It drives Chuck Shinn crazy to see builders squander good profits through poor purchasing. “Builders are too busy building,” says Shinn, president of the Lee Evans Group. “They're not making time to negotiate.”
They should. Price is the third most important quality to builders when choosing a supplier, according to Builder's 2004 Purchasing Survey, but most aren't doing what they could to ensure their company gets the most competitive pricing available. “It's a lot of work to get good pricing,” Shinn says.
Here's what he recommends:
Hire an estimator. “If I'm doing $5 million to $10 million a year, and I don't have someone who knows how to buy, I am wasting money,” states Shinn, who says a good purchasing agent can add anywhere from three to eight percentage points to the bottom line.
Get competitive. Loyalty and past relationships matter to builders, who rank this as the fifth most important quality in selecting a supplier. That's fine, but don't let loyalty blind you to financial reality. “Too many builders have a favorite son they want to deal with, and so they are not truly competitively bidding,” Shinn says. When you are bidding a job, get bids from at least three firms. If you're really smart, you'll prequalify them, getting their references, credit report, insurance information, crew capabilities, and other details that show they can do the job before you ask and accept their bid.
Watch prices. While nearly half of builders rebid contracts frequently, according to the survey, almost as many (42 percent) do not and don't plan to, either. That's a margin-busting mistake that puts you at the mercy of your subs and suppliers. While you obviously don't want to bid every house, you can certainly bid large jobs (such as phase of construction) or material quantities for a period of time (lumber for six to nine months). Another time to ask for bids: when your vendor or supplier hits you with a price increase, which you should be notified of 30 to 45 days in advance.
Meet the manufacturer's rep. Use the International Builders' Show and other industry events to meet manufacturers' representatives, who can be valuable contacts as you explore pricing, service, rebates, and more. If you can, ask the rep to join you when you meet with your local distributor.
Remember the details. Purchasing isn't just about price. It's also about terms and conditions. If you pay cash or within days of invoicing, you should get a discount.
Embrace the purchase order. According to the Builder survey, 44 percent of builders say they do not use purchase orders and don't plan to in the future, yet Shinn says purchase orders are one of the best ways to control and manage your costs. If a vendor tells you his prices will be rising, your established purchase order for a quantity or period of time gives you temporary protection against that increase and allows you to adjust your home prices appropriately, preserving your margins.
Do your own takeoffs. This is one practice builders have adopted. Eighty-six percent of builders surveyed say they do their own takeoffs, a smart move that eliminates the fudge factor. “If I'm bidding and I don't know how many units I need, I am paying for extra material,” Shinn says.
Get organized. Timely delivery is the most important factor in selecting a supplier, according to builders surveyed, and it's one that cuts both ways. If you need timely delivery because scheduling is a problem at your company and you're always scrambling to finish the house, you are paying the price for your chaos. If your jobsite and construction process is well-organized, you may be able to justify a pricing discount from your vendors while getting the prompt deliveries you need.