Sharing lessons learned in the hope that the next generation of industry leaders can avoid making the same mistakes
When I was asked to share with the 2018 Professional Builder 40 Under 40 inductees what I know today that I wish I’d known in my 30s, it sounded easy. I’ve worked with more than 250 builders in 40 states and five countries, giving me a fertile field for such a harvest. But after I’d brainstormed my list, I had a difficult time with both the organization of the material and reducing it to a manageable number. Which issues are truly important for this “Under 40” group today?
And what if these industry standouts are way ahead of me—perhaps even understanding fully at this point in their careers what it took me a few decades more to get through my head? After multiple passes, I honed the list down by subject area and function. I challenged myself, asking for each, if young industry leaders understand this better, will it make a difference? Will they avoid the mistakes of previous leaders? Will they make better decisions? What I came up with is by no means a complete list—nor does it touch on the important nuances—but these are the ones that rose to the top.
For those under 40 in this unique business of home building, here are a few things I know today that I wish I knew back then, about …
1) Architects and engineers
During the past 11 years, more than 200 week-long lean-process workshops confirm, with a few notable exceptions, that most architects and engineers don’t understand who their customer is. I love great architecture and design, and a well-engineered home has an elegance all its own. Yet our TrueNorth team members encounter inefficient design and wasteful engineering everywhere they go. It’s the norm, not the exception, and it adds greatly to cost without commensurate benefit. Virtually every housing analyst today proclaims we are overpriced in every market segment, while labor and material costs continue to rise. Architects and engineers who show little concern for helping builders overcome that obstacle don’t deserve an investment in them. Never assume they “get it”; in fact, assume the opposite and make them prove they fully understand the builder as their primary customer.
Much is written about the wants and needs of various buyers at a wide range of price points. It’s a mess to sort out, but the common denominator finally became clear to me: value. The classic definition is simply value = benefit/cost.
Whether a 250-square-foot micro unit in Seattle, an 1,800-square-foot ranch in suburban Charlotte, N.C., or a 6,500-square-foot trophy house in the Texas Hill Country, each buyer evaluates the product according to their perception of value. What benefits does it bring in terms of utility, function, practicality, family needs, or even ego gratification? Then what are the costs, and not just purchase price or monthly payment, but taxes, upkeep, distance to commute, etc.? Your and my personal tastes have little to do with what your customer values.
I dislike the “ultra-bling” product in Dallas. The 14/12 pitch roofs on ranch homes in Louisiana look ridiculous to my eye. The plethora of shutters throughout the Mid-Atlantic to me just scream “waste!” But the buyers in those markets find value in them and gladly write the checks. No matter what your market, housing type, or price point, a relentless focus on value brings success in product.
3) Options and selections
You can offer as many plans, elevations, options, and selections as you like if and only if you have the systems, processes, trained people, and capable suppliers and trades to deliver them at a profit without brain damage. Few builders meet that standard. Find the discipline. Hold the line.
4) Schedule and turns
The best builders are the best schedulers, and the best schedulers are the best builders. Period. I have never found an exception to this.
I have met builders who build a decent house and make a profit despite poor scheduling. The question there is just how much are they leaving on the table? A tight, efficient, well-managed schedule enables you to turn capital, leverage your overhead, and attract and keep not merely the best trades but the best crews. There is nothing that matters more to suppliers and trades.
Most builders today are lucky if they consistently make “two turns.” The better ones get three. The strong ones get four, and I have seen five and even six. That changes everything. To run a schedule right requires you to do 10 other things right upstream, from product selection to plans to start packages to a well-managed sales process, among others. As goes the schedule, so goes the builder.
Measured correctly—which it almost never is—variance is among the most revealing indicators of builder performance. Any change or event that occurs after the initial start turns into loss. Beware, however, there is no essential measure more subject to manipulation than variance, making cross-comparison difficult to impossible.
I burned up four columns last fall illuminating both the critical importance of variance and the numerous pitfalls with measuring it. Inadequate plans? Tentative, incomplete bid packages? Inaccurate start packages? All result in variance that costs builders, suppliers, and trades alike. Reducing variance to an absolute minimum, just like managing the schedule, differentiates the great builders from the also-rans.
In purchasing, we need a few new paradigms. First, it’s no longer about “How do we pay less for labor and materials?” The new goal is “How do we become the builder our suppliers and trades find the most profitable to do business with?” And, of course, the answer can’t simply be, write a bigger check. Now add to that an operating philosophy of using the fewest possible fully qualified and financially sound suppliers and trades.
Finally, despite noble claims to the contrary, most business done today is based on bid price. The only thing that doing business on bid price alone guarantees is that you will never operate by lowest total cost. And total cost is the only thing that matters. The problem is that so few understand the components of total cost and how to measure them. They include the costs of procurement, inventory, delivery, quality, installation, warranty, liability, and serviceability long after the warranty period expires. Any organization that adopts these new paradigms will overcome its trade shortage and increase profit.
There are nearly always customers for something that’s built exceptionally well with great value. Everyone claims to build the best product with the highest quality and great customer service. Do you? How do you know?
