When housing starts are in the doldrums, homebuilders need to make every dollar count by cutting construction costs while still providing top value. Easier said than done? Charles C. Shinn Jr., president of the Lee Evans Group/Shinn Consulting in Littleton, Colo., says there are myriad ways to do it.
"If you can reduce construction costs by only $10 per cost code, you will significantly increase your profits," he says. There typically are about 100 cost codes per house, creating $1,000 of increased profit per house. Even better, there are many ways to find that $10.
Cutting direct construction costs is the most effective way to boost profits, Shinn says. Land costs and operating expenses are generally fixed, and it's difficult to raise prices in a tight market. "You have the most control over these costs, and you need to attack them on all fronts to control and reduce them." Here's his battle plan:
- Create target construction-cost budgets. Develop a preliminary direct-construction cost budget for each cost code and design, and then estimate and specify to maintain that cost and the profits. "Direct costs are the only variable in the pricing formula," Shinn says.
- Improve your working drawings. By making all drawings uniform and detailed, you avoid missing details and create consistency that ensures against change orders and lost productivity by crews.
- Design and specify homes for your customers. Survey customers to learn what they like (and don't like) and what they’re willing to pay for and then tailor the homes to those preferences. "Fall out of love with your homes," Shinn says — give home buyers what they want, not what you want them to want.
- Analyze standard specifications. Ensure that they truly are standard, and emphasize the areas that customers perceive as creating high value. Conduct a cost/benefit analysis to cut back where possible, and offer alternatives as options and upgrades.
- Don't overdo standard specifications. "Extra amounts of standard features have diminishing value and eliminate potential areas for upgrades," Shinn warns.
- Change the level of specification between floors. Create a more sumptuous look for the public first floor and cut back where possible on moldings, trim, door heights and other areas on upper levels.
- Analyze low gross-profit plans. Determine where the plans have excess specifications and reduce those costs wherever possible.
- Create a true purchase-order system to control all charges. "Do not accept invoices, and pay only the purchase-order amounts you approved," Shinn says.
- Issue complete construction-start packages. Completeness ensures against change orders and redundancies in finishing each stage. However, this approach does require customers to make all selections before the project starts.
- Improve estimating and purchasing. Conduct your own detailed in-house quantity take-offs. "Don't leave this to your trades and vendors," Shinn says. All agreements also should be documented, and they should be based on unit pricing instead of lump-sum bids.
- Value-engineer your plans to ensure they're still efficient. Consider new and alternative materials that may have been introduced and proved since the plans were drawn up.
- Work with trades to eliminate inefficiencies. Treat them well so they will help you maintain schedules, manage their work better and clean up and organize the site.
- Conduct "as-built audits." These investigations allow the superintendent and the estimator to ensure that materials are being used correctly and that the proper amounts are specified.
- Gain control of construction-cost variances. "These can equal or exceed profits," Shinn says. Using a purchase-order system will help document where variances occur. Analyze them to find why they arise.
- Don't get too attached to your trade contractors. "Sacred cows cost a lot," Shinn says. Always obtain at least three competitive bids, and be willing to release a job to a new trade contractor if he meets your criteria.
- Question the engineers. Evaluate the design of the structural system, trusses, floors and HVAC to ensure that they continue to be the most efficient approaches.
- Improve negotiating techniques with your vendors. Do your homework and focus on the most important areas, Shinn advises. These include payment and volume discounts, displays, sales training, collateral, delivery arrangements, back-order penalties and rebates.
- Break up turnkey trades. You can save as much as 25 percent if you buy materials and labor separately, Shinn says. It creates more challenges for the superintendent, but it unbundles processes and drives out hidden costs.
- Improve material inventory and control. Create a system to protect fragile products, including entry doors, countertops and tubs, so that damage doesn't eat into profits. Monitor your Dumpster to ensure your waste rate isn't growing, and keep a close eye out for diverted materials. Be sure to return unused or damaged materials for credit rather than throwing them away.
- Standardize your construction processes everywhere. "Be consistent and reliable, efficient and effective," Shinn stresses. "Establish a culture of discipline."
Craig A. Shutt is a freelance writer who specializes in construction topics.