2021 was another incredible year in the home building industry. Builders faced a number of challenges from supply chain issues to pricing fluctuations and labor shortages. while trying to maintain profitability. So how can you take the lessons from this year and apply them to 2022? We asked top industry thought leaders for their insight and tips to take on the New Year!
Call Attention to Supplier & Trades Contractor Delays in the Sales Center
Carol Smith, Home Address
Alerting home buyers to challenges created by the pandemic early and with a plan for addressing the issues can forestall a lot of frustration: Supply chain delays are our challenge to address and at the same time we are unable to completely protect our buyers from the results. We may encounter issues due to the pandemic’s impact on manufacturing, shipping, or both. Our trades are short-staffed and stretched beyond normal work levels as well—so construction schedules are less predictable and warranty items take longer than normal.
It's important to communicate with the homebuyer. When a product becomes unavailable you may attempt to resolve it with one of the following steps: contact the buyers to arrange for an alternative selection or install a temporary product that will be replaced with the original choice at a future date. In a world where one size rarely fits all, you need to find new ways to face today's challenges while keeping customers happy.
Become a Master of your Construction Schedule
Carrie Roeger, Builder Partnerships
In 2022, work to master your construction schedule. You can’t control delays or material shortages, but you can control your process. Look at your schedule to see what activities have some flex and which don’t. Define the critical path for your builds and then work around those activities to make adjustments based on material and labor shortages.
This Will be the Best Decade for Housing Demand
Charles Shinn, Shinn Consulting / Builder Partnerships
This decade, housing demand is at record levels from the two largest groups: millennials and baby boomers. Our challenge is to satisfy the housing demand with our depleted building suppliers, trade contractors, and finished lot resources. Added to the housing issues are the economic and political issues we will experience during a year of inflation, rising interest rates, and supply chain problems.
Follow these recommendations to respond to the challenges.
- Make sure you balance your sales pace with your production capacity.
- Simplify your homes and customer options, focusing on your higher profit margin products.
- Monitor your costs to respond quickly to inflating construction costs, which could be double digit.
- Release your purchase orders at the beginning of construction to lock costs early and give time to your suppliers to get needed materials to the job site on time.
- Watch your home buyer traffic to monitor the impact of increasing interest rates so you can react quickly.
2022 will have a number of challenges to counter but the 2020's decade is still going to be the best decade for housing demand in our lifetimes.
Accurate Job Cost Tracking
Diane Gilson, Info Plus Accounting Inc
Put an accurate job cost tracking system in place:
- Assign direct costs such as materials and contractors to your customers and jobs.
- Do you have employees working on jobs? If so, determine each employee's fully-burdened hourly cost and include that cost on each job.
- Assign indirect costs (such as shop supplies, holiday and vacation payroll costs, etc.) to a "non-job-specific" (NJS) job.
- Spend just 20 minutes per week looking through your job cost and company reports.
- Use month-end closing procedures to ensure your reports are up-to-date and accurate.
- In addition to big-picture company reports, request estimated vs. actual job cost "variance" reports. Each variance report tells a story about your cost estimates' accuracy vs. what is REALLY happening with the job. (Understand and "dig into" that story!)
- Use your job cost reports to Identify which TYPES of work are most and least profitable.
- STOP: Taking on jobs with historically minimal profits.
- GO: Focus your marketing and job acceptance on job types that are winners.
- ADD $: Develop your "winner" market niche and then – as a specialist – increase your prices.
Rethink How You're Building and Get Rid of the Waste
Ed Hauck, Builder Partnerships
There is so much waste in the construction process. With the supply shortages and cost overruns, I challenge you to rethink how you're building. Take a look at how you are framing your homes and ask the tough questions. Can you cut your material costs by actually cutting materials? I bet you can. Try it!
Discipline, Discipline, Discipline!
Emma Shinn, Shinn Consulting / Builder Partnerships
The biggest differentiator between companies that survive and prosper and those that don’t is organization and a focused mindset on continuous improvement. Companies that succeed strive to have processes in place, and they are continuously evaluating them to gain efficiency or cut costs. If you don’t have clearly defined processes in place now, take the time to define and document them.
Sometimes you must go slower to gain consistency before you can go faster. The time you take now to get your systems in order will pay off in spades later with greater efficiencies, increased capacity, and, ultimately, more profit.
Make 2022 the Year You Take Back Control
Jane Meagher, Success Strategies
Take back control by creating a strategic action plan uniquely suited to your company, and by training your team to deliver on the updated policies, processes and elevated customer experience.
It seems like we’ve all been trying to catch our breath for the last two years. Builders have been on the never-ending treadmill, trying to keep up with supply chain challenges and heightened volume, while also reacting and responding to ever-changing market realities. “Survival tactics” often took precedence over being truly strategic and intentional. You may not have fully implemented a strategic action plan to guide your homebuilding company toward future goals by taking actions aligned with your company’s mission, values, goals, and unique strengths and opportunities.
