Increase Efficiencies, Boost Bottom Line With Technology
Although home construction and amenities have evolved significantly since the advent of electric lighting and indoor plumbing, many builders’ business processes, unfortunately, have not.
To cut costs and increase efficiency, especially in these difficult times, builders would do well to examine and consider integrating up-to-date technology into their business processes.
Integrating the technology available today will help builders do more with less.
Processes that once required several employees can now be completed by one person using technology. Increasing efficiency with building process technology will free up time and resources to tackle critical tasks that require constant human intervention.
Technology promotes efficiency in four main areas:
- Accounting and financial systems
- Project management
- Purchasing and inventory tracking
Accounting and Financial Management
Nothing is more tedious for a builder than inputting accounts payable, completing progressive invoices, making periodic draw requests and performing general bookkeeping. But all of these functions are necessary for healthy business operations.
With accounting and financial management software, you can systematically monitor the information your accounting system generates to gauge the overall health of your home building business. Regular monitoring will help you spot troubled areas before they do irreparable harm to your company.
When times are good and cash is flowing, business owners tend to ignore key benchmarks. On the other hand, when business is bad, they watch every number.
The best business practice is to establish key benchmarks and then monitor them regularly — in good times and bad. Technology will expedite gathering accurate financial information for this purpose.
Key benchmarks to watch are:
- Current ratio — the ratio of assets to liabilities.
If the ratio goes up, it is a good sign. If it is going down, it could indicate that jobs are not profitable, which means you must examine job cost reports to ferret out areas of potential cost savings; that jobs are taking too long and overhead is outpacing its recovery per job; or that sales are not keeping the projected pace, or closings are taking too long.
- Gross margin and net margin — the balances left after subtracting construction costs from revenue (gross margin) and construction costs and overhead from revenue (net margin)
Pay more attention to these percentages than to overall revenues. Although you may be building more jobs and generating more revenue, you could actually be losing money.
- Accounts payable and receivable turns — indicators of cash flow
How quickly do you receive money owed and how long does it take to pay bills that are due?
Project Management Systems
To successfully manage a project, you must manage information flow to your entire team.
Everyone on your team will need information about customer selections, dates for draw requests, how to answer requests for information and the appropriate process for managing change orders. To successfully manage a project, you must provide this information promptly and accurately.
Successful builders deploy information technology that allows information to be:
- Entered into a system once
- Viewed by multiple users
- Archived for easy retrieval
- Transmitted from the client to the field, from the office to the field and back again
Technology solutions for project management include:
- Customer relationship management (CRM) software systems
- Scheduling software
- Internet-based technology
- Change-order management systems
- Job-cost review and tracking software
In a business environment where profits are squeezed it is imperative for builders to know what their costs will be before taking on a project. To price a project competitively and still attain the desired profit margin, builders must know as precisely as possible how much it will cost them to build.
A well-integrated estimating program is the first step to maintaining strict controls over a project’s costs and profits. Today’s estimating programs provide accurate pricing quickly and efficiently.
For example, with assembly-based estimating, an estimator gets quantities for plates, studs, sheathing, siding, insulation, drywall, base trim, electrical outlets and paint by merely entering the linear footage of the walls.
Estimating software also integrates with computer-aided design (CAD) programs to coordinate takeoff quantities from the drawings.
These programs eliminate mistakes caused by human error that can eat into profit margins.
Once the customer accepts the estimate, anyone in the company can order the necessary materials and labor — allowing the builder to delegate this task to an employee. This frees up the builder’s and project manager’s time so they can focus on managing other construction, customers and labor issues.
An integrated purchase order (PO) system helps control project costs in 10 ways:
- Labor and materials are ordered exactly as stated in the estimate.
- The system links procurement to the estimate to validate the estimate and for future reference.
- When invoices are used, they reflect the same unit pricing as in the estimate.
- POs obviate the need for invoices because payments can be made on a PO number.
- When invoices are used, they can be checked against POs.
- Verification by PO eliminates the need for builders and their project managers to handle each invoice.
- POs derived directly from estimates allow better advance reporting and job tracking.
- Tracking variances that occur between the purchase order and actual job costs helps improve future estimating.
- POs enable just-in-time delivery, simplifying staging and reducing materials theft, loss and damage.
- POs reduce waste with details that help organize materials according to the areas where they will be used on the job site.
Information technology offers tools builders can use to handle routine tasks and systematize operations and frees them to concentrate their oversight in critical areas.
Successful technology deployment expedites operations, aggregates and coordinates information, enables delegation and accountability and ultimately provides users with the information they need to make sound business decisions.
John Barrows is president of J. Barrows Inc., a custom home builder and consultant based in Wainscott, N.Y. Barrows serves on the board of directors of The NAHB University of Housing, the executive board of the New York State Builders Association Research and Education Foundation and the executive board of the Long Island Builders Institute. For more information, e-mail Barrows, call him at 631-537-8734, or visit the J. Barrows Web site at www.buildersite.com.
The article will be featured in the latest “Cost of Doing Business Study” to be released at the 2010 International Builder’s Show in Las Vegas next month. The study enables builders to compare their balance sheets with other builders around the country. It can be purchased through Builder Books.com.