“Be quick but not in a hurry.” – John Wooden
Legendary UCLA basketball coach John Wooden's famous advice has a real parallel for homebuilders. In the college hoops world, a shorter shot clock (the NCAA cut it from 35 to 30 seconds this season) has put pressure on some players to "hurry up and shoot." The inevitable missed shots make for painful hoops viewing for die-hard fans like me.
In the home building world, hurried mistakes usually come during the last months of the year in what I call the “Q4 Fire Drill”—a frantic effort to finish homes before the clock strikes midnight on New Year's Eve. The pain here is on the bottom line.
It doesn't have to be that way. A builder with a simple, clear and disciplined approach to making important operating decisions early in the year can easily avoid the December panic. In my experience, however, only about 25% of builders have this discipline. Most don't face reality soon enough to adjust the business plan, forcing emergency decisions later in the year.
But just as the best college basketball coaches refocused their pre-season training to help players move faster while scoring more points, smart homebuilding companies are making forward-looking decisions in February and March. The momentum they gain carries them through the year with less uncertainty, fewer callbacks, and higher profits.
If your company has just endured the Q4 Fire Drill, you can avoid it this year by working with your management team this month to ask key questions and make key decisions. Here's how.
When I bring up the need for timely decision-making to my builder clients, most jump immediately to a specific part of their cycle. They want to know how to shave a day off of the framer's schedule or how to compress the time between sale and start from 45 days to 40. I tell them they're getting ahead of themselves. Yes they should look for ways to streamline workflow in all areas, but that streamlining stands little chance of success if they don't first make some bigger decisions.
- How many plans should we offer in this community?
- What percentage of speculative starts can we afford?
- Will we build plans that are not in our plans library?
- How many options should we offer?
- Will we accept “custom” or “non-standard” options?
- How do we handle cut off dates for customer changes?
These decisions shape every task, workflow and outcome that follows. Still, a surprising number of builders either put off making them or make bad choices based on a small set of observations.
If management puts off making a decision someone else will have to make it—often an employee who lacks perspective on the overall business. Take the example of custom options. Without a clear policy, a sales representative might offer a custom option to close a sale. Although it seems a win to the salesperson, it adds design and production time and, if the crews haven't built it before, invites mistakes. A clearly communicated options policy—a decision—eliminates these problems.
Even when management eventually does make a decision, procrastination and a lack of information can breed some ugly results. Take the example of matching the sales rate to the budget projections. What should we do if the sales rate is slower than predicted? Should we run a promotion? Should we release speculative starts to maintain the optimal production rate? Do we need to drop prices? What about our advertising tactics? How do model home traffic and sales absorption compare to that of our competition? Do we need to adjust our product offerings?
Most builders don't get serious about answering these questions until July or August. By then it's too late. Because builders almost always forecast too optimistically, they end up behind schedule and in a haste to get more homes in the ground. Most of the time they also lack the resources to handle the extra work, so cycle time gets stretched out.
By contrast, high functioning management teams anticipate and plan for several scenarios before the year even begins. They begin with an optimal budget based on their best-projected sales and their anticipated production capacity (the amount of work-in-process they can maintain while still meeting their required cycle times). But they also go beyond that to analyze the implications of various spec and pre-sale plans, as well as sales rates. The benefits are obvious: if sales in February are falling behind projections, that pre-planning puts the builder in a position to easily increase spec starts and ramp up production to optimal capacity before feeling a time crunch. Contingency planning lets them quickly identify what is playing out in the market and push the right buttons, while there's still time to affect the business plan.
Most builders avoid this level of analysis because they don't want to think about tough decisions early in the year.
Although contingency planning benefits all parts of the business, let's continue with the example of whether or not to raise the spec rate. Builders put off thinking about it because they see it as a financial risk. But consider the bigger picture: increasing the number of starts also lowers operational risk by letting the company work in a more even fashion throughout the year, which reduces mistakes and overruns. This helps eliminate the Fire Drill by making for a more orderly and predictable business process. It also reduces financial risk and builds credibility with key stakeholders —like banks, trade partners and customers!
How does a company move from procrastination to proactive decision-making? As with any critical business process, it needs to be supported by the right structure. To consistently make good decisions, the three things in Figure 1* must be in place.
- Timely, relevant and accurate information. In the spec rate example, making a good decision requires accurate sales numbers, along with an understanding of the resources needed to handle the extra work.
- Clear responsibility and authority. The builder needs a clear policy on what person or persons in the company or division will decide whether to increase those starts.
- A well-defined timeframe with hard limits. To get those starts going in April, for instance, the decision needs to be made by the end of February.
While implementing this structure takes time and effort (it involves changing a lot of entrenched habits), you will make much better decisions with it in place. Without it, there's a virtual guarantee that decisions, even if correct, will be late. That lost time is a commodity you can't buy more of once it’s gone.
Only about 25% of builders are this organized, but those that are reap significant benefits. They get the best land deals. They're almost always the builder of choice for the best trades. And they have the highest customer satisfaction scores.
The bottom line is that decisions made or not made in February lay groundwork for predictability or panic in November and December. In fact, anticipating the scenarios and setting the structure for making the necessary decisions should be part of the annual budgeting and business planning process. This is usually done when? Oh, that’s right, usually in the 4th Quarter, when most builders are too busy putting out fires to take time for analysis.