You only start making money when construction begins and so the best managed projects are usually the most profitable but do you know where profit can leak from other areas?
While the quality of the site scheduling is the key to profitable projects, bad processes can hide profit leakage in many areas without you realising it.
Unless you have the systems and processes in place to handle a myriad of building types, designs and variations, even custom designs properly, you will end up creating havoc for your customers, suppliers and trades and be extremely frustrated with low margins for all your efforts.
Over the many years in this industry, I have been involved with many builders who fail to understand the complexity and frustration that is introduced into a house building business when there is no clear strategy in place and they end up taking on all kinds of projects only to wonder why jobs take so long to be processed through the pre-construction part of the journey and then why it takes longer to build them onsite.
As an example, a builder which focuses on simple investment housing can offer a tight range of plans to suit the type of lots available and these can be documented by junior drafting people without too much problem (assuming the construction team and designers have sorted out the 'build ability' issues in the plans in the first place). The success of any house building business is built upon its ability to complete the pre-construction phase of house building with the minimum number of staff involved and in the shortest period of time. That's simple business economics-lowest overheads for the maximum number of products moved to the point where the revenue is received.
This equation can have different effects for different types of builders - developers who also build their own homes and only receive the revenue at the completion of the home need to use the lowest overheads right through to completion as compared to those builders who 'build on contract' and can use the progress payments on the home to 'fund' the process without the need for a large amount of capital.
In order to reduce the complexity there are a number processes to deal with if you are going to be successful:
Business Strategy
Imagine a builder who tried to do affordable homes, custom homes, renovations, high rise apartments, industrial buildings, townhouses, commercial buildings and schools to name a few. Imagine the different skills and processes needed to manage and build all these types of buildings. While there are a few builders who do attempt this, they are large complex organisations which break down the business into different sections to handle each of the different types of construction and project management. Unless you have a clear strategy that follows your skills and strengths, you will be continually having to create new processes, develop new skills or employ staff to provide those skills and expertise which all comes at a cost.
Lot Type vs Home Design
Which comes first, the lot configuration or the house design? Plenty has been said about the difficulties developers create when developing lots and the myriad of design requirements over the developments. Qld is particularly difficult in this sense than some other states in Australia but the size of the lots are aways related to the house design in any market. Lots need to be a minimum width to fit garages, entries and habitable rooms across the width and depth of a lot.
Without dwelling on the planning difficulties here (the topic for another blog later), you can't expect to have a house design that suits every possible lot size and configuration. This would require a massive product development commitment for not much gain, only losses.
Work out the most common lot widths and depths on the market and develop house designs to suit those. This will limit the number of designs required and at the end of the day, there are usually 6-9 designs that are the most popular and so focus on these and evolve them into better products over time and get rid of the poor sellers. As new types of lots become more popular, look to develop house designs to suit those.
Adding Designs without Proper Development
Over the years, I have seen it many times-the sales team complain there are not enough designs to sell - yet when pressed on where are the gaps in the product range, there is little response or solutions offered. If there is a genuine market for a new design, then research it and develop a home design/s that will meet the requirements of that market segment.
Simply adding more and more designs to the price list will cause problems and headaches further down the line as mistakes are found, compromises have to be negotiated with customers because what has been sold can't be provided, re-work has to be done on marketing material that is wrong and there is no time to 'value engineer' the design along the process because there is pressure to get it out to site. Once it is under construction, all the problems come to the surface as supervisors find new materials that haven't been used before, issues with towel rails that won't fit anywhere and the list goes on that show up as 'extra' costs or ETSs.
Create a proper product development process for any new design before it is released to the market and also make sure a reasonably accurate BOQ has been prepared to get the price close to what it should be. Price/m2 is not the way to estimate selling prices as all sorts of variables come into play with different designs and construction.
Inadequacies in Plans and Documentation
One of my bosses and mentors from way back in the early years when I was a draftsman in a home building company said to me "If you can't build it on paper, how can you expect the guys onsite to be able to build it?". Never was a truer word said.
Today I find there is so much pressure on drafting teams to get the plans out, that little attention is paid to checking and ensuring the full amount of information is provided. For most drafting teams, getting the basics right is hard enough without adding in 'custom' designs to a business that is not equipped to handle 'custom' designs.
While CAD drafting software makes it easier to perform some of the repetitive tasks and show 3D images easily, I am finding that there is very little understanding of what information is required on the plans to be able to build the home. For example, most CAD packages can use what is termed 'hot dimensioning'. This enables the CAD user to simply select a series of items or elements on the plan and the dimension line is automatically generated. The number of times I've seen a dimension line that goes from the outside of the brick veneer to a door opening then to a cabinet and back to a stud wall. The dimensions have to relate to the trade that is using it such as the concreter, carpenter, bricklayer and while some can use the same dimension line, most times trades have to end up working it out for themselves onsite. This is being lazy and shows a poor understanding of the onsite construction. Consider getting an external consultant to check the plans if your team doesn't have time to check the 'draft' documentation.
There is always not enough plans to communicate the information and so this leads to mistakes and a waste of time for trades and supervisors onsite-a loss of profit for both builder and trades. Remember, build it on paper first...
Increasing Customisation
Back in the AV Jennings era, the homes were developed and released to the market with a large degree of simplicity and a lot of research had gone into them. This made AVJ very successful in the housing market at the time due to the efficiencies achieved throughout the process of documentation and construction. There was a period when AVJ went down the 'customisation' path with their 'As Original As You Are' campaign.While this sold a lot of homes, it also added to the overheads because at the time more drafting staff were needed, more estimators were needed and supervisors couldn't supervise as many homes at once.
