Three-quarters of the 65 builders who responded to a recent poll conducted by Shinn Consulting are convinced that subcontractors see their companies as "employers of choice."
That self-assessment might be comforting to some. But builders also know that subs can have the upper hand when demand from a recovering housing market outpaces the supply of available competent construction workers in many markets.
Throughout 2013, shortages of labor and, in certain product categories, building materials inflated prices for goods and services at a time when builders weren't sure about how much of those increases they could pass along to home buyers without quashing a sale.
"There is tremendous pressure in the labor market and very little loyalty," said one builder responding to the Shinn survey in September, a month when residential construction employment nationwide, at 586,600, was 4,000 jobs less than the same month a year ago, according to the U.S. Bureau of Labor Statistics. (Preliminary seasonally adjusted residential construction employment in November, the latest month available, was up 3.7 percent to 595,500.)
This builder also noted that 18 months earlier, his company was hiring masons at 95 cents per block; those masons are now demanding $1.30, "and will leave a job for a nickel [more]." David Erickson, CEO of Grayhawk Homes—which closed around 300 houses in 2013—has scrambled for labor as subs abandon his home market of Columbus, Ga., for greener pastures 100 miles away in a more active Atlanta market.
Legend Homes started 1,200 homes in its headquarters market of Houston in 2013, during which time its purchasing manager, Aaron Ward, watched labor costs for scarcer concrete finishers and framers jump by as much as 30 percent. Paying the increases "is necessary," says Ward, to ensure Legend has full crews on the ground. "You just hope you're paying enough to keep them on the job."
On the materials side, lumber and panel prices may have leveled off toward the end of 2013, but they remain volatile. Framing lumber—which along with trusses can account for more than 13 percent of the construction cost for a single-family home, says the NAHB—in the week of Dec. 27 stood at $387 per 1,000 board feet, or 1.6 percent above the same week a year earlier, according to Random Lengths' composite price. Southern Pine was down 1.6 percent to $423, while Random Lengths' composite price for structural panels fell 20.5 percent to $369 per 1,000 square feet.
Paul Quinn, a timber analyst with Canada-based RBC Capital Markets, projected in October that 2013 would be a "peak year" for OSB prices. Quinn also foresees continued price inflation for softwood lumber, panels, and plywood through 2015.
Steve Svopa, vice president of operations for Minto Communities in Florida, observes that price increases track the sequencing of building a house, with exterior stages getting hit first. Atlanta-based Atlas Roofing lent credence to that observation by announcing four price increases on shingles and roll goods last year through August. And the major drywall suppliers provided the exclamation point by announcing 20 percent price increases for wallboard products in 2014, on top of similar price notices for each of the previous two years.
Demand from China has been driving concrete prices skyward. And some builders and distributors fear that an antidumping tariff the U.S. is imposing on plywood shipped from China could cause prices for cabinets (nearly all of which are made with imported plywood) to rise by as much as 30 percent.
Several factors have contributed to rising labor and materials costs, not the least of which being the mass exodus of construction workers from the housing sector during the crash, including immigrant workers whose legal status is now under tighter scrutiny. Shuttered factories, sawmills, and distribution centers further weakened the supply chain.
The strain has become more acute as new-home construction has accelerated. And with market conditions improving, suppliers and subs have tried to recoup revenue they yielded during the downturn, when some builders threatened to pull their business if their "trade partners" didn't provide price relief.
Some suppliers harbor resentment about how builders treated them when the market collapsed. But Dean Tompkins, who owns Chardon, Ohio–based Payne and Payne Builders, counters that suppliers are wrong to lump custom builders like his company in with the giants that beat up their vendors for concessions. "We took price increases during the recession," he says.
