Picture a thought bubble: "Wait a minute, I thought we got through this last year!"

In the spring and summer of 2013, home builders in many key metro markets around the country felt the pinch of significantly constrained construction trade labor resources. The results were felt by builders as construction costs increased, schedules stretched and quality assurance became more challenging. While these problems were felt to differing degrees by different builders in different areas, there were very few companies whose business plans were not impacted in 2013.

Then in the fall, when demand started to flatten and the first quarter’s east coast weather further suppressed sales, the trade capacity problem dropped off the radar screens of most builders and it receded from top of mind for the industry as a whole. However, the problem--which is not only cyclical but also structural in nature--has not been solved. The extreme economic cycle that incorporated the housing bubble and the subsequent crash drove significant changes in the US residential construction labor pool. These changes were layered on top of deeper structural, cultural and demographic shifts that have left the US market more dependent on immigrant labor resources than ever before. Now a combination of forces, ranging from scores of workers leaving the US as the work opportunities dried up to the resurgence of the Mexican construction economy have combined to depress this resource pool’s availability for the recovery.

Our firm tracks key residential trade categories for the US market as a whole and for major metro areas. We look at two major statistics: the employment by trade category and the number of establishments per trade category. These two supply statistics are extremely important and while employment is routinely discussed in the business media, the number of establishments does not receive nearly as much attention. As a practical matter, number of establishments is a better indicator of true trade capacity since most builders hire subcontracting firms to perform the construction labor on their projects, not individual trades-people who are directly managed by the builder. In the trends of these two statistics we see the following.

  • The key trades that are most dependent on new residential construction for employment are still barely meeting demand and will not be able to cover much, if any, growth in the near term.
  • The number of establishments has not recovered and the average size of establishment has shrunk. The net of this trend is that there are fewer companies available to hire, train and otherwise assimilate new entrants and returning players to the market. And that those companies who are in place, have less financial capacity to grow.

These trends are happening at a national level but vary across different metro areas. In many of the largest metros, these challenges are more acute than they are at the national level. [Thought bubble again] "Ok, so this problem isn’t solved yet--what can I do about it?"

Smart home builders will take advantage of the momentary break provided by 2014 and focus significant efforts in three areas with the goal of securing the loyal and profitable services of the best trades in their respective markets for the foreseeable future.

1. Know your supply market inside and out, backwards and frontwards. First dig into the statistics for the labor pool in your metro area or in each metro area where you operate. Understand the official numbers and more importantly, what trends are playing out within these official numbers. Make sure that you know and have current company profiles for each residential trade contractor in your metro area. The company profile should include the name of the company, the owner’s name, the management team, its capacity in units per month and any objective or subjective information you have regarding their performance on any relevant criteria.

Any official information that you gather should be supplemented on an ongoing basis with live research in the market. Ensure that your production staff provide periodic evaluations for the trades that you employ. Require that your production and purchasing staff gather intelligence in their conversations with trades and other builders. You should know where every key trade has crews deployed in your area, who they are working for, who they used to work for but don’t anymore and why, and other key reputational and performance feedback. This information would ideally be maintained in a database, but Microsoft Excel will suffice, especially to get started.

2. Trade relations, engagement and negotiations. All of the research described in step one should be used to feed into this step. Six to eight times per year, smart builders will engage the owners of their key trades in open ended discussions about the health of their relationship. These discussions can be as informal or structured as is comfortable for the builder. At its most basic, the discussion should be framed around two critical questions from the builder to the trade:

  • a. What does my company do that helps you make money?
  • b. What does my company do that costs you money?
  • These questions, asked sincerely, never fail to yield valuable insights into how to improve some of the most important relationships that exist for any home building company. One caveat is that if the builder argues the trade’s answers point for point or questions them in any way other than to seek clarification, understanding and possibly explanation, they risk wasting the opportunity to secure ideas and insights that can help make the overall system more effective and more efficient.

    What comes from the “what makes and costs you money” discussions will be a list of ideas that could become process improvements, cost savings, cycle time reductions, quality enhancements, customer satisfaction improvements and many other benefits for the builder’s business and the trade contractor’s or suppliers’ business. The next critical phase is to select which ideas to implement, determine how to implement them and begin the process. The periodic discussions with trades and suppliers should then serve as a way to support the implementation discipline.

    3. Keep an open mind about your core practices. For example, if you receive feedback that the complexity and variability in your products makes it very hard for your trades and suppliers to serve you efficiently, deliver the required quality, meet the schedule AND make a profit, make sure that you at least check it out. Run the numbers to see if your product variability and complexity actually drives more sales and profitability for your company or whether it is only adding complexity and cost. Most builders find that they are able to reduce product complexity and variability with little impact on sales. And most trades and production staff can attest to the fact that even a relatively small reduction in complexity can have a significant payoff in the field.

    For another example, if your suppliers and trades provide feedback indicating that coordination among and between different trades is causing problems for scheduling, quality and cost, don’t hesitate to look for non-traditional solutions. One such solution could be to form a trade council that, while managed by the builder, has at least an element of self-governance in that the trades and suppliers are responsible for helping to define the rules of engagement, solving conflicts, and proposing solutions to the builder to help manage scope gaps, communication problems, and other inefficiencies in the system. When the builder can foster a team culture among its trades and suppliers, top performance typically will follow.

    Finally, and possibly most importantly, use this time as an opportunity to think through the set of incentives and disincentives that you are currently fostering based on your approach to contracting and managing your trade and supplier relationships. For example, a contract that is based on unit or lump sum pricing but has no incentives for cost savings, schedule performance, quality or process improvement, will only produce a low unit price. However, the total cost of contracts like this is usually well in excess of the price, once quality, supervision, variance purchase orders, schedule delays, and material waste, among other factors, are taken into consideration.

    Builders who execute on these key elements will find the following outcomes:

  • The best trades and suppliers will seek to do more work with them, which helps secure the builder’s production capacity and over time helps to reduce its indirect costs.
  • The key construction metrics of cost, schedule, quality and safety will all trend in a positive direction.
  • The builder will be able to deny its competitors access to the best of the scarce resources that are available in the market. This can allow a builder to create a significant and potentially sustainable competitive advantage, perhaps the most elusive element in the residential building industry.
  • How well do you know your trades and suppliers? If you can’t answer basic questions about their capacity, quality, and capability and desire to grow… the answer is not very well… and not well enough. Take a few minutes to ask these questions and let us know what you find.