Early one morning in August, veteran California carpenter Patrick Johnson showed up for work with two fellow crewmen of varying experience, Barry McKenna and Benny White, at a site in Northern California’s Eastern Valley.
Three working days later, after starting with nothing in front of them but a bare slab poured level by Merced, Calif.–based Central Valley Concrete and Trucking, the three stood back to look at what they’d accomplished: a fully framed, two-story weather-proofed enclosure for a home that would retail in the low $400s in Stonefield Home’s Mission Village in Los Banos, Calif., 80 miles east southeast of San Jose.
In three working days equating about 30 hours of labor, three workers took this enclosure from slab to completion—a job that typically can take 10 or so trade crews 20 days to rough in the frame and its shell. Johnson, McKenna, and White barely noticed that others—stakeholders, principals, and partners of a startup company called Entekra, based in Ripon, northwest of Los Banos—had gathered at the site to watch them finish and take photos.
“I texted the pictures straight away to my 82-year-old father,” says 55-year-old Entekra co-founder and CEO Gerard McCaughey.
After a two-year migratory stint from Ireland to the United States in 1957, McCaughey’s father, Brian, returned to his homeland and introduced timber-frame home building to Ireland, which up to that point had been dominated by concrete block-built homes. Brian McCaughey started a company in 1965, and all three of his children took up home building in one way or another. The McCaugheys sold the 8,000-homes-a-year Century Homes to United Kingdom–based building materials giant Kingspan in 2005 for 100 million Euro (nine-plus times EBIT), and they’re starting from square one in the U.S., but with 50 years of business validation in some of the world’s most regulated jurisdictions. From Ireland, Brian McCaughey shared in the August moment of jubilance via text: “Here we go again! Full circle.”
The three tradesmen could scarcely believe it themselves. Using an assortment of hand-tooled fasteners and tie-downs, they had assembled the 2,800-square-foot structure from a fully integrated pre-designed, engineered, and constructed roof truss system, a floor that went down in 40 minutes, and wall panel systems complete with precut ancillary blocking, wall studs, headers, posts, and beams that had all been trucked 65 miles, flat-pack style, to the site from Entekra’s just-up-and-running 28,000-square-foot plant.
What labor crisis? Here was proof that, in California, no less, fundamental cost assumptions around three of residential construction’s chronic pain points—a shortage of labor capacity, home price attainability, and a building enclosure that can perform at a high level for a long time—could be dramatically improved all at once.
“There were 20 of us standing on the side of the house as they wrapped up work for the third day, and it was remarkable to see everything fit, down to the millimeter perfect,” Gerard McCaughey says.
Since that August maiden run as a home builder’s fully integrated off-site solution (FIOSS) partner, Entekra has continued to pilot skill-sets and mostly imported technology that, when fully up and running, its leaders believe will make them a $250 million (revenue) residential construction moonshot within five years’ time. The company—whose principals anted up about $10 million of their own money to launch the venture 24 months ago—finished two more houses in Los Banos in the fall, and as of press time was expected to test its process in about eight other single-family detached homes before the end of 2017.
McCaughey’s first-year ambitions were many, the first of which was to strategically align with a building trade company—preferably a roof-truss manufacturer—with an existing portfolio of big builder clients and materials sourcing accounts. Better Built Truss, a Ripon, Calif.–based roofing firm run by Jeff Qualle, had both the willingness and the client base to meet Entekra halfway as a venture partner, a model the company hopes to iterate in other markets.
Next, Entekra executives established a Monaghan, Ireland–based engineering, design, and IT hub that allowed key members of the former Century Homes braintrust—including McCaughey’s brother Gary, with 20 years of procurement experience, and design and engineering specialists William Kilpatrick and Alan Fannin—to work on computer-aided design and engineering plans for each house plan Entekra pulls into its workflow. Add to that team Michael Treanor, whose years as an auditor of Kingspan make him an ideal fit as the company’s CFO.
Entekra also engaged Whelan Advisory CEO Margaret Whelan, a leading investment banker to the housing industry, who is leading a capital raise for Entekra that would provide liquidity for two immediately planned factory expansion projects to support the five-year business plan.
