The last thing a home builder should do—given the financial risk involved in building homes and the cyclical nature of the industry—is settle for single-digit profits. And as much as some home builders would like to blame external forces for low profitability, the truth is, well-run, efficient, profit-oriented home building companies make double-digit profits in any market, under any market conditions, with any product lines.
There are several steps home builders can take to increase profits, but simply increasing volume is not one of them. An increase in volume does not equal an increase in the rate of profitability. The components of the profit equation with the greatest impact are expenses and direct construction costs. To generate double-digit profits, home builders need to focus on things within their control. Here are five proven methods to increase profitability.
1. Get rid of bad deals
One bad deal can wipe out the profits from several good deals. Conduct gross profit analysis by community, model, and each house. Eliminate plans that do not generate your target gross profit. One method of analyzing standard plans to improve gross profit margins is to conduct a comparative job cost classification for your best gross profit generator. Using these percentages, calculate the amount that should be spent in each classification for your poor gross profit producers and compare these calculations with the actual costs. This comparison will highlight the cost classifications causing your loss of gross profits.
2. Don’t give things away
Analyzing standard specifications is one of the most productive activities a home builder can undertake to produce immediate improvements in profitability. Home builders need to develop the practice of "zero" base specifications instead of the typical practice of starting with the current level of specifications and continually adding to it. Strip your standard specification down to the basics and conduct a cost/benefit analysis of each item and add back items with adequate returns. Items once included as standard and given away are now options or upgrades, generating the appropriate margins.
3. Design for your customer, not yourself
Fall out of love with your homes. Learn how your customers define and perceive value. A key question to ask during the design process is will your customer be willing to give you an appropriate return on the design elements you have prioritized in the plan. Information about customer needs, preferences, and buying patterns is the most important input to all business decisions.
4. Eliminate excess material usage
Everything that ends up in the trash pile represents lost profit dollars. And this is only the tip of the iceberg. Eliminate wasteful techniques. Monitor diverted materials, extra materials installed for no purpose, excess materials being stockpiled. Take inventory of deliveries and return excess materials for credit. Don’t move them from house to house until they become trash.
5. Develop scopes of work and quality checklists
Poor construction quality standards and control cause rework and warranty problems which increase cost and reduce profit. Create scopes of work and establish quality standards. Train construction personnel and trade contractors on scopes of work. Implement quality standards through training and the use of quality checklists. Confirm work is complete and accurate before paying trades and suppliers.
Becoming a superior profit builder requires dedication and discipline. Shinn Consulting is here to help. We have been helping home builders achieve double-digit profits for more than 50 years. A veteran of the home building industry, Stuart Terl said “When you first told me we should be making 12% [net profit], I thought you were crazy. Now the 12% is in our rear view mirror.”
Contact us at 303-972-7666 or firstname.lastname@example.org
and discover how we can help you increase profitability and reach new levels of success.