Regardless of who's right, shortages and price hikes could be around for a while, especially if the nation's job market strengthens, which would create demand for housing beyond current expectations. But growth-minded builders—large or small, custom or production—have options to manage construction costs more effectively right now. Here are eight to consider:
1. Stockpile and Standardize
At least two-fifths of the builders who responded to the Shinn survey had minimized sticker shock on building products by locking in prices via guaranteed purchases, sometimes for up to a year. Chuck Shinn, the consulting group's owner, contends that ratio is atypically high compared with builders in general. So more companies could be flexing their muscles to secure price protection.
For example, the multifamily builder Summit Contractors Group in Jacksonville, Fla., has been buying lumber at a set price and stockpiling the wood for future use, says Summit's CEO Marc Padgett. And while it bids out every job, Summit often finds that it is cheaper to hire the same sub crews it's been using for the past decade, many of which travel with the company from project to project. "We even know which foreman to ask for," Padgett says.
Other production builders, such as David Weekley Homes and DSLD Homes, are availing themselves of suppliers' national and regional account programs to get the best pricing available for all of their divisions and communities. In that same vein, Shea Homes—which had been letting its divisions buy product—last year consolidated its purchasing into two regional offices, which made buying "more consistent and standardized," says Robb Pigg, Shea's vice president of operations.
Summit and Shea prefer turnkey installation for almost all stages of construction. But Tony Callahan, Beazer Homes' former supply chain guru who currently is president and CEO of Callahan Consulting Group in Kennesaw, Ga., recommends that builders unbundle materials and labor prices for clarity on their purchasing costs.
At a time when loyalty is harder to come by, Callahan believes builders must prove they are significant customers to subs and suppliers. Consequently, he recommends that builders use no more than two trades and one primary supplier per product category. Callahan also cautions builders not to automatically leap at the lowest bid price, and to take into account total costs that include distribution, quality control, and jobsite management.
2. Buy as Part of a Larger Group to Control Costs
Smaller builders that typically don't have the purchasing clout of the big publics and regionals are controlling their costs by banding together into buying groups such as Custom Builders USA, whose network includes more than 250 builders in 13 markets.
"Historically, we have not been able to establish manufacturer-to-builder relationships with builders using fewer than 400 doors or openers annually," explains Tim Matthews, vice president of residential national accounts for Overhead Door Corp., which recently asked builders and contractors for a bundled price increase of $10 per single door and $20 per double door. "CBUSA had excellent data on the products they were buying as a group, which allowed us to develop a solid three-year program with defined incentives."
Todd Usher, president of Addison Homes in Greer, S.C., says CBUSA has become "a key tool for us to control costs and stay up to date on the market." And Tompkins of Payne and Payne—which buys garage doors, lumber, and fiber cement through CBUSA's national accounts programs—says the buying group "opened my eyes to what's possible."
Homes by Dickerson in Raleigh, N.C.—another CBUSA member—is part of a 25-builder guild that through local committed purchase agreements has locked in prices over six-month periods for framing packages and other building products. "That's where our real success with CBUSA has been," says comptroller Jon Showalter.
As Homes by Dickerson has grown—it built 114 homes in 2013—it has gotten more involved with Build Exchange, which brings together builders and manufacturers in what Showalter calls "speed dating" sessions to share information about products and services. With CBUSA, Homes by Dickerson cultivated purchasing agreements for HVAC, garage doors, and fiber cement at one such event. And through Build Exchange, Showalter negotiated guaranteed pricing for his plumber with Rinnai. "For a company that builds in two counties in North Carolina, the respect we get from manufacturers has been incredible," he says.
3. Build Loyalty by Being Loyal to Partners
Shea Homes' biggest challenge, says Pigg, is "maintaining a list of qualified trade partners." That's especially true in Colorado, whose labor pool is shallowest among the eight states Shea builds in. According to Pigg, the Walnut Creek, Calif.–based builder must convince subs that Shea is their strategic partner "to preserve our place in their book of work."
Callahan says builders should "treat suppliers and trades the way you want to be treated." When a builder brings on a new product line, it should solicit installation advice from trades. And in terms of scheduling, a site must be "job ready," with the previous stage finished. "If it isn't, it's going to show up in your pricing and the quality of your product," he warns. "I've seen trades ‘fire' builders over this."