Today, the market has been accustomed to a mentally of 'would you like fries with that' and so a myriad of options and customisation has gained a hold in the housing market as builders attempt to outdo one another with 'bling' and customisation. One could also add that the increase in housing costs is not only due to the increase in the size of the homes but also the complexity and level of 'customisation' offered to the market.
If you are going to offer 'custom' options then you need to make sure you have the staff, the experience, the processes and the margin to successfully complete the homes, otherwise it can be come a 'world of pain' and reduced margins.
Insufficient Training
The more options and the more customisation offered, the more highly skilled the sales team, the drafting team, the estimators and the construction supervisors and, of course, the trades. Without providing the right training, critical details will be missed and these manifest as ETSs onsite-the dreaded extra costs and another profit 'leakage'. Unless you are also tracking these 'extra' costs,(see my blog on "Do you Know What Your Real Costs Are") you will not know where to spend the time on training, processes and documentation.
Of course, if you don't do any training for new staff, how can you expect them to know what to do and they will usually fall back to what they were doing at their previous place of employment, which may not be what you need or want from them. Make sure you train your new staff and your existing ones as they deserve the right to carry out their job with the right tools and equipment. Don't come to the first six month performance review and find that they haven't been performing to their best because they don't know what they are supposed to be doing. I remember starting with a major builder many years ago and for the first two weeks, I had a constant stream of staff coming to ask me what they should be doing as the previous management had not provided any training, job descriptions, goals or support in general.
Incomplete Trade Packages
Many trades and suppliers I talk to over the years complain about the lack of information given to them when asked for a quote. I covered the lack of documentation above but this also affects your suppliers and trades. If all the information is not provided have a guess what they are going to do-allow for the worst case and cover their backsides. If a customer didn't give you the builder all the information when they asked for a quote, you would allow for the worst to cover yourself or go low (as many trades do) and end up in the battleground of variations and "I didn't allow for that in my quote scenario".
Spend time with your trades and suppliers to find out exactly what information they need on the plans. Even better, send your plans to the suppliers and trades and ask them to provide feedback and comments and this will continually improve your relationship and accuracy with quoting.
Scopes of Work
How many builders provide a full scope of works for each trade or contractor? It seems common sense but many builders do not think about developing a scope of works for each trade or supplier. As mentioned above with the incomplete trade packages, having no scope of works leads to arguments about what is included in the rates or the quote and ultimately 'extra' costs or ETSs arise.
Tighten up your processes with scopes of work for all your trades and key suppliers and rescue the 'extra' costs. If a full scope of works ultimately ends up creating some 'real' increases in the base price then at least you have a true baseline to work from in working out how to reduce the build costs on each particular design.
It's a Production Line
Building a house is, in general, the same no matter where you go. A sale is made, the documents and contracts are signed, approvals are obtained and the home is built. Don't complicate the process. It's a production line and the more homes you build, the tighter and stronger that production line has to be and even have to create duplicate production lines.
A number of the issues discussed above can create bottlenecks in the production line. Sort out the bottlenecks, break down the process into smaller, manageable chunks that can be repeated over and over again. The more you can introduce technology into each part of the process and automate it the better, because money is being wasted if staff are spending too much time on checking if work is being done correctly, creating manual reports to find out what you should already know or continually trying to work out what to do next.
The best home builder I worked for that had the process right was AV Jennings back in their heyday. AVJ used a 'quality' process before quality management became the buzz word but the system and process was tested, audited and made to operate exactly the same all the time, no departures, because it worked. Whenever any local manager tried to reinvent the wheel, the system fell down and mistakes were made, margins suffered and jobs took longer to complete.
Managing Customer Expectations and Knowledge
For most customers in the home building industry, they will only build a new home once in their lifetime. Either as a first home buyer or later as the family has grown. As a builder you have this one shot to get it right and the 'scars' of building a new home can send the customer into the established market next time along with a number of their 'scarred' friends vowing to never do it again.
Most of the arguments and mistakes with customers during a new home build originate from the lack of understanding of the customer in the 'process' and the 'standards' of construction. Unless the customer works for a new home builder, none are going to understand the complexity involved in documenting and building a new home.
So educate your buyers into the process and what they can expect, what you expect from them and what they should expect from you as the builder every step of the way, and I mean 'every' step. Take nothing for granted because you do it every day for a living but can't expect any of your customers to know what the process is and how homes are built-that's why they have come to you in the first place because you are the 'expert'.
Failing to set out the expectations and the information along the customer journey can create time wasting email trails, phone calls, stop work notices and delays in getting progress payments, to name a few, which take your staff away from the 'production line' at a cost.
Indecisive Senior Management
While this is not part of the 'production line', senior management can create delays and inefficiencies in a home building business with indecision, changes on the run and a general lack of direction. Staff can waste so much time and emotional energy wondering what the next change is going to be when senior management are not able to confidently set and follow the process. This just breeds complexity and time wasting.
It's difficult to quantify the costs of indecision but an example I saw many years ago when I came into a business had seen four state managers in the chair within 6 months and I was the fifth. The cost splayed out as staff left because they didn't know what to do or were poorly trained leading to a massive recruitment expense, a slowing down in the 'production line' to the point where it almost stopped until the clear direction was given, the business re-engineered itself and system was fully documented so everyone had a clear understanding of what was expected.
Closing the Loop
The discussion above highlights some areas where inefficiencies and indirect costs are created which are not easily identified in a business plan. A business plan is usually done on the basis of the 'best' performance and anything less leads to a reduction in margin and a loss of profit.
Commit to breaking down the complexity in your business and you can free up some resources who can then focus on the next largest part of the 'production line'.
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Bruce Robb | The 3C Mentor | I Build the Business behind the Builder
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