Builders are slowly recouping lost earnings by managing their operating expenses better and generating more gross profit to offset that spending.
Builders’ net profit showed a modest gain in 2011, as they continued to rein in operating expenses.
That’s one of the key findings in The Shinn Group’s 19th Annual Financial and Operations Study, based on information provided by 450 builders that are participants in the Shinn Group of Companies’ Builder Partnerships.
Last year, this group’s net income grew by an average of 4.4%, although individual company results ran the gamut from -17% to +18%, and one third of the builders in this survey reported losing money. “The size of the builder didn’t really make a difference; volume does not guarantee profit,” said Chuck Shinn, owner of the Shinn Group, who presented the study. The study was prepared by Emma Shinn, the company’s vice president.
Over the past two years, builders have managed to get their gross profits to grow at a faster rate than their operating expenses, which Shinn attributed, in part, to less-aggressive price discounting.
However, more than two-fifths of the builders surveyed reported operating expenses of more than 25% of revenue (Shinn’s recommended target is less than 25%). The group’s sales and marketing expenses specifically in 2011 were the highest they’ve been in five years; conversely, the group’s general and administrative expenses fell for the third consecutive year.
The highest-profit builders were those that kept their operating expenses under 20% of revenue, and cost of sales under 70%. And the builders that reported operating losses all had cost of sales that exceeded 70% (one builder’s was more than 100%). These parameters, though, aren’t always hard and fast. Shinn pointed to one builder whose operating expenses exceeded 20% of revenue “because they are spending more money” on marketing, but which managed to make money by getting a hold of such cost factors as land and construction.
The good news for builders has been that average sales prices have continued to move upward. In 2011, average sales prices were 54% higher than the lowest point in 2009.
After falling in each of the previous three years, cycle times held steady in 2011. Shinn warned builders that this is something they will need to keep an eye on, with impending shortages in labor and materials.
Builders appear to be running their job sites leaner; superintendents are not only managing more homes but also supervised warranties for 28% of the builders surveyed, compared to the 18% of builders that in 2006 turned warranty responsibility over to their supers.
The study found as well that companies’ sales and marketing were less effective last year, when the group’s conversion rate was 8%, versus 10% a year earlier. And once they’ve sold a home, fewer builders—53% in 2011 versus 60% in 2010—seem willing to offer custom options after construction started.
When builders lost sales to cancellations, financing problems were the reason 52% of the time, with contingencies causing 33% of cancelled contracts.
It does not appear the builders are using computerization and technology to their fullest advantage. Only 8% of the builders’ superintendents use computers in the field. Slightly more than half of the builders have customer-oriented websites that can receive service requests. And just 28% of the builders surveyed use their websites for customer selections.
Less than half of the builders in this group are formally evaluating their trade contractors. And the electronic nexus between builders and their trade partners could be more extensive; only half of the builders polled use vendor portals for information and documentation, and less than one-fifth bid online. “And I don’t think the problem is the suppliers here,” said Shinn.
John Caulfield is senior editor for Builder magazine.