The housing market is enjoying some good tailwinds, which typically mean positive things for residential construction.
Mistakes to avoid when running a homebuilding company
Experts to weigh in on the most common business mistakes home builders make.
Most business articles tell you how to improve your business. Because we like to think we march to a different beat here at Professional Builder, we've decided to try a different angle and let you know what not to do.
We turned to experts such as Chuck Shinn, Scott Sedam, John Rymer and others for input; the list on the following pages represents merely a sampling of their recommendations (Believe us — they could go on!).
1: Allowing the market to affect your company's character.
Industry expert Charlie Jenkins chalks up things such as poor decisions on land purchases and compromises on hiring decisions to a good-looking market. Once the market turns the other direction, however, everyone sings a different song. "There is no substitution for good business character," Jenkins says. "The ideals, standards and values that we base our company strategies on should make sense in a good market as well as a bad market."
2: Not having a purchase-order system.
No P.O. system means no agreement of trade cost or specific house information in advance. Do yourself a favor and get yourself organized.
3: Jobs not ready for trades.
If your jobs aren't ready for the trades, you're setting yourself up for a big problem. Try dry runs for trade contractors.
4: Paying trades too early.
Pay your trades too early and you may not get them to finish the job, which creates a need for punch-out people, says consultant Chuck Shinn — and that leaves you to pay for the work twice.
5: Leaving money on the table by pulling all suppliers and trades through the same cost-reduction knot-hole.
Scott Sedam, TrueNorth, recommends against a one-size-fits-all approach to cost-savings in the trades and suppliers department. You're "killing a loyal trade" with that tactic, he says.
6: Continually hammer suppliers and trades to rebid and cut margins.
You're better served working cooperatively to eliminate waste in product and process.
7: Not checking in on the purchasing department.
Although purchasing is usually great at negotiating the best price, Sedam says, it doesn't hurt to challenge your purchasing departments to show you documentation that they are not only negotiating for the best trades by those criteria but also for the best crews.
8: Holding on to your trades and suppliers out of comfort.
Says consultant Chuck Shinn: "[Builders are] wed too closely to current trades and vendors." Maybe it's time for a trial separation. We're not saying leave them all together, just give someone else a shot. Repeat after us: "There are no sacred cows."
9: Too much land inventory.
Use the market recession to develop a land strategy.
10: Buying land outright.
When you buy land, have a due-diligence period and a take-down schedule.
11: Paying too much for the land.
Shinn recommends builders work backward from house sales price and keep land within market ratios of sales price.
12: Lack of systems and procedures.
Form a team and begin to create standard operating procedures for your company if you don't have them already. If your systems aren't documented, they don't exist.
13: Inefficient and ineffective systems and processes.
You may have systems and processes in place, but do they work? Shinn recommends analyzing, documenting and streamlining processes for maximum impact. Often you'll find a lot of duplicate efforts.
14: Lack of discipline.
Your policies and procedures are only good if they are being followed by everyone in the firm. Hold your employees accountable if they don't fulfill their responsibilities.
15: Poor integrated management process.
Each man may be an island but your departments shouldn't be. Urge your management team to get behind integrating the whole company. How? Implement management software; create a central repository for information, spreadsheets and reports; and stop duplicating work.
16: No strategic plan.
Do you know where you want your company to be in three to five years? Stay on course by developing a strategic plan. Shinn describes a good strategic plan as a written plan that helps guide decisions and actions; it should be reviewed and updated at least annually and should be used, not just put on a shelf or given to lenders.
17: Poor communication.
Nothing will tire your staff quicker than a lack of communication. Keep the lines of communication open both to and from the management level. You'd be surprised how responsive your employees will be if you keep them in the loop. Provide clear direction and they'll be yours forever.
18: Lack of staff training.
Would you want your next CEO to come straight out of high school? If you've dropped new staff orientation programs to save a buck, you might as well start recruiting your C-suite from the playground. You'll save money in the long run by retaining "perks" such as job training — both new-hire and continual education — as well as orientation and advancement opportunities.
19: Not treating land and home building as separate profit centers.
The dynamics of land and home building are quite different, says Shinn. Too many firms "subsidize inefficient home-building operations with land appreciation." Land is a very liquid asset; don't dry up your cash reserves by keeping your land and home building operations in the same bucket.
20: Pricing homes on cost instead of the market.
Make sure you're doing your market research before you start building your million-dollar masterpieces. The local market will set the sales price of your homes, not the cost of the goods used. Direct construction costs, not profits, are the only variable in the pricing formula.
21: Never giving the level of attention to a new community startup that is given to sales, finance and production.
"There is more money bled out on the ground in the community start-up process — from signing a land contract to opening the first model for sales — than anywhere else in home building," Sedam says. If you're starting a new community, conduct a true value-stream analysis on your startup process and then create a sensible, streamlined process and thoroughly implement it.
22: Lack of good sales training.
Sales training hits to the heart of selling your homes. Take a good, hard look at your sales training: can your sales team demonstrate the home and its products? Are they asking the right questions? If the answer is no, then it's time to retrain your sales team.
23: You don't know your customer.
Do you know your customer or just think you do? If your entry-level options are appealing more to the empty-nester crowd, reconsider your customer profile and act accordingly. Sales expert and PB columnist John Rymer recommends paying close attention to your customers' wish lists. "Whatever the last three customers were asking for ... everyone [will] want."
24: An uncontrolled selection process.
If you've been sending customers to vendors or using allowances instead of baseline specifications, now is the time to stop. Shinn suggests taking control of the process by setting time frames, offering guidance and packing selections, thereby lessening the confusion for your customer.
25: Mismanaging HOA transitions.
Too many builders and developers with homeowner associations are notorious for mismanaging the transition to homeowner rule, says Stuart Teicher, senior vice president and general counsel of the Teicher Organization. The results can go behind the typical wear-and-tear fixes and turn into more catastrophic problems such as negative publicity from HOAs.
26: No master schedule.
Don't leave your build schedules up to chance — or to your individual superintendents. Not having a master schedule will leave you with too many phone calls, no consistency and no way of notifying trades and suppliers of what's going on.
27: Inadequate construction planning.
Don't be in such a rush to reach the construction phase. Opening a community without finished plans and specifications or starting individual homes without complete information will lead to inaccurate purchase orders.
28: No internal inspections.
Are you conducting critical point inspections? You should be. Shinn advises three to five detailed internal inspections with the ultra-critical internal final inspection prior to the customer walk.
29: Poor product design process.
This no-no is a first cousin to mistake No. 23: know your customer. Stop designing homes you want to live in and start designing homes your customers want. Our experts agree: you can't forget to include your estimators and production teams in the process; they'll know what you don't.
30: Inadequate construction drawings.
If your third-grader can read your construction drawings, you've got some work to do. Lack of details and no consistency leave a lot of room for error and interpretation, says Shinn. "Trades and supers haven't been asked for input on what they need, nor is there a scope of work for architects." Be kind and refine.