The company’s strategy is to scale like there’s no tomorrow. The Ripon plant is in continuous production mode, and McCaughey and his co-founding COO Bran Keogh expect it to reach its 500-home annualized run-rate in mid-2018. Revenue for Entekra gets its rocket fuel if and when the firm can tap enough growth capital to open a second, 175,000-square-foot factory in Northern California by the fourth quarter of 2019, capable of delivering 3,000 homes annually on single shifts of production.
Going into 2020, the company’s strategy calls for yet another 3,000-unit-a-year facility in Southern California, allowing it to cover home building epicenters from within a 250-mile range. By then, McCaughey and Keogh plan to be running a $166 million operation, with gross margins of 27% and net income of $13 million.
To achieve its goals, Entekra’s operational model will have to fire on all cylinders and excel at execution, which means removing variability from a process known to be full of variability. But that won’t be the biggest challenge. Traction for this business model will be only part proof-of-concept. Where there’s a big delta of expense among builders for on-site labor construction versus what manufacturing costs would be in factory conditions, there’s a big opportunity for automation to generate value.
“Coming out of the recession in 2012, we studied the market and found on-site labor was spiraling upward in California, especially, and to a lesser extent in Denver, Phoenix, the Mid-Atlantic, and North Florida,” McCaughey says. “Immigrant labor has been a particular challenge post-recession in California and Arizona, and it’s getting tougher in other places.”
The harder part will be converting industry skeptics. It’s up to the Entekra team to prove that the firm’s FIOSS model is not just another Johnny-come-lately among over a half-century-long line of technology and automation progenitors that failed to materialize as predicted in the harsh test of actual dirt, baseline quality expectations, reasonable cost, or scalability.
“People told my dad, ‘You’ll never sell a wood frame house in Ireland,’ and look what he did,” says McCaughey. “They tell us now, ‘This is California, the regulations here, etc.’ and they’re skeptical, but look at Ireland and Europe. They’re more regulated than anywhere. We were exporting wood frame houses to Japan, for God’s sake. We’ve been here before.”
A barrier to entry may come down to simple vicious circular logic-driven business dynamics that have impeded progress and productivity measures in residential construction forever. Anyone who builds houses knows it comes down to a builder’s command of math. Plumb members, identical and iterated squared joints and pitches, and leveled surfaces together add up to a home’s arithmetic table stakes. Conduction, convection, and absorption of heat, moisture, and airflow add complexity to a home’s envelope calculus, but comply with laws just as geometric measures do, and just as financial sums and subtractions do.
Builders learn these laws, and they learn to adapt them to the ground beneath each structure. They also learn and solve for the social, regulatory, environmental, and economic rules that change constantly and inevitably for every property. There are basic math laws that stay the same, and there are a host of one-off new rules that apply for each and every unit started.
To achieve what many agree would be three essentials for a home—strength, usefulness, and beauty—the proven method has barely changed in more than 200 years. Bring skilled artisans, an experienced designer, and good materials, and go about adapting each line, each angle, and each surface to the local laws of each home site, natural and man-made.
It’s common sense and self-evident to McCaughey that builders in the U.S. invite far too much variability into their build cycles, and they pay dearly for it on productivity, volume, and affordability. It’s common sense and self-evident to many of those builders that any other way to look at it defies common sense, because they’re selling every home they build.
“They look at pieces and parts of the process, and try to bolt them onto the way they’ve always done things, and wonder why it doesn’t produce greater productivity,” McCaughey says. “We look holistically at a home and how to put it together, taking out waste of materials, time, mistakes, and energy. If it’s not a whole system, it’s not a solution.”
DEALING WITH PUSHBACK
Among important stakeholders in the home building business community, current and potential influencers are both taking notice and beginning to suspend their own disbelief.
“I’m intrigued to see how this plays out in 2018,” says Bird Anderson, executive vice president and head of the Homebuilder Banking team at Wells Fargo, the nation’s biggest lender to builders. “In the last 25 or 30 years, there’d be the occasion when you’d get a call from a builder interested in some modular process or other, but none of these initiatives ever had legs. It feels different this time.”
