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Can We Make Home Building a Little Less ‘Interesting?’

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Business Management

Can We Make Home Building a Little Less ‘Interesting?’

Builders are feeling their margins being squeezed. How to respond? Here are 10 suggestions


By Scott Sedam, Contributing Editor July 26, 2021
Interesting
We are working our way through these strangest of times, but they will come again in some form. How do we respond? Will we have learned the important lessons? | Photo: Olly / stock.adobe.com

There’s an old saying, repeated countless times, yet it warrants another mention these days, “May you live in interesting times.” Fact is, it was a curse. 

Which brings me to our times in home building, which have never been more “interesting.” 

Just 18 months ago, none of us anticipated our current state of affairs. How could we? We had all heard of the bubonic plague and Black Death that decimated Europe centuries ago, and most of us had some awareness of the 1918-19 “Spanish Flu” influenza pandemic that ravaged America and is believed to have infected one-third of the world’s population, killing perhaps 50 million. My personal connection to that pandemic comes with no small irony. My grandfather’s first wife died in that tragedy, leaving him with an infant daughter. He soon launched a new courtship with the young woman who became my grandmother. So, if not for the Spanish flu, I’d never have made it into this world, let alone be writing this column. 

Some fears of a global pandemic came about in the past decade during outbreaks of the Ebola virus, SARS, and the Swine Flu, among others, but they (thankfully) never had a significant impact on the world, much less on North America. Which brings to mind another old saying: “Ignorance is bliss.” 

That is, with each of those threats quickly fading from our concern, we soldiered on and during the opening weeks of COVID-19, remained blissfully ignorant of the virus’s potential magnitude. Many lived in denial for months (and some, remarkably, still do), clinging to a less than blissful ignorance as shutdowns and slowdowns continued, eventually dragging on for over a year, resulting in more than 600,000 deaths as of this writing. 


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Volatile Markets and Interesting Times

At the beginning of the COVID-19 pandemic, every analyst, pundit, and prognosticator predicted the housing market would tank, possibly even to 2009 levels during the great crash. But 2020 turned out to be a great year, with 2021 shaping up to be even better. If not for severe shortages of land, labor, and materials, most notably reflected in the soaring price of lumber and steel, life would be not merely good but absolutely great. 

The pressure is rising, though, with builder sentiment down last month amidst feelings that something has got to give. Home sales are cooling a bit in some markets, with many builders holding back on sales for two good reasons. First, many cannot find enough trade contractors to build the homes, with six-month cycle times becoming all too common. Second, when actual construction lags so far behind sales, predicting material costs in a volatile market is risky business. The commonly accepted number for the retail price increase of a home in 2020 is around 17%. Does anyone believe the market can absorb another 17% increase in 2021? 

The inevitable result is margin squeeze. There are those who feel it today, as will nearly all others in the coming months.

Pretty interesting? Perhaps a bit too much so? We are working our way through these strangest of times, but they will come again in some form. How do we respond? Will we have learned the important lessons? Are there specific things we can do to prepare for an unknown future? I did a quick brainstorm of 10 items I believe will help inoculate home builders for the next time around and will help keep things “blissfully boring'' instead of the daily hair-on-fire of today’s market.

 

10 Ways to Make Home Building More Boring

1. Get involved in workforce development

I wrote columns about the coming trade labor shortage more than 10 years ago and was pretty hard on the industry for not engaging in meaningful ways to solve it. It’s been a long time coming and I am happy to report significant progress being made in this arena. I’m a member of the board of trustees of the Home Builders Institute (HBI), which has worked under the auspices of the National Association of Home Builders for decades on workforce development. Our last board meeting was easily the most positive in a long time. HBI’s work with Job Corps and military and prison programs is producing significant results. HBI’s BuildStrong Academy is in the process of establishing trade skills training academies in 20 cities.

The Colorado Springs model for bringing back trade skills training in high schools is spreading. The nonprofit Building Talent Foundation, launched by the Leading Builders of America, has focused on job placement for program graduates and mentoring to help them stay in the construction trades. These are just a few of the many efforts being made, and they’ll appear in a future column with more detail this fall.

Meanwhile, here’s the bottom line: Your personal involvement in home building workforce development is not an option; it’s mandatory. We can’t simply sit back and let others in the industry work to solve the problem on our behalf. If you haven’t already found a local high school, vocational school, or junior college to support, call your local Home Builders Associations or Building Industry Association and get started. The home building industry has been pretty good to you, hasn’t it? Now it’s time for you to do some real good for your industry.
 

