Consultant Chuck Shinn estimates that the average home builder’s annual net profit ranges from 3.5 percent to 5 percent. But the Littleton, Colo.–based founder of Builder Partnerships and Shinn Consulting contends builders need to earn at least 8 percent—and that they can net 20 percent more. “It doesn’t make any difference whether they’re [building] starter homes or move-up or whether the builder is urban or rural. It’s all based on how they run their business,” says Shinn, who has been collecting data on builder profitability for 40 years.
Here are nine tips from Shinn and home building professionals that can help you boost your company’s profitability.
Maximize the site
Balance Supers’ Schedules Profitable builders are successful in striking the right workload balance for superintendents. When supers have too many homes to oversee, new communities can quickly spin out of control. But when they have too few, trades can run out of work and go looking for it elsewhere. “I don’t want my key trades to roll up their tools and go work for another builder,” Shinn says. “Once that happens, the super has lost control of his construction schedule.” Shinn recommends assigning 16 to 20 houses per super per community, and five to eight houses for scattered lots “because 50 percent of the super’s schedule is spent driving from one site to the next.” MJ Farzaneh, construction director at Home Creations in Moore, Okla., adds that a super’s experience is also a major factor. “If you have a smart guy who gets it, he can handle 30 houses at a time. But you don’t want to drown the new guy.”
Keep It Clean Jobsite cleanliness “is our No. 1 focus,” says Brad Mooney, COO at Grand Rapids, Mich.–based Eastbrook Homes. “A clean jobsite runs so much more efficiently.” Shinn agrees, noting that when subs “don’t have to work around other people’s mess, their attitude changes, their performance changes, and they’re faster.” Eastbrook has also resumed jobsite inspections—which it halted during the downturn—at all stages of construction.
Partner with Subcontractors
Make Time for Face Time When the home building market turned south, Eastbrook Homes met with its subs to figure out ways to shave costs while maintaining quality. Those face-to-face meetings yielded cost-saving methods that helped both the builder and its subs weather the recession. Now, Eastbrook’s Mooney divides subs into three groups—based on which contractors work most closely during each phase of construction—and meets with one group per month to discuss processes and how they can be improved. “Once you have subs embrace the culture of your company, that’s when it really starts working,” he says.
Be the Employer of Choice With subcontractors, improving profitability hinges on one thing, according to Shinn: being the No. 1 employer. “When I talk to trades, there’s normally one builder who is the builder of choice in that marketplace,” he says. “And it’s not that the builder pays more; in fact, it’s usually the opposite.” Why? Because employers of choice have tidy jobsites stocked with materials and have work ready when subs arrive. “Subs can get on the job, do the work, and get off the job—and not have to come back,” Shinn says. “Repeat and dry runs are a killer for subs.” And while payment doesn’t need to be the highest, it does have to be consistent.
Streamline the Schedule “One challenge is a shortage of skilled workers in the field,” says Keith Porterfield, COO at Nashville, Tenn.–based Goodall Homes. “There are plenty of companies, but not enough actual framers swinging a hammer.” To ensure it has the labor it needs, Goodall streamlined its scheduling process. The builder now starts precisely eight homes per week and keeps a web-based master schedule that details which days each group of subs will be on site, with some wiggle room built in to avoid the plans from getting thrown off-track. “The plumber knows, before the home even starts, what days he’ll be doing a rough in, what day he’ll be doing a trim out,” Porterfield says. “Our trades are able to plan how much manpower they’ll need weeks in advance.”
Design for Efficiency
Let Data Rule “Fall out of love with your houses,” Shinn advises, and instead hone in on potential customers’ needs and wants. Shinn encourages builders to sort local Census data by ZIP code to find out the population’s average age and education level and the area’s average rents and home values.
Standardize Options Adopting an “all-inclusive strategy” helped Southlake, Texas–based Bloomfield Homes gain better control of its construction process, says Don Dykstra, the company’s president and owner. Most of Bloomfield’s features are standard, which leaves construction managers with fewer decisions to make and reduces mistakes. Eastbrook also cut back on options after years “where we would do anything” for buyers to get a sale, Mooney says. Eastbrook now offers more standard features and sticks to the plans sold. Shinn recommends polling prospective buyers to see what features they most value.
Optimize Systems “Everything behind the walls, nobody sees,” says Ed Hauck, a consultant with Builder Partnerships who specializes in design efficiencies. But even out of sight, it’s still important. When builders don’t optimize I-joist systems or other wood products, they’re “leaving a couple thousand dollars on the table that nobody appreciates,” he notes.
Rethink the Box Five percent to 6 percent of the cost of a home is “lost in an inefficient box,” Hauck says. And when inefficiencies are built into the design process, builders are forced to sacrifice the high-profile amenities that help make a sale. To make its boxes cost-efficient, Goodall Homes is putting together a team of engineers that will evaluate all new plans to optimize framing, room widths and lengths, and house widths and lengths. Goodall has also simplified side and rear elevations, freeing up funds to spruce up front elevations.