As Albert Einstein said, “The definition of insanity is doing the same thing over and over and expecting different results.” So it makes sense that in order to see improvement and better results, we damn well better do some things differently. Obviously, you say. Yet, evidence shows it’s far harder than it sounds.
Tradition, habit, and inertia are powerful forces in home building. Even when a few brave souls in an organization are ready to embrace change, they often face monumental obstacles. People simply can’t fathom another way of doing things, expressed as, “That’s just home building.” Recently, this phenomenon has been on my mind a lot.
We’ve run more than 200 Lean process implementations where two of our TrueNorth Associates spend a full week with a select builder team while 23 suppliers and trades come through in turn, presenting improvement suggestions in a highly structured format. It’s remarkable how suppliers and trades open up and share their ideas—averaging about 150 per event—identifying close to $15K per house in product and process waste.
It’s all about finding and eradicating waste wherever it occurs, from the simplest phone call for clarification of a color selection to gross overengineering on an entire series of homes. The builder team is always blown away by what the suppliers and trades bring to the table, and many describe it as the most intense week of learning in their entire careers.
20 Repeat Offenders That Rob Margin From Home Builders
Recently I served as a team member for one of these events in a strong division of a good home builder. The builder team was excellent, highly motivated, and the suppliers and trades came through in spades. Things were going well. But toward the end of day three of the supplier/trade interviews, I felt my frustration rising. What was wrong? I began to make a “special list” on a notepad, and each time I got a break in the action from entering supplier/trade ideas into the tracking spreadsheet, I noted another point. Later, I wrote this heading on the list: “Sources of Waste We See Over and Over Again.” I thought back over the 220 spreadsheets we’ve generated in the past 11 years doing Lean implementation and the things we repeatedly see. These are not the one-offs; these are the things we see everywhere, all across the U.S., Canada, and several other countries. Of course the severity and frequency varies by builder, but the majority of these sources of waste raise their heads in every single implementation.
1. Excess plans and elevations
There is no magic number, and markets vary, but the error of too many plans and elevations is at least 10 times the problem of not having enough. Keeping plans current and continually improving them is just too hard when you offer more than you need and maintain those you never sell. It puts an enormous burden on suppliers, trades, and your own staff to stay knowledgeable on all of them.
2. Too many options, selections, colors
If a marketing professor was looking for the perfect demonstration of “feature creep,” I’d direct him to new homes. We recently saw $250K homes with six trim options! Would the builder sell one less home if just three choices, or even two, were offered? The default option is to challenge every new add-on or increase in choices in existing options. Does it provide value to the customer? As Antoine de Saint-Exupéry famously said, “Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.”
3. Design without regard to cost
I started writing about this more than 20 years ago and little has changed. Let’s steepen the roof pitch. Let’s add corbels. Heck, why not have double corbels—and quoins? Now embed fieldstone in the quoins! Add shutters. Add brickwork requiring huge steel lintels. Add a full bay window with four extra corners in the foundation instead of keeping it straight and using cantilevers. Maybe some transom windows, standard? And big, fat 8-inch fascia trim. How about a fake dormer or two? Go for it! Or not. You can create great, even wonderful, plans and elevations without going full-on bling city. Find an architect who gets it.
We walk houses continually throughout the year with many truly good builders that strive to do the right thing. Yet few will challenge their engineers. If it’s on the plan, well, that’s the way it gets built. It’s a rare house we walk, though, where we can’t find at least $1,000 in engineering waste; $1,500 to $2,000 or even more is a regular occurrence. If you don’t challenge the engineers and demand to see the calculations, they’ll keep doing what they’ve always done, and the waste will continue.
5. Inadequate plans with insufficient detail
Is it smart to let your framer decide the size and location of headers and supports, and figure the load transfers? Should you allow mechanical trades to determine their layouts on the job? Will you accept your lumber company’s takeoffs for wood, TJI joists, lam beams, and trusses? Better to work these out ahead of time and get them on the plans. If any supplier or trade has to call you for details, your plans are coming up short. Even worse is when your plans are sketchy, they don’t call you, and they just make it up on their own. That’s a prescription for waste.
6. Lack of site-specific plans
Any builder that thinks they save one cent by not providing site-specific plans simply doesn’t know how to count. The money you think you saved is far outweighed by confusion, errors, and rework. And if you ever see anyone holding up a plan to the light because they are building from a mirror image … let’s not even go there.
7. Failure to involve suppliers and trades in plan review
I’ve conducted innumerable sessions where builders conduct sit-down plan reviews and it always results in significant improvement that increases value and reduces cost for all. Yet it’s a rare builder that regularly does this. These reviews should be conducted before the first model is built, at the mechanicals stage of the first model, then every year or two while the plan is still in production. To do anything less is just ripping up money.
8. Inadequate bid package
If you fail to provide complete and final detailed plans, specifications, options, and selections in a bid package and you expect suppliers and trades to give you their tightest bid, you’re kidding yourself. Or don’t you care about cost? The better and tighter the bid package, the better and tighter the bid.
9. Inadequate start package and purchase orders (POs)
Your start package should be like gold, with fully detailed POs. As I’ve described in the past, when the late Bill Pulte ran things at Pulte Homes, he called the start package “The Bible.” It had to be that good, that dependable—sacrosanct. I’ve encountered only a few exceptional builders that do everything possible to get their POs 100 percent right the first time, leaving no guesswork for suppliers and trades—no questions, no emails, no phone calls. Their lives are decidedly different, and quantifiably better, than their competitors, and they are “builder of choice” for their suppliers and trades.
10. VPOs (variance purchase orders) lack detail
Each VPO must come with thorough documentation and references to lot, plan, elevation, option, what’s required, and why. Anything less causes misery on all sides. We constantly hear about this.
