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Builders Advised to Pare Costs as Sales Slow
Builders who are finding the current downturn in the housing market tougher than they had anticipated are being advised to take steps to reduce their costs and minimize the damage of slower sales to their business.
“As the home building industry settles into a year of more typical gains, historically speaking, managing and cutting costs are likely to be high on home builders’ minds,” says Steve Hays, a partner-in-charge of the Home Builders Services Group of RubinBrown LLP CPAs, in St. Louis.
Advice from Hays and other experts in managing home building businesses is included in NAHB’s Back to Basics Toolkit. Introduced last month, the online kit is geared to providing members of NAHB with materials that will help them respond to the challenges of the current slowdown in housing activity that is affecting the majority of the markets in the country.
Hays urges builders who are seeing slower sales to take steps to:
- Control fixed general and administrative expenses
- Develop and monitor budgets for other fixed expenses and capital items closely
- Control and manage the number of specs and display homes that are being carried
- Monitor closely the relationship between staffing and sales volume
- Manage and reduce direct construction costs
Salaries, payroll taxes and fringe benefits, rent, office supplies, training, insurance, travel and entertainment, and professional fees tend to remain the same regardless of the number of homes a builder is closing, Hays says, and “they can eat up an increasing percentage of your profits. They should be monitored and, if possible, reduced.”
Cross-Training Employees
For example, builders who have seen their sales volume decline by half might want to consider eliminating one of their two construction superintendent positions. “You should be cross-training your employees routinely to better absorb personnel losses,” says Hays, “and, as always, think twice before you hire anyone new.” Also, many business functions, such as payroll, can be outsourced.
“The number of employees by job function should be monitored based on your projected sales volume,” says Hays. “The volume must be able to support the number of superintendents, estimators, general laborers, and general and administrative staff that you employ. While your company may have been able to support two superintendents when you were closing on 80 homes, when your volume decreases to 40 to 50 units, you must take a hard look at those two positions.”
Reducing Construction Waste
Another cost-cutting measure to consider, according to Charles Shinn, Jr., a veteran home building industry consultant, is paying attention to where your materials are actually going. Unbelievable amounts can end up in the dumpster if you don’t handle estimating, purchasing and delivery efficiently, he says. Builders should ask their employees and contractors where materials are going so they can help reduce the waste, and they should return unused materials to their vendors for credit and use just-in-time delivery to discourage materials theft.
Also, builders should take a look at overhead, asking such basic questions as how many telephone lines they really need or investigating the possibility of closing the office and operating out of one of their model homes.
To keep a lid on homes, Bosgraaf Homes of Michigan pays on purchase orders, automatically re-bids when notified of a price increase (usually the proposed increase is retracted) and belongs to a builders buying group.
Builders can also protect themselves from unexpected increases in materials costs by including NAHB’s escalation clause (a members-only link) in their sales contracts.
Also, builders can look to manufacturer rebates and Uncle Sam as potential sources of cash and credits. Thanks to NAHB’s advocacy efforts at the federal level, home builders can benefit from a new Section 199 tax deduction for domestic production that is part of the American Jobs Creation Act of 2004. In addition, new homes may qualify for energy efficiency tax credits.
Focus on Customer Service
Now is also a good time for builders to scrutinize what they are building, where and for whom.
“In a down market, there is nothing more important than customer service or customer focus,” says Bosgraaf. “If you run things well, there’s just as much opportunity in a slow market as there is in a stable or growing market,” he says.
Bosgraaf found out that he could boost profits with new designs. He vastly improved the elevations of one of his 2,200 square-foot homes for about $3 a square foot just by pulling back garages, adding roof lines and making other aesthetic changes. These alterations allowed him to raise the home’s base price without sacrificing market share. It cost $25,000 to develop the new plans, but he says “what’s even more expensive is a plan that doesn’t sell.”
Also, the company decided to go against a trend of cutting back or abandoning amenities as the market slowed. Adding streetscapes, clubhouses, pools, even a “cruise director” to orchestrate neighborhood activities helped build a sense of community and allowed Bosgraaf to compete successfully in a market dominated by resales in established neighborhoods.
Upselling options can also increase revenue. “Believe it or not, we’ve heard from home buyers who were not offered upgrades,” he says. “Of those who were, one said, ‘I never would have thought to go with cherry cabinets until the builder showed me the difference between cherry-stained and actual cherry. Once I saw the actual cherry, I was sold.”
As the market slows, it is also important to adequately plan and manage the number of spec houses and models included in the construction inventory, says Hays. “In other words, the anticipated closing volume should have a strong relationship to the specs and models needed to sustain such activity,” he says. “Too much sitting inventory will have a substantial negative effect on a home builder’s financing and model home costs.”
Hays says that now is also a good time to review direct construction costs. “The impact of even a small reduction in each home’s cost can add significantly to your bottom line,” he says. “In particular, value engineering can help determine what features in the base model can be replaced by less costly items that will not detract from the consumer appeal of the product.”
Subcontractors and suppliers are the best sources of ideas for reducing costs and identifying possible design alternatives, says Hays. “Ideas that can be duplicated across your homes will multiply your savings and, again, add profits to your bottom line.”
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