Site readiness, along with consistent communication, is how Tri Pointe Homes' year-old Denver division keeps subs from straying. "These elements create partnerships that are effective in all markets, good or bad," says division president Matt Osborn.
Kent Homes in Wilmington, N.C., also meets frequently with contractors "to be proactive and promote ourselves," says owner Dan Kent. Legend Homes holds onto subs by guaranteeing purchases and paying subs on time, Ward says. And Showalter says Homes by Dickerson allows trades and suppliers to adjust contracted prices when there's a significant market spike, up or down. "Being flexible brings credibility to these deals," he says.
4. Expect More From Subs
Trade partners that take the initiative to improve construction processes have a competitive leg up.
"We are seeing more requests from builders to expand our labor offerings," says Raquel Fuentes, corporate communications manager for ProBuild. The company is the industry's second-largest pro dealer chain, which, depending on the market, offers turnkey installation on just about everything it sells.
To ensure that it can meet its customers' demands, ProBuild partners with subcontractors "to streamline their future work, clearly document their work scope, and pay them on a consistent and timely basis," Fuentes says. "When we bring both labor and materials to the builder as a solution, we are getting more involved in the construction planning and scheduling." It doesn't hurt ProBuild's standing with builders, either, that its 400-plus locations in 45 states are bolstered by 46 millwork shops and 31 truss plants.
Tulsa, Okla.–based Building Solutions has emerged as one of the fastest-growing pro dealers by whittling costs from its operations, stocking more categories like gutters and cabinets, and expanding its services. All of this is designed to free up its builder-clients' time to concentrate on marketing, says CEO Ronnie McGlothlin.
Minto favors contractors that can make labor easier to execute. Its plumber now delivers precut packages "that are like putting a puzzle together," Svopa says. And the builder has discussed with its drywallers how wallboard might be hung faster.
Shea gives its subs responsibility for everything from purchasing to jobsite security. "We want the trades to feel they are accountable for what they purchase and where it ends up," Pigg says.
Mutual accountability is crucial to any partnership, says Bill Justus, vice president of supply chain services for David Weekley Homes. The firm last year celebrated the 10th anniversary of its "Partners of Choice" program, where its employees weigh in on the quality and service of more than 200 product suppliers. Justus says the program saves Weekley millions of dollars annually through pricing and process improvements.
DSLD Homes, which builds across Louisiana, requires contractors to grade each jobsite activity that preceded theirs and how it affected their ability to complete their stage. DSLD uses this system to track the trades' performance on a weekly, monthly, and yearly basis, and has stopped using certain subs based on these evaluations. Ryan Nash, DSLD's product development director, says this regimen helps trades grow with his company, which closed 1,500 homes in 2013. One framer has gotten to the point where "he's making his own checklists," Nash says.
5. Streamline Your Operation
The recession pushed many builders to take a hard look at themselves, and from those examinations emerged efficiencies that are helping builders cope with today's price inflation.
Labor shortages have forced Erickson of Grayhawk Homes to rethink how his company builds houses. For one thing, "we're slowing down, to make sure we're doing it right," he says. The builder recently hired its first assistant superintendent and is looking for someone to manage a captive labor force in Grayhawk's Des Moines, Iowa, division.
Summit Contractors Group now asks developers not to price jobs farther out than 60 days from breaking ground. "That way, our subs can lock in prices" with suppliers, says Padgett, its CEO. And Kent Homes is focusing on its houses' scope of work "to make sure our vendors are keeping up and our subs aren't bumping into each other," explains its owner.
More than half of the Shinn survey respondents said their construction is even flow, meaning that they are starting a predetermined number of homes every week or month. Knowing that it will complete a house every 43 days gives DSLD a better idea about what its products and labor needs will be, Nash explains. Even flow also makes this builder more attractive to trades looking for steady work.