Seth Godin’s book, Purple Cow: Transform Your Business by Being Remarkable is the best short course on marketing strategy I’ve ever read. It’s about defining what it is that makes you truly exceptional. Are you so good that if half the market vanishes, you’ll do fine because you are the clear No. 1 provider of starter homes, luxury townhouses, full custom on-your-lot, or whatever segment you relentlessly pursue?
I’ll never forget builder Otto “Buz” DiVosta 25 years ago, explaining his remarkable success: “Most builders go after 40 percent or 50 percent of the market and hope to convert 5 percent of those prospective buyers to get 2 percent market share. I go after 4 percent of the buyers and get half of them. I don’t care if 95 percent of the market hates what I do. That is not who I build for.”
DiVosta had the highest-quality product, most efficient building system, and strongest margins of any of the 250 builders I have worked with in the past 30 years. Don’t try to be everything to everybody. And this leads us right into what I’ve learned about land ...
One thing this generation of 40 Under 40 learned up close and personal during the downturn is how fast even a seemingly good land position can take a builder down in a bad market. Yet land remains the most alluring money generator in the business because when it works, it’s so easy compared with the messy business of building houses.
I have known a lot of successful “deal hounds” in my life who have made millions, and at least as many failures who have lost as much and more. The trick for home builders is not letting the tail wag the dog. For so many, a piece of land walks in the door. You work out the price and terms, then say, “Great, what will we build on it?” This sets off a flurry of activity to pick a product with an endless stream of changes, trying to get it right. Meanwhile, purchasing never gets final plans, specifications, and options on a timely basis so it can generate tight bid packages followed by fully accurate start packages.
The key starts earlier, with strategy: Having found your happy confluence of what product has a market demand, what you build better than anyone else (profitably), and what you have a genuine passion for. Only then do you hunt down pieces of land that fit those criteria. This will keep you always ahead of the builders caught in an eternal scramble trying to determine what to build on the swell new piece of dirt they just signed for.
9) Suppliers and trades
Even if your market is 30 percent short on trades today, never forget: One of your competitors is getting them. Why? Despite the current worst shortage of labor ever, I can send you to builders all around the country that have no trade shortage—and it’s not because they pay more. They earn those trades because their systems, processes, product, and management make it easy for trades to be profitable. And never forget the huge impact of getting the best crews. Someone gets them. Do you? Do you really know? The best suppliers, trades, and crews can’t be demanded, negotiated, or bought. They can only be earned. Few builders are willing to work that hard.
Measurement is not the strong suit of most builders, even for those that are very good at math. First you need to know the right things to measure and then determine how to accurately measure them.
We constantly derive calculations to determine performance, yet they fail to capture all the factors. The difference between bid price and total cost above is a perfect example, but there are myriad others, both macro and micro. For the big picture, to cite a favorite measure, large builders often use ROI. Yet it’s so easy to manipulate it by asset classification or simply by moving items off the balance sheet, often making comparison impossible.
At the micro level, let’s return to variance and the biggest factor of all, which no one measures or tracks: overhead. We used to advise adding a dollar for overhead for every dollar of material or labor that shows up on a variance purchase order. Further study has revealed that a better factor is 10 to 1, and we’ve seen it go as high as 100 to 1 and more. Again, no one measures the overhead associated with variance for the builder, supplier, and trade alike. Perhaps it’s time to start.
11) People and culture
When I started out, I was very idealistic, believing most people are good and any company can build a great culture. Over the years I became more realistic and eventually understood you just can’t expect a culture where everyone does the right thing and people truly support one another. Then, during the last decade, I actually encountered multiple cultures that actually come incredibly close to the ideal I envisioned when I was young and naïve.
The vast majority of people want to do the right thing, want to contribute, and want to accomplish something with their time. They want to be part of something bigger. Almost no one wakes up in the morning and thinks, “Yeah, I’m gonna be a pain in the butt today. I’m going to see if I can do as little as possible while getting paid.” Negative behaviors arise in a defective culture. So be idealistic—even naïve—and find or build that elusive culture where everyone works together to achieve great things. I have seen it now too many times for you to tell me it can’t be done.
I’ve now reached the age and experience level where I’m frequently asked to expound on the two or three factors that truly make a difference, whether it’s changing the organizational structure, trying a different marketing strategy, implementing a new back-office system, or managing the overall performance of a company. For years I would fill up flip charts with factors of requirements—enough to overwhelm almost anyone. My model is simpler now though because over time I discovered that each factor I listed is rooted in a single source: the will of senior management. Everything stems from that. If senior management has the genuine will to achieve any goal or implement any system or process, or even create the ideal culture described above, it happens. Without “will,” it fails. It’s as simple—and as tough—as that.
But Wait ... There’s More
To pick and choose just 12 things I’ve learned in the 25 years since I turned 40 was both interesting and frustrating. The original list had more than 30 items, and although I found ways to squeeze two or three points into one bullet, so much remains unsaid. If this was useful to the under-40 crowd that’s quickly taking charge of this industry, I’d love to know. And for the old dogs and gray hairs out there: You’ve most likely thought of one or two really important items I missed. Please email those to me at email@example.com. I think the target audience here just might enjoy hearing from another 10 or 15 of you in a follow-up column.
For the latest PDF in Scott's series “Bridging the Margin Gap,” send a request via email to firstname.lastname@example.org and include “Margin Gap” in the subject line. For other article series and white papers on critical home building issues, see truen.com.