LAST YEAR, FIRST HOME Builders of Florida was struggling with too much of a good thing. Sales were soaring, and, coupled with significant price increases, so were the company's revenues. Yet, despite the record demand, the Fort Myers, Fla.–based builder couldn't find the trades it needed to close its homes on its desired schedule, 15 a day.
For First Home Builders, the answer was simple. It brought in-house the pieces of the process that were lagging behind the 15-a-day pace. Florida Construction Services, as the separate entity is known, now handles the concrete work, framing, painting, flooring, cleaning, trash removal, and septic system installation for First Home Builders, and the company continues to consider additional pieces, such as irrigation, which was added in January. “It's whatever we need to do to get to 15 a day,” explains Fred Hermann, company president.
The company is counting on the strategy to dramatically boost its production. Last year, the builder closed 1,819 homes in 2004, up 65 percent over 2003, and this year it's shooting even higher: Hermann has set a goal of 3,000 closings this year and 3,600 in 2006.
But with the potential for great gains comes substantial risk. It can take 60 days for each new in-house service to become profitable, and the new employees—along with their medical insurance and vacation time—can't be easily shed if business gets tight. Hermann considers the additional costs and risks worthwhile. “In the long run, the craftsmen are better off and the end product is better,” he says.
Hermann is not the only builder taking risks in the hopes of greater returns in the future. Up and down our list, BUILDER 100 companies—and those in the Next 100 striving to move up a few notches—are experimenting with new strategies that they think will give them an edge over the competition.
Note the timing. Builders are bank-rolling these initiatives with the tremendous profits they have booked in recent record years, comfortable with investing more now than they'll get in return. What's important, they say, is that they find efficiencies and new money makers before a downturn happens.
“Builders are going to have to work harder to grow,” says Greg Gieber, housing analyst for A.G. Edwards, who predicts housing starts will fall 5 percent this year. “But there's no reason why any business can't grow in a flat or declining market. You just have to be more efficient.”
Test-driving possible efficiencies, such as limiting moves toward vertical integration to select markets, makes sense given the industry's continued strength, Gieber says. “[The big builders] are trying to test new procedures to help shove the medium-sized builders out of the market. Some of them will fail. But they're in a good position to try to figure out how to play tough when things become more competitive.”
While some of the national builders, including KB Home and Pulte Homes, say centralization will be one of the keys to competing successfully in the future, other BUILDER 100 companies are headed in another direction.
In the Midwest, Neumann Homes began shifting more management responsibility to its divisions two years ago. Today, its decentralization initiative is nearly complete, with each division operating as an autonomous business unit, responsible for everything that goes toward the bottom line. CEO Ken Neumann acknowledges that the process hasn't been easy, but he says it positions the company better for future growth. “We're past the pain,” he says, adding that the new structure has empowered leaders and energized employees, who now work on teams of several dozen rather than several hundred.