Big thinking, big risk, and big reward normally are aligned and achievable in housing recoveries. Not this one. Builders must be disciplined and well managed in order to enjoy robust returns this time around. There are the few lucky ones who positioned themselves with developed lots at a low basis and have contracts that protect their lot backlog. But if you are not one of the lucky, then good old-fashioned operational excellence will be essential for your ultimate financial success.
Let?s start with a discussion about risk and reward. Buying land is the riskiest venture for builders. The downfall can be huge if the lots are in the wrong location, too expensive, or if expected demand does not materialize. Leveraging your business with debt, equity, or your own cash is the next biggest risk. Make the wrong move here and your deal is a loser. Design is the next big hazard. An inefficient or poor design, or concepts that fail to connect with customers, will force you to revamp your product.
But if you have all these attributes right, then your next concern is creating a team of people that can get the job done in a timely, accurate, and professional way. That task demands focusing on the details of your operational practices. Neglecting to invest time and money in your people can body-slam all that hard work and the risks you took to establish your company. Yet this is one area where you have the most direct control and influence.
Listen to your back-office team and respect their dedication to the details. If they are concerned about your company going sideways, if they request technology, team members, or tools to improve what they are doing, then listen, analyze, and act. Remember, if you want to move quickly as a company, you must invest in either systems or people. Otherwise you will not be able to meet agreed-upon deliveries. In some instances, you may need to augment your staff and leadership for an interim period of time, or slow down your commitments and growth.
When builders execute each of the key processes correctly, the bottom line can be improved in ways that very few builders can fathom. It is important to delegate and fill your team with people who can move fast and accurately. Each day you are inefficient, you burn margin. Investing in the improvements and the ability to repeat details accurately is what continuous improvement is all about. If you do not use simple process-flow software, you should (I love All-Clear by Proquis).
If the challenges are beyond your comfort zone, secure professional advisors promptly. Why? When you rev up a fast moving locomotive, like the building process, two things will happen. Your company will crash and burn, or margins will erode without you realizing it. In some instances, you may need to stop the locomotive and regroup. Yes, I said stop and regroup. Why do you think private builders go out of business even in a great market? The reason is mismanagement.
Now let?s talk about the details home builders need to heed for achieving operational excellence.
A process flow that challenges most builders is framing actual design and construction details correctly so that the purchasing department does not have to revisit its previous work. Having the sales, design, and construction services (aka internal ops, purchasing) groups estimate and cost product efficiently and timely can be beneficial. Yet in many organizations the flow from conceptual design to actual construction drawings and then to prototype build is pathetically terrible. The best-run companies can go from concept to construction drawings in 10-to-12 weeks with less than 2-percent variance on hard costs.
This ability requires attention to market-driven decision-making, meaning you need market-comp feedback (more about that later). It also calls for a tight process flow with the design, construction, and sales teams so that the details of the conceptual estimate and the actual original estimate move quickly and seamlessly. So much detail is attached to this process that if it is done incorrectly or is ignored, the starting budget will be painfully wrong.
In most instances, the base house specifications?meaning the materials used to build the house?are managed in Excel spreadsheets rather than in a database. Consequently, management is not aligned in a timely way, and confusion in the purchasing and sales groups ensues. Builders need clear base house specifications. In one instance, a longtime client told me, my insistence on building a house 100-percent right based on the architectural drawing, the construction specifications with the options, and the upgrade selections was a turning point for both accuracy and cycle time. It is amazing how error-free and well managed a builder can become with great specifications. This detail carries over into estimates and budgets and results in low variances against projections and fewer errors during the selling process.
The Price is Right
I mention market comps all the time because in a growing market many builders are not adjusting quickly and are underpricing homes. One of my clients told me point blank that my market-comp coaching improved their top line by more than $1 million. How? They were well informed as to what the market would bear. So they held their pricing and earned better margins while competitors dropped prices even though they did not need to. The details required for this level of confidence include regular updates about market conditions by management and sales, full analysis of the data, and a comprehensive understanding by the builder and the sales team of your competition above and below your price points.
Framing your strategy and priorities is important. A private builder in a Northeast market had me produce an operational assessment that helped its managers understand where to invest in people, technology, and systems, as well as how to position the company for growth in a highly competitive market. Now they are focused and getting much better results. Their feedback was, ?We needed a third party to set us straight on our priorities and how to spend our time and money.?
The Overhaul Timeline
Too many times companies grow to a fevered pitch and management assumes they have achieved operational excellence. Yet fixing and resetting a wobbly operation typically can take 12-to-24 months. If efforts are made during the scaling process, then fixing operational problems is less costly and more effective. Some builders and developers arrive at the wall of pain that says, ?Fix me or the problems will only get worse.? In the short term, your margin erodes and cycle time slips with sloppy deliveries. Even worse, reactive rather than proactive management wears down your back-office team.
If you are in this condition or see it coming, it?s time for immediate action. First, honestly assess where you have the most dysfunction and prioritize. Second, if you cannot assess the problem, secure professionals who can. Third, establish where attention to detail will reduce the most bleeding and improve revenue streams. Fourth, accept that you may need to invest in an operational overhaul fast. Fifth, put a strategic plan in place to align your troops.
Given my experience, I find that market comps, options, and upgrades can be a source of revenue when done well. Another area for boosting revenue is well-written contracts with detailed scopes of the work to be delivered. Such detail can form the basis for cost controls either through original budgets or a purchase order system with variance benchmarks that drive the correct management practices and ultimately produce better results. Third, the speed in which you can build quality homes is essential. Fourth, great leadership and respect for details will make these items happen in a timely way and promote the importance of such behavior. Understand that an overhaul requires great effort and attention to detail. The result may be the following: You sell 100 homes for a gross revenue of $50 million and a net of 7 percent ($3.5 million), or you sell 120 homes for $63 million and a net of 11 percent ($6.93 million).
Details matter. Delegate?don?t think that you have the time or talent to fix everything yourself. Structure your company so there are professionals working on processes and controls that enable your organization to repeat tasks correctly. Respect the people who work hard to secure cost control and systems. They matter more now than ever before. If you do not have a good internal operations team, then build one now. Don?t think you can inflate your way to profit. Leadership matters, and understand that leadership is not management. You delegate others to manage, but you must lead. Most of all, do it sooner rather than later because every day your organization is sideways you burn margin, and an empty shoe box is a woeful sight and a painful result.
Noelle Tarabulski is CEO of Builder Consulting Group of Lakewood, Colo., a management consulting firm dedicated to builders and developers since 1991. She can be reached at [email protected] .