20 Ways to Cut Construction Costs and Improve Profitability
Discounting home prices and reducing profit margins are not the way to weather the current downturn in the housing market, according to Charles Shinn, Jr., president of the Lee Evans Group and Shinn Consulting based in Littleton, Colo.
Instead, what builders should do is control and cut their construction costs, Shinn said at the recent International Builders’ Show in Orlando, Fla. Cutting these costs would lead to improved profitability — even during the downturn — and enable builders to put their companies in the position to fully take advantage of the market’s eventual upswing when it comes.
“Direct construction costs are the only variable builders have to work with,” said Shinn. Most other costs, he noted, are dictated by factors outside a builder’s control. The market sets the sales price; land costs and operating costs are fixed; and “builders should not negotiate their targeted profits,” he said.
“You have the most control over direct construction costs, and you need to attack them on all fronts.”
Shinn offered builders at least 20 different — and relatively simple — ways to cut constructions cost.
They ranged from systematic changes, such as improving all working drawings so they include the details and have the accuracy and uniformity to improve the building process, to simple procedures such as having the plumber cover installed tubs with a protective platform to keep trades working in the bathroom after the plumber is finished from damaging the tub or filling it with trash. “Just covering the tub could save you $400 a home,” Shinn said.
Other simple changes that Shinn offered included re-engineering and reducing the HVAC system so it is smaller, but no less efficient; changing to a 40-gallon water heater; standardizing window sizes for all plans; lowering ceiling heights from 10 feet to an accepted 9 feet; eliminating crown molding in coffered ceilings; using half walls, which are less expensive, instead of handrails and pickets where applicable; and more. The cost savings of these types of small changes can add up, Shinn said.
Shinn also offered builders 20 systematic changes to the production process, though often just as simple, that can significantly cut construction costs without reducing their profitability. These include:
- Develop and Target Direct Construction Cost Budgets. Shinn urged builders to develop highly detailed direct construction cost budgets that cover everything from plans and permits to preparation, the rough structure, full enclosure, interior finish, completion and final cleanup. All estimating and bidding should be targeted toward the budgets, he added.
A budget this detailed will help builders pinpoint where construction costs savings can be found, Shinn said. “When you have to reduce costs, use the detailed budget to trade off direct construction cost for direct construction cost, not your profits,” Shinn said.
- Improve Working Drawings. Detailed, uniform and accurate working drawings will eliminate much of the guesswork and additional costs that build up when working drawings are less precise or incomplete, Shinn said. Creating much more accurate working drawings involves developing an accurate scope of work for the architect so he knows just how detailed his working drawings must be.
Shinn also suggest that builders should involve their superintendents and trade contractors in the working drawings process. By having field personnel provide input and direction on what they need to have included in the working drawings, the drawings will have the detail they need to get the job done right the first time, which will save the builder money.
- Design and Specify Homes for Your Customers. “Fall out of love with your homes,” Shinn told the builders. Build homes that your customers want, not homes that you like, he said. To do that, he recommended that builders survey their traffic and buyers to find out what they liked best and what they would like to add to their homes.
He even suggested holding an occasional “Monopoly night” with home owners and prospects — holding a social and giving them play money so they can buy whatever features they want to add to their homes. Even with Monopoly money, he said, they will only buy those features they really want, which gives builders a better idea of what to add to the homes.
- Analyze Standard Specifications. Shinn said many standard items that builders offer can easily be offered as options instead, reducing constructions costs per home. “Lots of things can be made optional,” Shinn said. “This would have an immediate impact on reducing direct construction costs.”
To reduce standard items, he said builders should conduct a thorough analysis of their standard specifications. They should compare and match their competitions’ offerings — by verifying what is truly standard and by determining the quality, grade and details of standard items.
He also said builders should develop a practice of “zero” base specifications — essentially stripping standard specifications to the basics and conducting a cost/benefit analysis of each potential standard offered.
- Don’t Overdo the Amount of Standard Specifications. Coupled with the analysis, Shinn said that an overabundance of standards can actually diminish the value of a home. He cautioned builders to eliminate potential upgrades and limit the amount of standards offered.
- Change the Level of Specification in Your Homes From Floor to Floor. What is standard on one floor does not have to be offered as standard on another. “The private area of a home does not have to have the same level of finish as the public area,” Shinn said. Changing the level of finish per floor will enable builders to cut construction costs.
- Analyze Low Gross Profit Plans. As with specification, Shinn suggested that builders analyze — and either change or eliminate — low gross profit plans.
Builders should determine the high cost areas of low gross profit plans and take actions to reduce those areas.
- Implement a True Purchase Order System. Shinn said operating under a true purchase order system will eliminate or reduce costs that are otherwise added to a job. Under a purchase order system, he said builders should pay only purchase order amounts — and pay them on time; they should release purchase orders for all direct construction costs; and they should never accept invoices.
He said contractors prefer working within a system like this because they know what to expect and what is expected. They, in turn, can be more efficient and cost-effective, which allows the builder to be more efficient and cost-effective.
- Issue Complete Construction Start Packages Prior to Starting the Home. Simply put, Shinn suggested that builders should have everything in place, and that customer should sign off on selections and other variables before production starts.
