If a villager asked for a house of polished obsidian, the builder would construct it himself, and say nothing of the extra cost. After many years, his back ached; his fingers became twisted and bent. Yet he grew no richer. Best Defense: Calculate Your Costs.
Watch your pennies on the job, or your company will lose millions of dollars throughout the year.
By Alison Rice
This builder was making nothing," recalls Steve Hays, who manages the home builder services group of the accounting firm Rubin, Brown, Gornstein and Co. in St. Louis. "They'd misestimated the direct construction costs and didn't realize it until they had 45 units closed."
Ouch. With direct construction costs representing the largest piece of a home's sales price (50 percent to 58 percent, depending on the consultant), controlling them has a critical impact on profitability. "You have got to manage that number," Hays says.
Yet, as the above builder discovered, that often fails to happen during the endless decision-making involved in building a house. But builders must manage that process effectively. "The accretion of little details can end up costing you the profits on a job or a succession of jobs throughout the year," says John Wilcox, executive director of business management at the NAHB.
To maintain your company's profitability, pay attention to these key areas:
Stay off the job. Want to reduce your profits? Work on the jobsite with your crew; research suggests it may correlate negatively with profitability, according to a 2001 study by the NAHB and Mark Hutchings of Brigham Young University.
Keep moving. Schedule your suppliers and subcontractors to maximize efficiency. Each day that workers stand idle waiting for a delivery, you're throwing away hundreds of dollars per house, says Chuck Shinn of the Lee Evans Group.
Watch equipment buys. Leave the brand-new, $25,000 excavator at the dealer and rent one instead. "You always think you'll save money [when you buy your own equipment], but unless you do a lot of volume and you run that Bobcat like a business, you're not going to," says Hays.
Purchase smart. If you're doing 75 or more homes annually, or you pay suppliers on cash terms, you should receive some level of discount. Add competitive bidding, contracts, and a purchasing order system, and you could gain as much as 5 percent, according to the Lee Evans Group.
Estimate right. By relying exclusively on subs and suppliers for estimates, you lose control of your material costs. "You've got to get rid of the fudge factor," Chuck Shinn says. But make sure you're accurate: A low lumber estimate cost the builder mentioned earlier thousands of dollars extra on his $165,000 houses, virtually erasing the margins.
Price for profit. "Builders often start with the costs and then come up with the markup. Instead, they should start at the top," says Steve Maltzman, of Builders Accounting Services in Redlands, Calif. Determine the market price for the home, the desired profit, the cost of land, and the amount for direct construction. This is critical for spec homes, which typically sell for 10 percent less than contract homes.