Despite the financial curveballs 2020 has thrown, demand for housing is strong and many home builders are scrambling to keep pace, especially those coming off of construction shutdowns in their states. The increase in construction projects around the country has led to more demand for raw materials, which has driven up cost for builders. To combat rising construction prices, builders should look for new ways to cut expenses in areas like land and labor.
1. Make smart land investments
The land acquisition process takes time and money. Developed lots have dried up since the Great Recession and, therefore, builders are left to find raw land that needs to be entitled and developed before homebuilding can begin. Available land in desirable locations is scarce and expensive. The right piece of land may cost more in the short term, but the wrong piece of land has long-term cost implications. Not only will it result in poor sales and slow velocity, but it will extend time spent on a construction site and increase cost.
It's important to remember not to buy a bad piece of land even if it is priced great. Builders want to take advantage of the current demand, but an investment in a bad piece of land is almost certainly a waste of money that will increase overall construction costs.
2. Make trades want to work on your jobs
The availability and consistency of tradespeople can be hard to come by, but if you can regulate the flow of labor and reduce time on site, you can save money on labor. By building in one location over several years, for example, trades have consistent work and are more likely to prioritize that project over others.
Also, consider building a limited lineup of floor plans, which allows your tradespeople to avoid a learning curve on every job and makes the process much more efficient over time. Planned even-flow building, rather than ebbs and flows in volume, allows you to manage an accurate schedule and move trades efficiently from one house to the next.
These strategies are easier for production builders to implement, but even smaller home builders can reduce labor costs—and therefore overall construction costs—with careful planning. Put simply, make your jobsites as attractive as possible to your trade partners, and you’ll get the best possible price on labor.
3. Reduce complexity
Home building can be complex, but it doesn’t have to be. If you are a custom or semi-custom builder, how much time are your people spending pricing customizations, managing construction issues arising from one-off designs or reworking features that appeared to work on the drawings but posed problems in the field? What additional costs are your suppliers baking into your bids, knowing that they will spend extra time troubleshooting complex custom blueprints or making special trips to scattered jobsites? How much could you lower your costs if you ordered the same materials for every job and gave yourself the opportunity to build your plans more than once? If any of these questions strike a nerve with you, your business could benefit tremendously by committing to a simplified business model.
4. Increase your buying power
As a builder, you likely have great relationships with your suppliers and are receiving competitive pricing that’s in line with the volume you build each year. Consider the benefits you could realize by multiplying your buying power ten-fold or more. Think of the leverage you could gain with those who supply your plumbing and electrical fixtures, drywall and yes, even lumber.
When you join a large network of builders, you can have access to cost discounts and rebates through a national accounts program that provides pricing advantages you may not be able to obtain on your own. This is the power of strength in numbers, as you gain the ability to benefit from national builder pricing within your small business. Even if you only reduce your cost per square foot by $1, you instantly achieve thousands of dollars in savings per home, not to mention the substantial savings that can be realized when building entire communities. This can add up quickly when you’re saving on every window, door and faucet placed in your homes. Those dollars go directly to your bottom line.
Demand for housing is high, and builders want to capitalize on that by building more homes. Look at your labor, materials and land costs closely, and you should be able to find ways to decrease your overall construction costs while meeting the current market demand.