Could some of the most in-demand housing markets be cooling off?
Professional Builder Columnist Scott Sedam creates a scenario illustrating how builders, contractors and trades can work together to cut costs without severing relationships.
Imagine you own a fairly large framing business. You run 20 crews and work hard to price fairly, maintain quality standards and stay on schedule. Most years, you work for six or eight builders, several with whom you have long-term relationships. This year is a tough year. You open a letter from one of your major accounts stating that your contracted price for all future work has been reduced by 5 percent. It's worded nicely, but the bottom line is, take it or leave it.
You recall all of the extras you routinely do for this builder that you never charge for and how habitual late change orders screw things up. You reluctantly accept the new terms, vow no more freebies and scrap your annual contribution to their big golf outing. And that's just Monday.
On Tuesday, another builder letter arrives, informing you that your dowry to continue the relationship is an immediate 8 percent price reduction. You are steamed. Last month you saved the construction vice president's fanny by tearing the second story off three framed models and never charging the builder. How many times have you absorbed a lumber price increase with the promise that it would be made up but the makeup never came? Get a small price drop, though, and the firm's purchasing manager calls you before breakfast, demanding a reduction.
The builder contracts with marginal foundation crews that cause your guys to incur extra cost — same with their mechanical crews, who cause return trips after the city inspector takes exception to how they chop up joists while installing plumbing, electrical and HVAC. What a load of crap! Just last week you passed on to the builder the latest lumber price reduction, and even if you trim labor costs and cut your margin to the bone, another 8 percent makes this business relationship a loser.
On Wednesday, a certified letter arrives from your big national builder. As you have come to expect, their language isn't even nice. It proclaims that, retroactive to Sept. 1, the builder's deducting 10 percent from all contracts. A contract addendum is to be signed and returned within five days.
You toss the letter across the room. The extra cost you endure with this builder — just to get his volume — makes you nuts. On top of that, the wet-behind-the-ears college kid superintendents are a constant problem, and you stopped counting the times your guys have kept them from doing something stupid. Every week sees another wasted trip to a building site and each one costs you a couple of hundred bucks. Their plans are never right and their constant churning of their trades means things never run smoothly. The lawyers are so afraid of lawsuits that their product is way over-engineered — and you eat most of those costs.
Adding insult to injury, this builder is "chargeback happy," and there is never a prior call to discuss the source — it just shows up two months after a house is finished as a check deduction. By then it's too late to negotiate, and it completely screws up your accounting. To get the business last year, you gave their purchasing guys your single lowest price, yet they never let up.
But what really sticks in your craw is that this outfit always talks "partnering." They started a supplier/trade "partnering council" a while back, and it's a joke. At the supplier/trade breakfast, the CEO from headquarters gave a long speech about how much they value their exceptional supplier/trade relationships. Suppliers and trades alike rolled their eyes, and many called the CEO a hypocrite. You just think the CEO has no clue what is going on in the local division.
You want to just walk on this builder, but that means laying off a lot of your guys. So you resolve to find enough business to allow you to ignore their future bid requests. In the meantime, you will sign the 10 percent agreement and make it up everywhere you can. You will always send them your weakest crews. You will skimp on lumber, dropping the extra jack studs and using material traditionally set aside for bracing and blocking for framing. No more special favors, no more coddling superintendents, no more smoothing things over with inspectors and no more absorbing problems caused by other trades. You will charge for everything, including a $150 fee —"wasted trip to the building site" — and refuse to accept any chargeback without a prior discussion. You know that within a year, you'll be gone, but you'll get your 10 percent back and more.
On Thursday, you get one more letter and you hate to even open it. This is starting to feel like extortion. It's from the big local builder you have known the longest, and he's the closest thing to a partner you have. The company still does a lot of things wrong, wasting time and money, but it is always fair, whether it is bid packages, charge backs or change orders. It usually has the best trades to work with, too. You open the letter.
You have no doubt received letters from other builders demanding a 5 percent to 10 percent reduction in contract price. This is a tough year for all of us, and the truth is, we need the same kind of cost reduction — at least 8 percent.
But we want to go about it differently. We know that you and your team know more about your work than anyone, and that's true for all our suppliers and trades. We believe that if you come up with the ideas and we listen, work together to implement them, you can show us how to find that money — without killing your margins. We're calling it an assault on cost without assaulting our suppliers and trades.
So here's the deal. Focus on the plans for the Premier Living series. Go through them from top to bottom with your guys. Where are we wasting material? How could we make them easier to build? What are other trades doing that add to the cost? Bill, nothing is sacred here. Take a hard look at process as well as the product. If there are things we could change in the way we schedule, supply plans and specs, the way we handle options — whatever it is — lay it on the table. In short, you tell us how to save the money and we will do everything possible to respond. We suggest a goal for every supplier and trade of finding at least $250 per house — on your terms — not ours. In two weeks, we will sit down in turn with each of you who want to participate and see what we can figure out.
If you like the approach, give us a call right away and we'll send you a fresh set of plans to mark up and a checklist from something called "Lean Production" that will help you touch all the bases while looking to reduce cost. If this sounds like too much trouble, we can just do it the old-fashioned way and simply cut 8 percent from your contract, but we hope we get no takers on that approach.
We look forward to hearing from you.
Regards, Smith Homes
You sit at your desk, stunned. "$250 a house?" you think. "Hell, I can find them more than that — IF they are really willing to listen." You call out to Marjie: "Hey! Bring me those plans for the Smith Premier series and call Carlos, Joey and Luke and tell them I need them here at 5 sharp for a meeting! And order us a pizza before you leave; we'll be working late."
In the race to cut costs during the worsening housing downturn, there will be winners and losers. Demands for across-the-board cuts guarantee you two things: short-term gains that make it look like you've won and not-so-long-term consequences that ensure you lose it all — and more. Those who survive the downturn will be poised to reap tremendous rewards when things turn around. Those who do it with their supplier and trade relationships in tact will be the true winners.
|Scott Sedam is president of TrueNorth Development, a nationwide consulting and training firm focused on quality, process improvement and organizational development. He can be reached at [email protected].|