11. VPO for specifications in lieu of PO
A normal charge for any standard work, selection, or color is not variance. The use of VPOs to complete options and selections on a home should never happen, yet we see it all the time. It taints the database and causes confusion. Many of you are thinking What? because you can’t imagine doing this. That’s a good thing. For the rest of you, it’s time to fix it.
12. VPOs unapproved
Purchasing or Construction decides not to approve a VPO and no one at the supplier or trade is told or no explanation is given. Our data shows that less than 20 percent of the work suppliers and trades could rightfully submit as VPOs is turned in. And less than half of those, on average, are paid. Do the math. You’re paying for less than 10 percent of what is legitimately out there. So carefully think through the typical purchasing approach to pushing back hard on every VPO. You may save $100 today and pay a far greater price in schedule adherence or warranty response just down the road.
13. VPOs paid late
Whether due to slow approval, multiple approvals required, fear the boss will get mad, or just a habit of pushing VPO payments to the back of the line, paying late on VPOs is the rule, not the exception. Taking 150 to 180 days or more is common, and this wreaks havoc on the supplier or trade’s accounting system. Any VPO request should be approved (or not) within five days of receipt and paid in the normal cycle. Denials must be immediately communicated.
14. Late change orders/not respecting cutoff dates
Mutually negotiate all dates between Sales, Purchasing, and Construction. That done, it’s up to Sales to manage customers to those dates. Eighty percent of the late change orders come from 20 percent of your salespeople. From time to time, there may be a legitimate problem such as an illness, but this will be the rare exception. Ordering required materials late creates multiple problems for suppliers and trades. Even worse, the late change order of something previously specified is always a loss, if you calculate total cost.
15. Concrete specifications conundrum
Hardly a Lean implementation passes without significant discussion and disagreement on how to spec concrete for slabs, walls, footers, and flatwork. The dynamic interplay of options in psi rating, rebar, cables, added fiber, wire mesh, accelerators, retardants, and sealers—just to name some of the common variables—makes concrete a far more complicated recipe than outsiders could ever imagine. Wherever you are, wherever you build, find a good building scientist, sit down with your labor and material providers, and hammer out your complete specifications for concrete.
16. Extra jobsite trips
Wasted, or what otherwise should be unnecessary, trips to a building site are home building’s toxic waste dump. They come up in every Lean implementation and the numbers are staggering. We have data showing an average of more than 50 wasted trips averaging $200 per trip, for a total bill of more than $10K per house. That’s a conservative estimate, and few builders proactively manage the issue. Yet it is huge, and any good supplier or trade takes it into consideration in their bids. As proof, more than 90 percent of trades report they have someone who serves as a “scout,” driving jobsites daily to see if they are really ready. If they didn’t, the problem would no doubt be far worse. But, one way or another, you pay for these trips. TrueNorth’s “Trip Cost Calculator” helps you understand the problem (see below to receive a free copy).
17. Software not solving the problem for builders
I know most of the software companies out there and I find their stuff absolutely compelling. Yet builders continually make the same mistakes, such as trying to automate a bad system, shortcutting on training, not understanding garbage in/garbage out, and failing to constantly update the system. It’s common for us to find builders shocked when 75 percent of their suppliers and trades report that the builder’s cool, new software isn’t doing what it’s supposed to do. It can—if you absolutely resolve not to skip a single step. Take a look in the mirror. Ask your suppliers and trades for their honest input. Now get to work.
18. Impact of cycle time and schedule on home building
Quick ... How many homes can a field superintendent carry? If you answered without first asking, “What’s the cycle time?” then start over because you can’t know. I’ve written extensively about scheduling and cycle time. Schedule creep eats you alive, affecting every part of the business. Conversely—presuming you have the people and systems to handle it—reducing schedule days makes everything better. Schedule days typically cost five to seven times more than builders estimate. Our TrueNorth “Saved-Day Calculator” proves that (see below to obtain a free copy).
19. Design center profit bleed
The assumption that all design centers are profit centers is a bad one. They tend to grow out of control. Do you really need 15 brick choices, five appliance upgrades, and, as we heard above, six trim options? Time and again we see breakdowns in the translation of customer choices to the field that originate in the design center. Get in the habit of doing true “total cost analysis” for everything you offer and either fix your prices or eliminate unprofitable options.
20. Communication, communication, communication
This is a constant, ongoing refrain from the more than 4,500 suppliers and trades we’ve heard from during Lean implementation. For so many of the margin-robbing issues builders face, including most of those above, inadequate or poorly designed communication is at the heart of each one. It requires genuine awareness and daily vigilance to stay on top of your communication needs.
For Things to Improve, It's Time for New Ways for Home Builders
Everyone wants improved results—in quality, customer satisfaction, and profit. Yet home builders continually employ the same methods and processes that produce the same results, then seem surprised that nothing has changed. That’s what Einstein called insanity.
I recently facilitated a multiday meeting with the owners of some large suppliers and trades and the corporate and division presidents of a builder that’s considered one of the best by its peers. The builder asked for candid feedback, and the supplier and trade owners gave it. At one poignant moment, the president of a large, successful trade said this to the builder’s staff: “We’ve designed our systems to accommodate your inefficiencies.” That was a genuine sit-back-in-your-seat moment. After prolonged silence, the president of the home building company thanked the supplier for setting the builder straight.
All 20 of the issues highlighted above require that suppliers and trades accommodate builder inefficiencies. Could that also be true of your firm? I think you know the answer. It’s time to quit doing the same things the way you’ve always done them and expecting different results. That’s just insane.
For free copies of the “Trip Cost Calculator” and “Saved-Day Calculator” Excel templates and a PDF of “Bridging the Margin Gap,” a collection of columns on practical ways to improve profit, email your request to [email protected].
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