Good Margins Start With Knowing Costs of Building
Builders don’t have to tear their businesses apart to improve their margins, according to FMI Corporation and CatCon Systems. And they probably don’t want to follow in the footsteps of many of the nation’s top 20 builders who have embarked in recent years on well-publicized centralization efforts to do everything from revolutionizing the home building supply chain to delivering 20% reductions in cost and cycle time, only to end in failure.
A management consultant and investment banking company for the construction industry, with offices in Raleigh, N.C.; Tampa, Fla.; and Denver, FMI Corporation is a member of the National Council of the Housing Industry — The Supplier 100 of NAHB.
Many home builders have sought to preserve their margins by mandating price concessions from their trade partners, channel partners and product manufacturers, says FMI. While this may work in the short term, it is a hard strategy to manage unless the builder has a detailed understanding of each key trade package.
Margin management programs should more appropriately start by focusing on cost reduction, not price reduction, according to FMI.
The first step, it says, is to take the most expensive trade packages — framing, drywall, concrete, roofing, etc. — and perform detailed takeoffs of the materials needed to complete a significant volume of active models in their division. “A critical step in this process is to field-verify the material take-off by walking units and counting material for each model being evaluated,” says FMI.
“Once armed with both the take-off and field-verified counts, the builder has the knowledge to control costs, not to just manage bids. The challenge then becomes not to use this knowledge like a new-found hammer to pummel respective trade partners or suppliers with whom productive relationships are essential. Instead, use the verified data as a catalyst to discuss the importance of efficient, material conservation and cost management in today’s residential environment.”
In the last several months, FMI says, it has found that volume home builders across multiple markets are able to realize an average material savings of more than $2,000 per home just by evaluating lumber, drywall and siding. Additional savings opportunities have been identified in roofing, masonry and interior trim categories.
“Whether through an outside or internal resource, builders who understand the true cost to build and communicate those costs in a fair manner will enjoy substantial savings.”
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