Home Building: 25 Lessons Learned

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Industry consultant Scott Sedam shares what he has learned over the years from working with more than 200 builders.

September 15, 2014

With the onset of considerable gray hair and age lines, it’s not unusual for young people at conferences or during builder visits to seek me out for advice. They expect a sage possessed of wisdom they don’t yet have, and at times they cling to my every word—the price of being introduced as a “noted authority.” That’s a bit scary because most days I don’t feel so much older than them. There are plenty of reminders, though, such as the blank looks I get when I make a reference to Vietnam, Sputnik, or the green-and-gold AMC Gremlin my Dad brought home in ‘67. Just this morning I heard a John Dean interview about Watergate, the single biggest political scandal in U.S. history—the one that took down a sitting president. Hardly anyone under 40 knows about it or cares. Yes, I have a lot of home building experience, and my many years in manufacturing before then contributed greatly to my understanding, but how much have I learned? Enough to earn the official sage merit badge for my Consultant Scout’s uniform? Larry Wilson, one of the great trainers of the ‘70s and ‘80s, always counseled that knowledge comes not from our experience, but what we learn from that experience. Thus, Larry emphasized, the first challenge is to learn—or how to learn—from our experience.

Semantics? Hardly. Larry was right. Take two directors or VPs of construction, purchasing, sales, or any other home building discipline. They have each logged 20 years of experience. One has learned so much that you feel humbled in his or her presence. The other, well, you wonder how they ever made it this far. They have the same years of experience, but one learns an incredible amount, far more than most, while the other totally missed it and still stumbles through the workday making one bad decision after another. I have been blessed to know a few of the former—guys like Doug Campbell, Mike Rhoads, and Gary Grant, among many others—who gave me the opportunity to learn from their experience and, thus, save many of my colleagues from the serious damage I otherwise might have caused. 
 
The late great Dr. W. Edwards Deming, a quality guru the likes of whom the world has never seen before or since, has been deceased more than 20 years now; but hardly a day goes by when something he said does not come to mind. The venerable Doc had a lot to say about learning, but my favorite went like this: “Two students. One memorizes that Madison is the capital of Wisconsin. The other discovers why the capital of Wisconsin is Madison.” Deming would just let it sink in for a full minute or more, saying nothing, quietly demanding that his audience of several hundred think about it, contemplate it, learn from it. Then he would say in a plaintive voice, “That is all the difference ... all the difference in the world.” 
 
So have I truly learned from my experience? I began writing down my lessons learned for the younger members of the building industry, the things I often proclaim in this column, in presentations, and in my work with builders in the field:
 
1. Home builders don’t build a home, they manage a process. They plan, prepare, finance, coordinate, inspect, et al, but not build. Never forget that you are wholly dependent on those who do what you cannot or will not do. For every paid member of a builder team, there are 35 or 40 others going about the daily work of designing, building, and selling your houses. Handle them with care and treat them always with dignity and respect. 
 
2. Figure out a combination of what you are good at, what will sell, and what you enjoy building. Do that better than anyone else and you’ll prosper. Quit chasing deals. Learn to make money on the house itself and treat land profit as a nice bonus, when it comes.
 
 
3. The best builders are the best schedulers, and the best schedulers are the best builders. Period. Working with more than 200 builders in five countries, I have never seen an exception. Any size, any product type, any location. 
 
4. Cycle time is the greatest harbinger of home building profit and simultaneously the least understood. I first learned this from Bill Pulte in 1989 and am continually amazed at how many investors—banks, venture capital, and private equity funds included—have little understanding of this fact. Profit goes up as you absorb fixed costs with more units in the same time frame. Your investment turns more frequently, and the money flows in faster. Win-win-win.
 
5. Comparing financial ratios builder-to-builder is risky and more often than not misleading. I can drive down your house cost as a percentage of sales .... pay more for land. Silly? I see managers at the highest levels make these mistakes all the time.
 
6. A minimum of $50K of the median $250K house price is avoidable waste in product (including land) and process. The 20 percent holds for a normal curve of homes around that price, skewed higher at higher price points and skewed lower, but only slightly, at entry-level price points. How much of that $50K per house have you recovered? How do you know? It is waiting for you.
 
 
7. The data from 150 Lean implementations tell us that at least 50 percent of product and process waste is designed into building plans and company systems. Most architects know little about cost—they are artists, not estimators. For engineers, more is better and less risk. Every software package that computes EWP, truss, or framing overestimates by at least 10 percent. The calculations go largely unchallenged, and you are paying the bill.
 
8. For every dollar you uncover in product, you will find $2 in process if you learn how to find it, understand it, and measure it. Product is easy. You can see it, touch it, count it. Process is harder to grasp, tougher to measure, much more costly, and it’s mostly buried; but you cannot afford not to go after it. 
 
9. Every dime you think you save jamming a new project out early costs you a dollar over the life of a project. Funny thing, a project that is jammed out three months early because of a perceived market need or financial demand, never finishes three months early. The mistakes and rework that result from the details not being complete eat up any front-end margin gain many times over. 
 
 
10. Every dime you think you save on float by paying suppliers and trades late, costs you a dollar on supplier trade goodwill, quality, and schedule. The very best builders are always among the quickest to pay. They get the best crews and the most attention from both suppliers and trades, which means fewer mistakes, errors, and rework, plus higher profit, not to mention higher customer satisfaction. In these days of increasing trade shortages, paying quickly has become table stakes.
 
11. Direct from Dr. Deming: “Some of the most important numbers for management are unknown and unknowable.” Just because you cannot definitively measure it does not mean you can ignore it. What is the cost of one unhappy customer? You cannot definitively measure that, but you damn well better care or before long there’ll be consequences you can measure.
 
