More money bleeds away during the startup process than anywhere else in home building. Certainly more than during the construction process itself.
Contact Scott Sedam
via e-mail at scott@TRUEN.com
I have stumbled across few ways better than this to ruin a builder’s day. “Do you have a new community startup process?” That’s the setup. After the usual affirmative answer, I drop the bomb: “Great, let me see it!” I expect a detailed flowchart of the complete process keyed to checklists at every stage with complete documentation, as required, at each step. If that isn’t scary enough, it must be so clear and logical that any new employee with some intelligence and experience can make sense of it unaided.
That’s a real litmus test, and most builders do it poorly.
Some of you are with me now because you know that your startup process is 90% ad hoc. Sure, you get it done. Lots are readied, plans drawn, people assigned, options specified, collateral materials printed, trades selected, contracts let, models built, and then you start selling and building for keeps. You also start dealing with all of the brain damage that results from such an unorganized process.
Yet many of you remain in denial. But does the following scenario sound familiar? The project closed out, and you’re doing the post-mortem meeting. You made money but not what you expected. House cost variance was $500 over budget. Maybe your cost assumptions were wrong going in or lumber prices shot up during the project. Maybe drywall went on allocation or you had to add wing walls to support stoops that kept cracking. Or perhaps it was just a lot of little mistakes by new, untrained people. Whatever, you pledge to find and kill the $500, leaving no stone unturned in this cost-control quest.
Good for you. You are right and smart to take that approach and prove to yourself and your people that such variances were justified — or not.
During that same meeting, someone mentions that finished lot costs were $5,000 higher than original projections, way back when you got that great “price and terms” deal on 100 acres of prime farmland. Maybe you had to move bad dirt, or perhaps the city issued new draining requirements. If you’re like most builders, though, you shake your head, mutter, “Damn, land sure is getting expensive around here,” and issue more directives about controlling house cost.
I have presented this scenario over and over at workshops, conferences and Builder 20 meetings and in on-site meetings with builders. What I usually get are roomfuls of nodding heads and ironic smiles. So a lot of you are guilty of this, I know.
Simply put, more money bleeds away during the startup process than anywhere else in home building, certainly more than during the construction process itself. Yet builders spend incredible amounts of time, energy and money working the dollars out of house costs. They spend comparatively little on a similar effort applied to startup.
There is a key distinction about how to define “the startup process.” By my definition, you must include everything from looking for a piece of dirt to the moment you open for sale after the models are done. (You do wait until the models are done before opening for sale, don’t you?) If you don’t look at the entire process as a system, you’re guaranteed to miss something, probably a lot of things.
I recently met a builder who claimed that none of this applied to him because he buys only finished lots. All that means is that he pays a “dumb tax” to the developer who also fails to understand the whole process. A huge amount of startup loss occurs outside of the lot itself and applies to those who buy lots as well as those who develop their own.
For a vivid demonstration, take the Startup Analysis Quick Test at right. Better yet, have five or 10 members of your team take it and average your scores. Here’s how to score your results:
0-5 points: Move on to more critical issues.
6-10: Take preventive steps before serious problems develop.
11-15: Quick, targeted action is needed to stop the bleeding.
16-20: Major intervention is required immediately. This is a survival issue.
Every item in the Quick Test can be a source of loss, but some of the worst losses come when a project suddenly gets pulled forward or simply never had the time to pull together in the first place.
Each analysis I have helped a builder perform shows a minimum of 5-to-1 negative return and often more than 10-to-1 over the project’s life. This isn’t hard to prove, yet builders remain reluctant to mount a significant attack on the problem. Key reasons include the following:
- Neither development nor startup costs are measured or budgeted as tightly as production, resulting in the absence of good metrics to track variances.
- Builders and developers don’t know how to measure the true total system cost of a poor startup, including indirect costs and “second-order effects.”
- Development and startup are pushed so fast that no time is taken for post-mortems and thorough analysis — it’s on to the next project.
- There’s an almost universal buy-in to the idea that quick startup brings financial rewards outweighing any sins and their resultant costs (rarely true).
- Until confronted with the brutal facts of poor startup, builders rarely believe they have a significant problem in this area.
- Of the few builders who acknowledge a problem, even fewer have the skills to correct it.
- A certain enigmatic, “hard-to-grasp and -understand” aura, nurtured and cherished by its practitioners, surrounds the development and startup arena.
- Builders fear this answer: “Add time to the startup process.”
Your goal must be to create a well-designed, locally relevant, sustainable community startup process that results in on-time, on-budget openings, with no missing elements that come back to haunt you and cost you months or years later. (For a dramatic depiction of this, see “A Day in the Life: Ted’s Story,” August 2000 PB.)
Such a process, properly defined, remains so rare that implementing one creates a significant advantage few competitors can match. Benefits accrue financially, as Quick Test questions 6, 7 and even 8 figure cost savings during a project’s life. You also can substantially reduce cycle time in the startup process itself. Just as vital, the reduction of organizational “wear and tear” on people is nearly incalculable.
So go back to last year or the year before. Go back to the beginning and determine what lousy startups really cost you. Create an intelligent process, with the participation of all involved. Get disciplined and stick with it. You’ll find that 2004 will go a lot smoother than you expected.