This is the third installment of a nine-part series addressing--getting builders to deal with-- the skilled labor shortage in residential building, by encouraging them to change the way they do business.

Part I looked at building the internal understanding, desire, and resolve--the “why” and the “want-to”--to deal with what is essentially an external problem. This piece explored Open-Book Management and Team-Based Performance Compensation; it looked at building a savvy, motivated, mutually-accountable home building team.

Part II looked at restoring elegance and allusion to architectural design, in order to make homes faster, easier, and less expensive to build, and, at the same time, making them more livable, more distinctive, more storied, and more desirable. We examined what happens to productivity when builders waste time, energy, and money building senseless, overdone, exaggerated illusions of architectural style.

Part III looks at costs--specifically, how costs behave in relationship to what caused them to be incurred--and how to manage those costs in a way that diminishes the shortage of skilled labor shortage facing builders.

From a managerial accounting standpoint, costs can be associated with structural hierarchy, objects, and/or behavior. When they are associated with objects, costs are deemed to be direct or indirect; when they are associated with behavior, they are deemed to be variable or non-variable.

Despite what the NAHB Chart of Accounts says on its Income Statement, Cost of Sales should ought to contain only direct, variable costs, and Operating Expense ought to contain only indirect, non-variable costs; that is because Cost of Sales and Operating Expense are not managed the same way.

Operating Expense is internal capacity, and understanding how Operating Expense should be managed is simple and straightforward: since Operating Expense is an indirect, non-variable cost that will be incurred regardless of the Revenue generated, a builder has to leverage those costs, has to get more out of them, has to produce more with them.

Unless a builder has a completely integrated building model, Cost of Sales consists only of costs associated with the capacity of external resources. On the surface, understanding how Cost of Sales should be managed is as simple and straightforward as understanding how to manage Operating Expense: since Cost of Sales is a direct, variable cost only incurred in association with the generation of Revenue, a builder has to exploit those costs, extract more value (benefit in excess of cost) from it, sell it for more, buy it for less.

However, because it is incurred with external resources, understanding Cost of Sales is easier than managing it.

And–therein lies both the problem and the opportunity.

We can afford to be instinctive and intuitive, when that instinct and intuition is pre-formed by reason and systems-thinking. And, when it is not so reasoned, relying on instinct and intuition can produce the wrong conclusions.

The home building industry conditions builders to view trades and suppliers as players that do not share interests common to theirs, and vice-versa; and, trades and suppliers are conditioned to view their skilled labor as players that do not share common interests. And–as soon as one party’s variable costs become another party’s non-variable costs, there is a problem.

When I note that Cost of Sales is comprised of direct, variable costs that builders have to exploit, the instinctive, intuitive reaction is to view this necessity as anything but collaborative; intuition and instinct tells you that exploitation occurs at someone’s expense.

It doesn’t have to be that way.

What would happen if builders began to invest in the capacity and capabilities of their trades and suppliers, through the relationship-building program and process of what we term Epic Partnering™? What would happen if builders, trades, suppliers, and skilled labor all began to view the issue as an opportunity to jointly benefit from the effort to deliver more value–at a higher rate of production? What would happen if the goal was to share in a higher level of benefit in excess of a lower level of cost?

What would happen if builders made it clear that they cannot win, if their trades, suppliers, and skilled labor loses? And, vice versa?

It would take an extraordinary level of trust and collaborative effort. Yet–just like thriving on the velocity side of economic return–extraordinary effort is what creates sustainable competitive separation . . .

. . . for builders that do it.

As I said in the introduction to this series: “Home building firms that deal with it will survive, possibly thrive. Those that don’t, won’t, or can’t deal with it, will not remain in business. For everyone, it will be Life on the Serengeti.”

Next month, a number of us will be speaking and facilitating sessions at the 2018 Housing Leadership Summit in Laguna Nigel, California, where the explicit focus of the entire summit is on collaboration. 

Collaboration is a level of effort–a demonstration of resolve–that goes beyond other forms of joint, cooperative effort. Yes–partnering, continuous improvement, and other forms of cooperative effort are vital–but collaboration involves those efforts and takes them to a higher level, to strategic effort between enterprises. 

Join us.

Next: Part IV: Offsite Component Manufacturing: Moving the Building Process Out of the Driveway