2. Fix your startup process

From my firm’s more than 200 lean process implementations in the past 14 years, it’s clear for most home builders that your new community startup process remains far too unorganized. In fact, at times it’s barely a step above a series of vaguely linked, random activities.

Accept the definition that anything not firmly defined and nailed down prior to opening the first model home for sale will cost you time, money, trade frustration, customer irritation, and “brain damage” to your staff both in the office and in the field. All the decisions get made—eventually. Why not get them made up front?

Be honest with yourself: Can you describe your startups as a finely honed process with all plans, specification, selections, options, colors, and sales collateral materials complete before construction of the first model begins? Are your suppliers and trades on board with 100% complete contracts and scopes of work? If you aren’t sure, email me to [email protected] and request our “Community Start-up Process” survey to find out.
 

3. Secure your trade base

I’ve written a great deal over the years about how to achieve this, even in today’s zero-sum game of severe trade shortages. My column on this very subject, “What Labor Shortage?” offers more detail, so I’ll refer you to that for some answers.

Just imagine, though, what your life would be like today if you could have all of the time back you now spend chasing down trades and fretting over the quality of their work. I wouldn’t challenge you on this had I not seen it done by enough builders who have demonstrated that securing a top-quality, dependable trade base is an achievable goal.
 

4. Secure your supplier base

As with trades, there are proven, specific steps to take with your suppliers to establish yourself as the clear builder of choice. The column I mentioned above addresses suppliers as well as trades, so again, let me send you there for specific methods.

The information about what truly makes a difference did not come from the TrueNorth team kicking back with an adult beverage, dreaming up the world as we believed it should be. Rather, the ideas are drawn from our work with more than 5,000 suppliers and trades, expressly outlining what matters to them. You can count on their advice to steer you straight.
 

5. Become a process fanatic

Home building is so much more than a simple transactional business, although many still treat it that way today. It’s not like buying and selling stock, bonds, or bitcoin, where you can perform the tasks in isolation, concerned only with the delta between what you paid out and what you received back.

The typical builder employs between 30 and 50 suppliers and trade contractors to ready a home for sale. Now toss in zoning and inspection entities for each unit, plus interfaces with support firms such as surveying, architecture, and engineering. Finally, add a customer for each home, a customer who, having just spent six-figures on the largest purchase of their lives, demands perfection even a year after closing.

Home building is so much more than a simple transactional business, although many still treat it that way today.

Is there any business with a more intense dynamic in the entire world? Ours is a business that demands a continual, near-maniacal focus on process, and building homes requires a multitude of processes. We’ve identified a group of “12 Essential Processes” from my team’s more than 150 years of combined experience. Again, email me at [email protected] for the survey and a PDF of the column on the 12 processes. Along with my more than 30 years examining home builders, I have 24 years as a judge for the National Housing Quality Award and have been an examiner on the past three gold award recipients. I can definitely state that these top builders are among the most process-centered I have worked with in my career. They work on process every day, and their results speak for themselves.

6. Become a construction efficiency champion

Something that makes my blood boil is finding an obvious, exceptionally wasteful construction practice in the field and getting this response: “Well, we built it the way it’s specified on the plans.” That doesn’t make it right, and that doesn’t make you money.

Sometimes it’s just vague specifications by your local drafting department, other times it’s the lumber/truss/panel operations that push it to the high side, and yes, often it is the engineers who are not taking the time to do fresh calculations on each home. It’s a rare house where we don’t find at least $1,000 in sheer waste, and upward of $3,000 per unit is common.

You simply have to challenge everything and make sure those creating the specs are working for you, the builder, and not for LP, Georgia-Pacific, Weyerhaeuser, MiTek, or Simpson. Those are all great companies, but make sure they are in the business of selling you what you need, not what they think you want. This “challenge mentality” also extends to anything you buy internally, from paper to copiers to internet service to insurance.

Challenge people consistently and soon they’ll learn to work it thoroughly the first time because they know if they don’t, you will.


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7. Apply technology

There are many caveats here including, “where it works” and “if it works.” Those of us around for the “dot-com revolution” just over 20 years ago will vividly recall the plethora of latest, greatest technology that promised to change the home building universe forever. We’re still waiting for a lot of it, but change is indeed happening, albeit at about 15% the rate predicted. Blame it on the software or blame it on the users.