Make 2022 the year you take back control: of the crafted customer experience you deliver, the internal efficiencies you need to sustain profitability, and the forward-thinking actions that will position you for success over the next 3-5 years. For your design studio and options program, this means 1) ensuring that your design studio operations and options program are derived from your business goals, not solely from reacting to market and ancillary factors, 2) training your team to deliver a customer-focused experience, 3) offering optional products specifically aligned with your architectural product, target market segments, financial goals, and on-trend consumer preferences, 4) operationally delivering those products in ways that compress decision-making and cycle time, and 5) continuing to ramp up your options-related technology.
Despite any frantic behind-the-scenes actions you may be taking, your customers deserve a supported, guided homebuying experience, from sales through to design and from construction to closing. As long as supply chain challenges continue to cause design studio reselections, missed construction milestones, or even price increases or adjusted move-in dates, your team needs to work smarter and be more aligned, in order to deliver an even better customer experience that is consistent across all departments. Most importantly, make sure your front-line team (sales, design, construction, customer-care) is trained to expertly deliver, to every single buyer, the components of your newly updated strategic action plan.
TecHome Tips for High Volume and Luxury Custom Builders
Joe Lautner, TecHome Advisors
High volume builders should form home tech teams with representatives from sales, marketing, options/design, purchasing and operations, and different office locations. They should meet regularly to determine/update strategic intent; develop home tech merchandise assortments and packaging; and set standards for prospective home tech vendors and subs.
Luxury custom builders can increase overall revenues by integrating tech planning in the home design ideation phase. An ambitious vision for tech in the home including AV, lighting, and motorization for special experiences can result in new or larger space plans and drive finishes upgrades along with the tech budget. The only thing people do more of at home than watching TV is sleep!
Builders should add home tech allowances with compelling standards to start the technology conversation early in the process to increase the options a buyer chooses and to incorporate technology into the documentation up front.
The Answer to the Skilled Trade and Supervision Shortage May Be "Back to the Future"
Joe Stoddard, Mountain Consulting Group, LLC
One of the most common questions we are asked by our builder-clients is "What can we do about the trade (or supervision) shortage?"
Consider this: Prior to World War II, most home builders hired young people who were interested in some aspect of the building trades, provided them years of on-the-job training in a trade guild system, and as a result built their trade and supervisory "bench" from the bottom up. It was a system that provided a clear career path for young people entering building trades (vs. today's view of construction jobs by young people as something you on summers off from college, and then only as a last resort); It assured that skilled trades and supervision were always readily available. It also gave builders much better control over both the delivered quality of their homes and the timelines required to build them.
While I don't believe in-house payrolls of skilled trades will totally replace independent trade contractors any time soon (or ever), I have no doubt that every builder reading this would benefit from having at least a portion of their trade capacity met by employees instead of subcontractors. Of course, builders will still have to recruit suitable individuals (look in trade schools, construction management programs, post listings at supply houses and even big box stores), provide training for them, and support the additional overhead required as your in-house program ramps up. But in the end, the investment can pay off, which brings me to my last point: the right way to bring any trade in-house is to set it up as a separate business unit and profit center, with its own set of performance benchmarks and the expectation that eventually that unit will be able to stand on its own financially, contributing to the overall health of the parent company.
Housing Transformation Tips
John Galante, AE Ventures
For communities where you have historically had multiple model homes, consider reducing and investing a fraction of the cost on virtual model homes. So long as you have one physical model where buyers can assess your quality with five senses, virtual models can do the selling job and set the stage for rich options sales as well.
90%+ of buyers start their research and buying journey online, but many builders are barely present in the online listings where a lot of the activity is. Tool sets are emerging for builders to look bigger, be more dynamic and gain advantages vs. used houses on these platforms. Fighting for attention and engagement early enlarges sales opportunities.
Personalization is a huge differentiator for new vs. used and the key to profitable, personalization on a schedule is the digital design center that optimizes consumer experience and simultaneously feeds the design and construction process for efficiency.
Most builders are cutting themselves off from truly offering new homes due to vendor relations centered on cost control vs. innovation. You need to embrace the new in your vendor’s line while negotiating best terms. Key is discussing and settling on all the process supports needed to get new right—the sales and marketing assets, the sib training or match-making, the help you need to developing full ensembles and system solutions from multiple vendors, the assurances and arrangements you need to make sure the new products are winners post close and add to your net promoter scores!
Don't Leave Yourself Open to Costly Lawsuits
Roger Langford, Professional Warranty Service Corporation
With the demand for new homes still high, builders are faced with many challenges from supply chain issues to managing home buyers to complex, changing construction defect laws.
Don't go into this year with mindset of, ”It won’t happen to us,” when thinking about risk, construction defects, and claims.
Focusing on operations without also mitigating risk leaves the door open to costly lawsuits. In those areas where the demand for housing has grown, so too have the claims against builders that corrode their bottom line. For companies operating in multiple locations, understanding key laws addressing construction defects is critical for building homes. Investing time to incorporate comprehensive risk mitigation and litigation avoidance solutions can minimize the likelihood of claims and their overall impact.
