Builders respond to Scott Sedam's model detailing all of the critical factors that determine a company's ultimate profitability.
In Part I of the “Overdue Diligence” series (see Professional Builder, December 2013, p. 44), we described the current builder world of impatient, short-sighted, risk-averse investment money. We reviewed a 10-point model, repeated here (now expanded to 12 steps), that ensures builders and developers will cover all the critical factors that determine ultimate profitability. We sent the article to a group of builders and I think you will agree that their responses are enlightening, educational, and sometimes provocative. The next step is to combine the Part I and II articles and send them to a group of developers and financiers. Their responses should be very interesting and complete the picture of overdue diligence, and further illustrate what we can do to remedy the problems that result from it.
John Johnson, President & CEO, David Weekley Homes, Houston
Jeff Czar, President, Armadillo Homes, San Antonio, Texas
Alan Laing, President & CEO, Orleans Homes, Philadelphia
Brian Johnston, COO, Mattamy Homes, Oakville, Ont.
Rich Rodriguez, Senior Vice President, Construction Operations, Waypoint Homes, Oakland, Calif.
Dave Erickson, President, Grayhawk Homes, Columbus, Ga.
Chris Cates, President, Caviness & Cates Communities, Fayetteville, N.C.
Due Diligence Dozen: A Total Cost Valuation1. Legal Clear title is a basic requirement.2. Entitlements For developed land or lots, all in place and current.3. Physical Assets Includes topography, soils quality, visual appeal, lot-fit analysis, drainage, site contamination, environmental impacts on land, animals and noise, historical/archeological concerns, and even crime rates, among others.4. Market & Demographics Knowing the growth patterns, the target markets, and how well they are served translates to opportunity.5. Warranty Tail For existing community assets, a total cost analysis of all warranty obligations.6. Management & Staff Is the management team up to the task of building the right product, at the right cost, in the right place, while maintaining quality and controlling cost?7. Trade Base No single factor drives profitability more today than securing strong trades at a competitive price for the long haul.8. Supply Chain Price increases are rattling all up and down the supply chain. This is a significant wild card today and must be actively managed.9. Systems & Process Strong systems and process throughout the operation that both help manage the details and provide continual feedback are essential to profitability.10. Cycle Time The best builders are the best schedulers, and the best schedulers are the best builders. Period. Responsible due diligence is impossible without understanding a builder’s cycle time.11. Customer Franchise The strength and reputation of a builder with their potential customer base makes a significant difference in velocity, pricing, and ultimately profit.12. Community Franchise The broader relationships with zoning boards, planning commissions, inspection departments, and even other builders can make or break a project.