Regardless, there is evidence today that the adoption of technology is accelerating. Yes, it’s time to get your plans, specifications, and schedule on a portal, if you haven’t already. And it’s time to get your plans into 3D, as it enables preconstruction value-engineering, and accurate digital takeoffs, the latter of which is 20 years in the making and nearing breakthrough.

It’s not essential for you to be the early adopter of these new technologies, but you had best not be the last one to the party either. Look for any great applications you can implement today, and keep an alert but sober ear tuned to emerging technologies. There are some real surprises coming in the next couple of years.
 

8. Explore off-site manufacturing solutions

As I’ve written about extensively in the past two years, a genuine revolution of the home building industry through application of manufacturing technology has been on the verge of exploding upon the scene ever since Sears began shipping kit homes more than 100 years ago. Three times in my career we experienced a major wave of manufacturing application anticipation, only to see the enthusiasm fade.

Some might cite the recently announced bankruptcy of high-tech building company Katerra as just one more sad story in this long, disappointing history, having blown through $2.4 billion in investor money. Yet there are significant indications this transformation—as I commented on more general technology above—is on. (And this time for real.)

Without accurate measurement, how can you possibly make the best business decisions? 

Of course, the trade shortage and increased material costs help drive this, but many other factors come into play. Again, I confidently predict the next few years will see some major and surprising methodologies appear that can make a genuine difference, providing high quality with more affordability. Stay tuned.

9. Let your market drive your decisions

So many builders find a piece of dirt and, if the price and terms are right, buy it. What to build is an afterthought.

Two unfortunate paths often result. One: It’s not a good fit but they just keep building what they know how to build, regardless. It’s a multi-million dollar crapshoot. Two: They find a product that fits, but it’s one they have no previous expertise building or selling, yet they build it anyway. Again, it’s a high-stakes roll of the dice.

Here’s a better approach: Find a market segment that needs something you are truly good at. Now, go find a piece of land that fits your expertise. You may have to pay more per acre, but your odds of success just increased significantly.
 

10. Be a maven of measurement

This industry has several major failures in measurement that have hindered our progress. These problems account for much of the reason so many of the new technologies mentioned above have failed to catch on.

One is understanding “true total cost.” We see this continually when companies examine on-site versus off-site construction methods. Almost never is the true total cost of each approach thoroughly measured, including indirects, overheads, and cycle time.

A second deficiency is the measurement of variance. Study your last 25 or 30 variances. The dollars shown fall into labor and material classifications, with an occasional trip charge tossed in. Dig deeper, though, and you’ll find most of the money is buried in indirects and overhead, part of the daily operating costs for suppliers, trades, and builders, alike. If you fail to measure those factors, you really don’t understand variance and its profit-robbing impact, thus you’ll never find the source and adjust your process to eliminate the variance.

Finally, let’s cite another popular item in this column over the years: the impact of schedule days. Again, almost no one measures this fully and correctly. The answer requires that you thoroughly quantify and track the absorption of fixed cost and ensure that everyone in your company understands.

Without accurate measurement in just the three categories cited above (yes, there are others), how do you make the best business decisions? 

 

Make Boring Happen

So, that’s my list, and no doubt you will turn up other processes that, if cleaned up, would make the business of home building just a bit less “interesting.” Rarely has the word “boring” had any appeal, but just recently, it sounds pretty good. 

There are limitless opportunities for us to learn from the COVID-19 pandemic, the only question is, will we? I suggest you sit down with your team and create a list of your own ways to make home building less interesting. Or take my list and edit it as needed to fit where you and your market are today, or could be in the future. 

Either way, some focused action on the top items in the list will ease the pain right now and help avoid it no matter what threats show up down the road—even those we can’t imagine. 

For PDFs of the surveys and articles above or a PDF of Scott’s “Process & Profit: Bridging the Margin Gap” column series, email your request with contact information to [email protected]

 

Written By
President

Scott Sedam is president of TrueNorth Development, a consulting and training firm that works with builders to improve products, process, and profits. A senior contributing editor to Pro Builder, Scott writes about all aspects of the home building business and won the 2015 Jesse H. Neal Award, business journalism's most prestigious prize, for his commentary in Pro Builder. Scott invites you to join TrueNorth's Lean Building Group on LinkedIn and welcomes your feedback at [email protected] or 248.446.1275.

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