By Charles C. Shinn Jr., PhD
Based on 50 years of working with home builders to improve their net profitability to exceed 12 percent, here are 25 sure ways to become a superior profit builder. You need to have dedication and the discipline to maintain focus. It does not happen overnight. Many of my builders making 18 percent to 25 percent net profits on their home building operations (not subsidized by land appreciation) have worked at it for a number of years. Several have told me it takes a mental adjustment to begin the journey.
1. Get rid of bad deals. Analyze gross profit by community, model, and each house. Eliminate the plans that do not generate your target gross profit.
2. Don’t give things away. Do NOT overdo a standard feature. Practice “zero” base specifications and strip standard specifications to basics. Conduct a cost/benefit analysis and add back items with adequate returns. Create selection upgrades out of the rest.
3. Design for your customer, not yourself; fall out of love with your houses. Learn how your customers define and perceive value. Information about customer needs, preferences, and buying patterns is the most important input to all business decisions.
4. Eliminate excess material usage. Examine trash and diverted materials. Eliminate wasteful techniques and installation of excess materials. Inventory deliveries and return excess materials for credit. Don’t move it from house to house until it is trash.
5. Develop scopes of works and quality checklists. Train construction personnel and trades on scopes of work, implement checklists, and assure work is complete and accurate before paying trades and suppliers.
6. Have accurate and detail working drawings. Develop a scope of work for architectural drawings to insure uniformity of working drawings with necessary construction details and material assemblage techniques.
7. Value engineer plans. Analyze for construction efficiencies, consider new and alternate materials, and implement material and labor-saving techniques. Watch the number of offsets and corners. Build on 2-foot modules.
8. Gain control of slippage. Document fill-in orders and extra work, conduct variance analysis, and develop a strategy for reducing variances.
9. Improve estimating. Prepare in-house, detailed quantity survey estimates of material and labor. Produce reliable construction cost budgets coordinated with purchasing, scheduling, job cost accounting.
10. Improve purchasing. Embrace unit pricing. Use quality trades and suppliers, negotiate prices, and document agreements. Implement a formal purchase order system, use variance purchase orders, and negotiate incentives and rebates.
11. Maintain construction schedules. Develop a master schedule, and continually work to shorten it. Track schedule variances and establish a strategy to reduce them. Maintain the optimum number of houses a superintendent oversees per cycle.
12. Develop quality standards. Have quality standards with checklists for each trade, and use to train the superintendents and trades. Have three to five formal internal quality inspections during construction.
13. Standardize procedures. Be consistent, reliable, efficient, and effective. Establish a culture of discipline.
14. Develop quantifiable objectives. Then measure and track critical performance indicators and hold people accountable. Analyze financial information using ratio analysis and develop your own target ratios. Chart financial information and conduct a comparative and trend analysis.
15. Watch staffing levels. Maintain balance with sales volume. Watch superintendent loading.
16. Train employees and subcontractors. Develop formal training for new employees and ongoing training for existing employees and trades. Consider establishing a trade council, which can be a great team-building and feedback mechanism.
17. Maintain adequate sales velocity. Set target velocities for your communities and remember the market sets the price. DO NOT discount houses to buy velocity; set the price right. Discounts are 100 percent lost profits.
18. Balance number of models with available lots. Make sure models have good gross profits. Decorate to sell, not to win awards.
19. Monitor advertising and promotion. Target advertising to your customers. Establish a PR program; articles are more effective than ads.
20. Develop a viable referral program. Set specific objectives for referrals; identify contact points to ask for referrals. Do not forget the service tech; customer service provides great opportunities.
21. Watch amount of unsold inventory. Balance levels with sales velocity; have a strategy to release inventory houses to construction based on market conditions and to liquidate old inventory.
22. Monitor interim financing fees and rates. Secure a revolving construction line. Balance the level of specs with sales velocity and maintain construction schedules.
23. Monitor points and closing costs offered to buyers.
24. Analyze management systems. Look at information systems. Chart approval processes, workloads, and number of hand-offs for invoice and contract approval, purchasing, and change orders. Invest in systems before adding staff. DO NOT over-departmentalize.
25. Build the house right the first time. Reduce change orders during construction. Do not jumpstart the house before selections are done. Change orders during construction negatively impact schedules, quality, construction morale, and profitability.