Whelan, who’s been working with builders for over 20 years, agrees.
“U.S. home builders spend so much time and capital on securing entitled land that they outsource much of the construction process,” she says. “This has contributed to some bad habits being perpetuated and a lack of innovation overall. Going forward, I’m optimistic that this generation of builders will find the way to FIOSS, so they can build better quality, more affordable homes with less environmental waste.”
Still, naysayers abound. This is especially true among home building operations and finance veterans, many of whom see off-site factories as unnecessary centers of storage, shipping, and quality assurance expense that don’t displace enough first-cost outgo to scale with volume.
Entekra and other high-tech Silicon Valley–inspired startups in the architecture, engineering, and construction realm have started to dot the map when labor capacity, local land-use rules, and housing attainability have vectored into a chronically negative feedback loop. Advanced construction processes’ viability and trajectory could lever fundamental changes in home construction, design, engineering, and product and materials specification and sourcing workflows that look eerily like they did a century or two ago.
There are two ways to look at the fact that almost nine out of 10 U.S. homes—single- and multifamily—are stick-built on-site as of data compiled at the end of 2015. One would be to say that “the same methods that got us here will get us there,” meaning that, for all its flaws, stick-built, site-built construction is the way to go.
Alternatively, one might look at that 88% share of residential construction stick-built on-site as a quantification of the opportunity for a company like Entekra, which proposes to take centuries of conventional wisdom on wood-frame home building and turn it on its head. To do that, Entekra must sell its value proposition—to save time, money, and labor, and do so with at least equal standards of quality and local code compliance—not only to a client list of builders and developers, but also to a home building business community that thinks it’s seen it all before.
“FIOSS and panelization and prefabrication and modular are each totally different things,” says McCaughey, who has learned to spend a few moments clarifying what his company is not before he begins to talk about what it is. “Modular has made strides in personalization and works in custom projects, but many builders feel that you’re shipping air as you transport it to the site. Panels are fine, but a panelized wall is just a stud wall when it comes down to it. It still needs to be squared up on-site, and the shear wall needs to be done. And what if you do have complete panelization of your walls, and you still have to loose-joist the floor? All that time gets lost.”
Through the integration and application of software, innovative engineering, technology, and advanced methods of manufacturing, Entekra’s idea is to consolidate the tasks that are normally divvied up among architects, engineers, building material suppliers, and contractors and significantly enhance the traditional wood-frame construction process to levels not currently available in the U.S. market.
Already, Entekra has had two big scores and both are critical to the firm’s ability to bring more than a few European-made CNC machines to America to put them on a floor or wall panel line in a factory.
For the Los Banos site, the challenge begins with the slab. Working with Central Valley Concrete and Trucking, the Entekra team laid the base for a precise structure on top of it. McCaughey says the site preparation required a lot of teamwork upfront.
“California has the added complication of all the hold downs, which causes issues for the concrete guys and for us. We worked with engineers to figure out alternative details to minimize hold downs in slab, which allowed the concrete guys to get a more level base and helped speed up erection on site for us,” he explains. “It basically required a team effort and a commitment to finding solutions and it worked.”
The other big lesson learned early on involves lumber, a charged topic as the U.S. and Canada engage in trade skirmishes over the import tariffs for Canadian softwood lumber such as SPF, a spruce, pine, fir blend that passes muster under Japan’s high-standard seismic conditions. While many builders regard Douglas fir as the go-to lumber for its strength, weight, and rigidity, the species—especially in its commonly supplied green condition—is prone to twisting and can be unreliable in dimensional precision because of its water content.
What’s more, since European CNC machines assume the lumber will be dimensionally perfect—which isn’t the case for Douglas fir—Entekra is working with manufacturers to adapt the machinery to materials widely used in the U.S. market.
“It’s not what you don’t know that trips you up and can kill you as an innovative startup in residential construction,” McCaughey says. “It’s what you think you know that you really don’t know that can put you out of business fast.”