But even flow is not for everyone. During the last housing boom many builders misconstrued the term to mean "you could never change your releases," recalls Mahesh Bhupalam of Totally Productive Group, which taught even flow to builders. As new-home construction ground to a halt, even flow lost its cache with production builders. But Bhupalam still thinks the process works, although what he emphasizes now is "controlled flow," which requires more pre-production planning.
6. Reduce Materials and Labor WIth Efficient Framing
Planning—in the form of re-engineering blueprints for less labor-intensive construction—is one of the internal changes Callahan recommends to cost-conscious builders. Such planning often leads to value engineering a home to take advantage of repetitive construction and to maximize profit. Callahan also tells builders to engage distributors in "channel efficiencies" that help the latter manage inventories by knowing what products the builder uses more or less often.
The strain on labor has led some builders to take a second look at the cost-saving potential of construction techniques such as advanced framing and panelization. But few of the production or custom builders interviewed for this article have adopted these applications. Part of the problem, they say, is the scant number of panel plants around the country. And when it comes to imposing new construction techniques, "we can't make this happen on our own," Pigg says. "The key trades have to become integrated into the process."
But consider this comment that John Clark—CEO of Universal Building Network, an online platform for construction networking and social marketing—posted about advanced framing on BUILDER's website in October: "The interesting thing about 24 inches on center, versus 16 inches on center, is the amount of studs you save. If you have about 600 feet of wall and you go 24 inches on center, you can save as many as 50 studs."
7. Consider Hiring New Subs
For 25 years, Homes by Dickerson has employed the same plumber. It rarely asks vendors to rebid for its business every season. But when a trade partner does issue a price hike, it "opens the door" for the builder "to look for other bids," Showalter says.
Builders may say they'd rather go to the dentist than rebid contracts. But even the threat of switching trade partners can give builders an edge, according to Shinn.
"I am using it as a negotiation tool to reduce the [price] increase," says one of the builders who responded to Shinn's survey. When his paint labor wanted more money, the builder got Glidden to reduce its prices, and he added the difference to what he paid his drywall and paint subs. "Negotiation with no fear has worked best for us," he says. "I don't want to lose a trade, but I can't be afraid to change, either. Do it once, and all the trades know."
Nash of DSLD Homes says his company now splits its purchases among more suppliers in different categories "to keep them honest." And both Justus of David Weekley Homes and Pigg of Shea Homes agree that the time has never been better for builders to reach out to start-up subcontractors to help them grow. But, Justus cautions, "developing those alternatives won't happen overnight."
8. Use Technology to Manage Costs and Communication
All builders have their war stories about jobsite mistakes and waste. Callahan recalls one builder's takeoff that included an extra porch column, which got installed over and over again in a subdivision.
To rein in such errors, builders are turning to technological tools with positive results. Kent of Kent Homes says his buying guild uses software to calculate how many framing packages its builders will need over several months and asks vendors to use that calculation for bidding. Kent says this process has saved the guild up to $500,000 per group order.
The pro dealer Building Solutions recently started using PlanSwift software to determine more precisely how much lumber should go into a framing package order. McGlothlin, Building Solutions' CEO, says these estimates are reducing builders' framing and installation costs by 7 percent to 10 percent. McGlothlin told BUILDER in October that his company was looking into adding a virtual design center that would offer house plans and takeoffs with product and pricing options.
As it expands, DSLD has turned to Constellation HomeBuilder Systems' NewStar construction software to produce customize reports that gauge the quality of its subs relative to the volume they're handling.
Minto has a centralized scheduling system that allows subs to see the builder's construction plans 45 to 60 days out. The builder also is developing a Web portal through which suppliers and contractors could access their documentation. Like many other builders, Minto now equips its supers with iPads so they can communicate scheduling changes quickly to their subs. If everyone's on the same page, jobs are going to run more smoothly. "Trades like to work for us because our jobsites are ready for them," Svopa says.