Knowing your costs is important in any market. In a bear market it can help you drive cost reduction initiatives. In a bull market, knowing your costs and the corresponding cost drivers can help you avoid unnecessary increases. Truly knowing your costs and what they should be is resource intensive. However, there are techniques that you can use in a resource-light environment to give you a better understanding of your costs.
Start by looking at your costs at a trade level. Each stage of home construction should have a target cost per square foot for the same or similar floor plans. During your next sourcing event, request that trades break out their bid into material, labor, and overhead components.
One disclaimer, for the sake of simplicity, this article will focus on the direct cost elements of material and labor. However, you should also consider overhead in your analysis. That said, let's dive in.
Knowing the material and labor buckets can help you determine if a prospective trade is 1) purchasing their materials eff ectively and utilizing them efficiently and 2) efficient and competitive from a labor standpoint. This approach is still at a pretty high level, but it will provide you with a wealth of information that is not available in a lump sum bid.
Another approach is to further break those costs down into elements. From a direct cost element standpoint, we will look at labor hours, labor rate, material quantity, and material costs. Knowing these four cost elements will enable you to develop an abbreviated Lowest Achievable Cost Model (LACM).
The LACM is based on the lowest reported cost in each category. Comparing the LACM with the competing trade's price for the four elements will enable you to look at the bid in a more meaningful way.
For example, the low overall bidder from the four-element standpoint in this case is Trade B at $955. However, they may have opportunity to lower their costs and share the savings with you. Specifically, they require more material than their peers in the marketplace. That could mean a material takeoff error or a material optimization issue.
Either way, you can work together to lower the costs, improve each other's margins, and drive waste out of the process. The same can be said for the material purchase price. Perhaps you can combine your volume with the trade for a mutually beneficial quantity discount.
Leverage your resources and your knowledge by comparing the LACM with the pricing that you are currently paying for the same or similar floor plans in other communities or markets. It will enable to you determine where to focus your next sourcing event.
With this information comes responsibility. Never share one trade's pricing with another trade. Doing so can tarnish your reputation and prevent you from getting favorable pricing in the marketplace. Finally, be careful of how many resources you cut from your purchasing staff . Cutting too much overhead in this area can cost you many times over in direct costs. BB Tony L. Callahan is managing partner of the Callahan Consulting Group, which specializes in helping clients lower costs and cycle times while managing risk throughout the supply chain.
He can be reached at [email protected].