Organizing production this way, Shinn said, minimizes or eliminates late change orders, and minimizes confusion, delays, mistakes and reworking those mistakes.
- Improve Estimating and Purchasing. Builders should take full control of the estimating and purchasing process and not leave it up to the trades or vendors, Shinn said. “This is your job to do,” he said.
Shinn recommended that builders conduct in-house quantity take-offs and that they document all agreements and scopes of work with their trade contractors and vendors. The jobs go a lot smoother when everyone knows what is expected of them, he said. He also said that builders seeking good examples of scopes of work should contact the Greater Atlanta Home Builders Association. “They have the best set of scopes of work on the market,” he said.
Shinn also cautioned builders to bid on unit prices rather than lump sums, and to lock in those bid prices for a set period of time. Controlling prices this way eliminates the need for builders to bid every job and helps them to better control their construction costs.
- Value Engineer Plans. House plans should be analyzed for construction efficiencies and then new material- and labor-saving procedures should be put in place to save construction costs.
Value engineering includes such implementing processes as reducing the size of the HVAC and hot water heater, where applicable, reducing room sizes, standardizing windows and using pedestal sinks instead of cabinet vanities in powder rooms.
- Work With Trades to Eliminate Inefficiencies. Shinn urged builders to work closely with their trades to make work on the job more efficient for the builder and for the trades. That way, he said, both can accomplish more in less time — at less cost and more profitably.
Shinn said builders should establish a trade council and work to become the builder of choice among their trade contractors.
“Treat trades like they are part of the company,” he said. “Work to eliminate dry runs and provide them with reliable schedules so they can plan accordingly.”
Have well managed, clean and organized job sites, and have the job sites ready for the trades when they are scheduled to work. Trade contractors prefer to work in a clean, efficient working environment, he said.
- Conduct ‘As-Built Audits.’ Superintendents and estimators should verify job estimates by auditing material usage on the job. Such auditing will enable builders to pinpoint and correct inefficient construction techniques.
- Gain Control of Construction Cost Variances. To gain control of and eliminate variances and the added cost they bring to a job, Shinn said builders should attack the problem on two fronts. They should analyze all variances to determine their causes, and where possible, correct the causes and eliminate those variances.
In those situations where variances are inevitable, he said builders should implement a variance purchase order system to help control costs.
- Don’t Keep Sacred Cow Contractors. “Sacred cow contractors cost a lot,” Shinn said. “You shouldn’t be wed too closely to your trade contractors.”
Instead, he suggested that builders competitively bid their jobs with a minimum of three bids — “always” — and that builders should be willing to release the job to new contractors. “This will keep all your contractors honest,” he said.
- Question the Engineers. Question the engineers on everything — structural design, truss design, floor system design and HVAC system design. “If you’re not questioning them on everything, you are probably overbuilding,” Shinn said.
- Improve Negotiating Techniques. Shinn said builders should do their homework, plan their negotiations ahead of time, negotiate intelligently — and negotiate everything.
Builders, Shinn said, should negotiate price, payment and volume discounts, upgraded specifications, model home discounts and everything involved in production, including warranty coverage, service and supplies and even a supply guarantee.
Builders should also negotiate everything involved with sales — design center displays and their maintenance, sales training for the sales staff, collateral product brochures and more.
“If you change windows on your homes, you should negotiate with the manufacturer to include new windows for your models,” Shinn said. If you don’t replace the model home windows, he said, prospective home buyers may think the windows they get in their homes are inferior to the models’ windows.
- Break Up Turnkey Trades. Shinn said turnkey trades, those that provide and install the material in one package, can cost builders an extra 15% to 25%.
To save money, he suggested that builders buy their material and labor separately. And to increase efficiency, they can then re-bundle the labor and material into a turnkey installation that they negotiated.
- Improve Material and Inventory Control. Countertops, entry doors, showers, tubs and other material invariably get damaged on the job site. To counter this, Shinn suggested that builders inventory all material deliveries and that they have their trade contractors protect all material when delivered and installed.
The trade contractors who install the entry doors, for instance, should put protection on the doors so that other contractors and vendors don’t damage them when delivering or installing their job material.
Another way to control inventory, Shinn pointed out, is to monitor and reduce the number of dumpsters on the job. This will enable builders to reduce waste and excess material, plus enable builders to save money by just eliminating one dumpster per job site.
Shinn also stressed that builders can return any unused material for credit.
- Standardize Construction Processes. Standardizing construction processes will go a long way toward achieving more efficient and effective operations on the job site. Key to this, he said, is “to be consistent and reliable” and to “establish a culture of discipline.”
“The better you are at maintaining a disciplined and efficient job site, the better performance you will get from your trades and vendors,” Shinn said. “The more consistent and reliable you are with your trades, the more money they can make and the more they want to work for you.”
With this kind of culture on the job site, Shinn pointed out, builders will be able to reduce costs while maintaining profits, and subsequently reduce their sales price if necessary to maintain sales volume, without sacrificing profitability.
For more information on ways to cut construction costs, e-mail Shinn, call him at 877-332-1069 or visit www.leeevansgroup.com or www.shinnconsulting.com.
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With the current cooling of the nation’s housing market expected to persist into the middle of the year, NAHB has developed a comprehensive online toolkit geared to providing association members with information that will help them prosper in today’s changing business environment.
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