. Home builder confidence is on the rise, house prices are increasing and acquisition activity is brisk. However, profitability remains relatively flat, as key input costs of land, construction materials and labor and staffing rise with house prices. In many markets, these costs are rising faster than house prices, causing builders’ margins to shrink. With these mixed conditions in mind, there has never been a better time to hire “smart overhead”, employees that generate immediate ROI. A good Estimator optimizes the cost of homes sold and increases starts velocity, driving higher profitability and better return on invested capital. What could be smarter than that?
How do I find these people and get them on board?
In a recent conversation with the Purchasing Manager of a top 40 builder I learned that his division is paying their Estimator a salary that they believe is above the market average. When asked why the builder would do this, he answered that they will do what they can to retain him because “there are just so few people that can truly estimate a home properly”. This Purchasing Manager, who has been in the industry for many years, understands the importance of having a strong Estimator on staff and said that true cost reduction through material management “has to have a solid starting point with great estimating.”
How can builders attract top talent to a position that is considered entry level, historically has a relatively low salary and has been eliminated by many companies? In addition to paying a competitive salary, which is only the starting point and will not result in long-term stability, here are three other factors to consider when recruiting your next Estimator:
1. What opportunity is there in your organization for this person to develop their skill set and advance to a management or leadership role? The most common career path for an Estimator is into one of several pre-construction services management roles. Examples include Estimating Manager, Purchasing Agent, Purchasing Manager, or Architecture Manager. It is also common for Estimators to progress into the construction department. The right candidates will be as motivated by a clearly articulated career path as they will be by the starting salary and overall compensation package.
2. What is your company’s approach to innovation, particularly as it relates to exploring and implementing new technology? The opportunity to lead or participate in a technology implementation or other major innovation will also be attractive to good candidates. For example, Building Information Modeling (BIM) is gaining momentum throughout the country by streamlining plans production and generating accurate Bills of Materials (BOM) from intelligent 3D models. The transition to BIM requires a manager to run the implementation and to train new and future employees. Many builders throughout the country have already hired key staff to implement BIM software and to develop the new business practices, processes and procedures that will ensure a smooth transition for the company. Estimating experience is an important skill for BIM Managers as producing accurate BOM’s requires an understanding of how quantities are derived from drawings. If you’ve targeted the right people, they will react positively to this challenge. BIM has been maturing in the commercial construction industry over the last 10 years. Using BIM as a recruiting tool may help attract experienced commercial Estimators who are interested in being on the front-end of a transition to a new technology.
3. How is your company approaching its need to manage materials throughout the pre-construction and construction phases? Material management is a critical process that starts by generating an accurate BOM but continues through the entire purchasing and construction phases. Estimators have typically been utilized exclusively to generate the BOM and the resulting cost estimate. Smart homebuilders recognize the opportunity to increase margin and velocity by integrating the estimator throughout the material management process. This means that the estimator helps to train the construction staff, suppliers and trade partners in the process to validate that the correct amount of materials were shipped to the site and that the material quantities provided are adequate for completing the various trade scopes.
Additionally, the estimator monitors the material management process to ensure that it functions smoothly, and in the event of VPO problems, the estimator evaluates the issues, performs root cause analysis and works with the appropriate parties to solve the problem, eliminating the VPO. Making clear to the estimator that they will be trained and expected to perform in this role demonstrates that they will be developing their skills and understanding of the pre-construction and construction phases. This allows them flexibility in their career path and keeps them from being “pigeon holed” into a narrow field with little opportunity for advancement, while gaining valuable experience that makes them more marketable inside and outside of their employer.
As you put the finishing touches on your 2015 budget and growth plan, make sure that the estimating function is part of your plan. There are not too many other functions that can offer as much punch in reducing and controlling costs as well as increasing your velocity over much of your volume.
It’s time to resurrect the Estimator.