Russ Stephens, Association of Professional Builders
According to a study by the Association of Professional Builders, between 40%-60% of residential home builders are not making a net profit on their projects due to rising costs and delays. And while materials may have peaked recently, the worst is yet to come as the inevitable interest rate rises come into play, driving up the cost of labour as employees and subcontractors struggle to pay their mortgages as well as cover the cost of the weekly shopping bill. If you do nothing, like the vast majority of residential home builders have been doing since April 2021, then when the dust settles you find yourself in hole that is too deep to climb out of. You need to take action right now before it’s too late. COVID-19 has presented the owners of residential building companies with a golden opportunity to take a giant step forward. Demand has far outpaced supply placing building companies in a position of strength never experienced before. However, rather than using that opportunity to increase their margins and put on more resources to streamline their operations through systemisation, most have carried on doing the same things while expecting a different end result. Well, the clock is ticking and we are heading towards the end of the construction industry's ‘bull run’. Now is the time to take action before it’s too late…
Plan To Retain Net Worth In 2022
Steve Hays, RubinBrown
No one could have predicted the record years 2020 and 2021 have generated while in the midst of a global pandemic. Record low interest rates and continued pent up demand that has not been satisfied will provide builders strong backlogs going in 2022.
Home builders should make every effort to retain and grow both their business and personal net worth in 2022. Supply cycle issues coupled with various labor shortages will likely erode some profitability in the upcoming year. However, 2022 should be a very successful year financially.
The home building industry certainty has had its highs and lows over the years. With possible tax law and economic policy changes in the foreseeable future, builders should take advantage of the “window of opportunity” available to enhance their personal wealth.
Customer Experience Trends
Tim Bailey, Avid Ratings
Customer Experience (CX) has evolved from “nice to have feedback” to “need to have data” with roles, and even entire departments dedicated to this critical business area. There are numerous trends in CX that are gaining traction and two that I am following closely as we head into 2022 are:
Balancing digitalization/automation with humanization — As digitalization and automation embed deeper into every facet of the building industry, leading companies are increasingly seeking ways to also leverage high-touch human elements in the customer experience. Multi-channel, “auto-magical” sophistication can certainly enhance customer ease, however, understanding when and where to add human interaction is vital for building strong customer relationships.
Servitization — In the quest for ongoing customer engagement and advocacy, many “product-only” companies are creating “product-service” offerings. The idea is to add value to core offerings through additional services. This not only creates additional opportunities for longer-term customer relationships, but it creates completely new business models in some cases. Many disruptive companies have become wildly successful utilizing “subscription” versus “purchase” strategy and servitization is a natural fit in today’s subscription-based world.
Beyond any CX trends, it is most important to remain aware of how deeply connected customer experience is to every part of a business, from marketing and sales through to warranty service.
Digitally Transform the Agreement Process
Wes Womack, DocuSign
For many home builders, there was a need for a simple, efficient, quick-to-implement technology that allowed them to continue during the pandemic. They needed to obtain signatures on new home contracts, vendor contracts, warranties, and more remotely.
Looking ahead, construction companies are continuing to see all time demand highs, unpredictable supply chains, and labor shortages. Manual, paper-based processes to manage new home sales and construction paperwork needlessly delay the home construction process and hinder home builders from keeping up with demand. These outdated systems are not sustainable for the complexities and demand home builders face today.
Home builders that continue to improve productivity, lower costs, and drive growth are investing in agreement cloud technology. By digitally transforming agreement processes, they'll accelerate their business goals and modernize the new home sale and construction process.
Make it a Win-win with Trade Partners
Scott Duman, ECI Software Solutions
While the COVID-19 pandemic has created many problems in the labor market in general, labor shortages are nothing new to home builders. It seems to be a constant struggle since the “great recession”, and in many cases before that. I expect that we will continue to see challenges going forward.
So, what can you do if you can't find the labor necessary to build the homes you've sold? One option is to create efficiencies by raising productivity. Basically, building the same (or more) with less by improving your own processes and leveraging technology.
But the technology you use is only part of the equation--your trade partners also need systems in place that reduce friction and create efficiencies. By taking advantage of technology available today, it means no more paper or constant phone calls back and forth. You get up-to-date schedules and real-time information. You create efficiency and increase productivity. A trade partner relationship should be what it says - a partnership. If you truly want to partner with your trades, help them become more efficient. It is a win-win!
Don’t Forget the Long Game!
Brad Haubert, ECI Software Solutions
Let’s face it – COVID has wreaked havoc on the industry. All of us have pivoted and adapted to the crazy world of price fluctuations and material shortages while trying to keep the active buying frenzy in check. The typical playbook has been thrown out the door and many have been working on sales and purchasing practices that change daily.
As long as this craziness has lasted – you need to remember that it won’t last forever. Many of us have forgotten this. And, unfortunately, the standard “best practices” that have worked for so long are also being forgotten.
I’ve been working with several home builders this past year who need to be reminded that you can do BOTH: react and act for today – but – ensure that those practices and procedures stay in place so you’re ahead of the game when things do return to normal. Keep those processes documented and easy-to-follow, and review them as a team consistently.
Those who don’t maintain those long-term practices are sure to be playing catch up to those who do! Which builder do you want to be?