Facing a recessionary housingmarket, home builders know they need to adjust to meet today’s economic realities. Home buyers are no longer lining up around the corner trying to outbid one another for a new home, and current business models need to reflect that.
With at least another 12 months of sales price declines ahead, readjusting for a new sales environment is essential to survival.
While builders would like to make a few big moves to lighten their financial load with minimal effort, the best move may actually be a continuum of smaller ones, says building consultant Chuck Shinn, president of Shinn Consulting in Littleton, Colo., a proponent of finding ways to reduce expenditures by fine-tuning construction.
“A lot of this, it’s just nickels and dimes,” he says. “Where you get your money in [reducing] direct construction costs is not big numbers. You’re not going to find a lot of big stuff. You’ll find $20 here, $100 there. But it adds up to huge numbers.”
Builder caught up with Shinn as he prepared for another round of home building seminars and asked him for tips our readers could apply to their own operations. (For more business advice from Shinn, see “Cash Flow,” page 230 for this month’s story on the importance of managing cash flow.)
Build what the customer values, not what the builder values, Shinn says. Crown molding has high value in certain areas, such as in a first-floor living room and other public parts of a house, Shinn says. But when builders put crown molding in every room of every floor, it ups their costs and re-duces the visual impact, and buyers will not pay extra for it, Shinn says.
To get a handle on what the consumer wants, Shinn suggests holding a Monopoly night, giving attendees $30,000 in fake money from the board game, and offering them a wide range of home options to spend their money on.
“I have had builders who were shocked at what the customers will pay for and what the customers won’t pay for,” Shinn says. “Analyze your standard specifications in what you put into the house, and make sure that they have value.”
Competitively bidding building supplies is one step to smart buying, but a builder will only be choosing among options, Shinn says. It is better to know what materials should go into a house, and in what quantities, so that a builder can negotiate from a position of knowledge. What if a bid includes 15 extra sheets of roofing material per house? Or similar levels of extra drywall? If a builder can go back to the supplier and point this out and get a new bid with accurate levels of material, they will have likely saved themselves big money.
First, determine what the house should sell for. If a market study determines a house should sell for $250,000, then work backward to create a budget for how much should be spent on land, operating expenses, and construction expenses, Shinn says. And make sure to build profit into that equation.
“I go so far as to break that down into, how much can I afford to spend on foundation? How much can I afford to spend on framing? How much can I afford to spend in each one of my cost codes? So I have a target to go after,” Shinn says. “I design, bid, and specify to those targets.”
Shinn offers several tips for building more intelligently and trying to control variances, and they all begin long before construction does, he says. A builder’s first move should be to work with its architects to create a common scope of work for all projects, so the same information is on the same page each time, Shinn says. In creating this plan, builders should also seek advice from their trade partners, the people who will actually build the house, and make sure all the information they need gets included in the overall plan. Even if two houses are designed to be identical, if the plans are not, they will turn out differently, Shinn says.
“The houses will change from one community to the next community, because one superintendent is trying to build it one way, and another superintendent is trying to build it another way,” he says. “I want consistency through the organization. It helps your estimator, so he’s not guessing at what you’re trying to build. It will help your superintendent and your trades. And you’ll get heating ducts in the same location, the furnace in the same location. ... It’s very hard to have cost controls when you don’t have a consistent product.”
MODEL FOR SUCCESS
Generally, builders will sell more of what they model than what they don’t, Shinn says. If builders are looking at their gross profits on a per plan basis, and they should be, they could decide not to model the lower grossing homes and model the more profitable product, increasing revenue.
“Even starting the plan of action for a community, I can have a big impact on the profitability of that community by the product mix I put in,” he says, assuming the role of the builder.
But don’t just eliminate low-grossing product, Shinn says.
“Analyze it. Maybe I’ve got too much roof on it? Maybe I’ve got too many kitchen cabinets in it?” he says. “I can figure out why this thing isn’t producing the kind of profits it should be producing, and then make some modifications.”
Shinn takes exception to what he feels many builders think of value-engineering.
“Their definition of value-engineering is to make a big ugly house,” he says.
Builders ought to use their resources more efficiently. They ought to question the engineer, because engineers typically over-engineer houses but could change their plans if pushed, Shinn says.
Develop a complete start package prior to beginning construction on a house and variances will go down, he says.
A complete start package will differ from builder to builder. A builder should meet with his production people, ask what information they need to start a house, and create a checklist of items. Then, assign an employee to collect that information, create a packet, and then sign off that the house is ready for construction before the information is turned over to the production department.
“A lot of times the start package comes out in parts and pieces to the superintendent, and when that occurs there are going to be more mistakes during the construction process. There is going to be more re-do,” Shinn says.
“It’s the mistake of rush to construction.”