12. Virtually every builder can eliminate 50 percent of site waste in one year by merely paying attention to it. Simply switching to low-side dumpsters or going to pens gets half of that. How often do you dumpster-dive? How do they know you care? The emerging trend is to pack it in, pack it out. Ten years from now dumpsters will be rare; the costs are too great on all fronts. 
 
13. The only thing that buying on low bid price alone guarantees is that you will never operate by lowest total cost; and in the value equation, lowest total cost is all that matters. There are at least 10 factors to consider in total cost when evaluating a supplier or trade. Find me just one builder who has not been burnt multiple times by buying on lowest bid price. 
 
14. The goal is not to be the low cost operator—it is to be the highest value builder. That means in your chosen product and price range, you provide the very best product for the money. Figure that out and you win in any market, provided you learn how to sell that value. 
 
 
15. There are two things that all purchasing managers need for new projects and never get: the complete plans and specifications required for bid packages and signed contracts with scopes, plus the time to get it all done prior to model start. The costs and consequences of this failure are enormous, and the obstacle is not time. The obstacle is timely management and decision-making on product, options, selections, and pricing. The decisions all get made eventually, so why not make them now?
 
16. The silo mentality kills both culture and process. Each department acting independently to maximize their performance always results in sub-optimization and thus loss for the organization as a whole. When you see it, kill it. 
 
17. One of the biggest missing links in builder profit is sales fulfillment—everything critical that happens besides what salespeople get paid for, which is closing the deal. The mistakes, errors, and miscommunication in options and selections are incredibly costly. Actively managing buyers to agreed decision dates for every point in the process is essential. How can some salespeople do it while most cannot?
 
18. You cannot solve your schedule, quality, or trade problems on the backs of your field superintendents. Try this: A+B+C+D+E = 62, a failing grade. Now, solve for C. They are a key part of a total system, but only one element. If you replaced them all, in six months would anything change?
 
19. Worksite cleanliness is a highly reliable predictor of building efficiency and thus profit. I walk houses nearly every week and often at more than one builder in a week. Clean sites and clean houses during construction indicate a discipline that translates into profit.
 
 
20. The best builders get not only the best trades but also the best crews—and that can make all the difference. I ask everywhere I go, and not more than one in 50 builders negotiates for the best crews by name, but caution: You have to earn the right to ask. 
 
21. Everything rolls downhill. Two groups that know all about your problems are the last stop on that roll, house cleaners and your own warranty people. Ask them to be brutally honest with you and really listen. 
 
22. Obstacles raised by government regulators, community entities, zoning boards, and developers can create a great competitive advantage if you are the builder that determines how to overcome them. This is a paradigm shift most builders cannot make, and that is your opportunity. 
 
23. In the absence of communication, people make up their own. It is never what you want it to be. Builders tend to greatly underestimate the need for communication and pay the price. One president I knew continually proclaimed, “On a need to know basis!” He just severely miscalculated who needed to know.
 
 
24. Culture is critical. Yet culture requires caring and caring is not macho. Builders tend toward macho. This stance is aggravated because culture cannot be measured by conventional means. Most senior managers avoid dealing with culture, yet they deal with the consequences every day. 
 
25. Ultimately, the key variable in every company is the will of senior management—the will to do whatever it takes to create a productive culture, sustain it, and lead it into the future. The bad news is that the success and failure of all company endeavors traces back to this single factor. The good news is senior management has complete control to fix any problem. 
 
I would like to say, “We hold these truths to be self-evident,” but for me they were a long time coming. The list is primarily a compilation of what I have picked up from others, and it is one thing to declare them, quite another to put them into action. Although my career is spent trying to help others implement improvements around the ideas on the list, I am acutely aware that is primarily your job after I fly away. I have had both the good fortune and the tremendous burden of writing an article for publication nearly every month for the past 17 years. Staying fresh and current is a considerable task. Most everyone else writing that long ago has given it up or publishes only occasionally. When asked how I keep it going, I go right back to Larry Wilson and Dr. Deming. First, I try to make sure I learn from my experience and the experience of others and translate that into the daily language of the reader. Next, I endeavor to not merely tell you that Madison is the capital of Wisconsin or that scheduling is the key to field operations, but rather bring you on a journey with me to understand what it takes to schedule well and the consequences if you fail. 
 
In this age of listicles—the type of article based on 10 or 20 things you must do to solve a problem or succeed—bringing deep understanding is a real challenge. I parted company long ago with an editor who believed a list presented in 500 words or less was all you, the reader, cared about. “Read the will!” I am fortunate my current editor and publisher both believe the readers of this magazine want to truly understand in depth. Still, the listicle always scores high with readers, although one like this with 25 items pushes the model considerably. I well recall Dr. Deming chiding, “I cannot simply tell you to do these 10 things and all will be well. It did not work for Moses. We’ve been trying to get that one right for thousands of years, without much success!” After the laughter of the audience died down, he would then gaze across the group and demand in a booming voice, “You cannot copy. You must understand WHY!”
 
On your journey to understanding why, please share my list with your team and send me your additions, corrections, and edits. I would love to print your lessons learned in a future article. PB
 
Scott Sedam is president of TrueNorth Development, an internationally known consulting and training firm based in the Detroit area. Scott welcomes your comments, questions, and feedback at scott@truen.com. Find Scott’s LeanBuilding Blog on www.ProBuilder.com or www.TrueN.com, where you will find archives of past articles. You can also join “The LeanBuilding Group” on www.linkedin.com.
 

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