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July, 2004

Show Me the Money

Want to earn undying loyalty? Cut to the chase and give builders what they really want: a bigger bottom line.

By Greg Brooks

If you had a nickel for every time you lost a bid because you were $250 high, would you be basking on a beach somewhere right now?

If you're like most salespeople, you'd say yes. But you'd be wrong. As soon as your builders got wind that you had a nickel, they'd be after it, and they'd beat you down until there was no money left even in losing jobs.

For all the effort salespeople make to convince their customers that the lowest price and the lowest overall cost are two different things, surveys still say builders value discounts over anything else dealers provide.

It's not that they're cheap, greedy, or short-sighted. It cuts to the heart of the most fundamental difference between business-to-business (B2B) and business-to-consumer (B2C) sales.

B2C customers care about quality and service for personal reasons; home buyers have to live in the product they buy. For a B2B customer, quality and service are means to an end. They either enhance a builder's reputation and make it easier to sell homes, or they prevent callbacks and save him money.

Selling is all about uncovering and addressing customers' hot buttons, then helping them either solve problems or capitalize on opportunities. But there is one "master" hot button that overrides everything else: If you can help your customers make more money, you neutralize price as an issue.

To do that, you have to understand how builders make-or lose-money.

By the Numbers

Every business is different, but the fundamentals of business are universal: Add up your sales and subtract your costs, and the remainder is your net profit or bottom line.

You usually see net profit expressed as a percentage of sales, called margin. Dealers' net margins can run as high as 15%, but 3% to 5% is typical. The typical builder's net margin is twice as high, and a few earn net margins over 20%.

In theory at least, the reason is that home building is riskier. Dealers and builders both make a big investment in the products they sell, but dealers can sell their products piecemeal to a variety of different customers. Home builders have one kind of customer-home buyers-and nothing to sell until the entire investment has been made.

Moreover, builders never know in advance exactly what that investment will be. That wouldn't be so bad if they could pass on unexpected costs to the home buyer. But even on spec projects, the price of the home is typically set long before construction begins, based on how the lot and the plan compare to the surrounding neighborhood.

When your selling price is all but fixed, the only way to control profit is to control costs. And that's no easy task.

The first critical factor in a builder's profitability is an accurate budget. According to a recent report from the U.S. Housing and Urban Development department (HUD), up to 135 people can be involved in building a new home, from the building official who issues the permit to the title company attorney who handles the closing. Plus, there are 35 to 45 unique phases in the construction process, completed by 15 to 25 teams of subcontractors who, in turn, may be supported by as many as a dozen suppliers.

With a new plan, budgeting is typically a three-phase process. The first step is a rough per-square-foot cost that helps you balance features that will make the home more marketable against the difficulty of building it.

Some details, such as cut-up roofs, bays and bumpouts in the walls, or elaborate trim, have a small impact on materials but add disproportionately to labor costs because of the extra skill and attention they require. Others, such as oversized kitchens and bathrooms, add primarily to material costs because of the concentration of cabinets, fixtures, and appliances.

Once the plan has gone through its initial massaging, the next step is a unit-cost estimate that breaks out labor and materials on a task-by-task basis, partly to help zero in on specific products. If the builder intends to use 1x6 wood lap siding, for example, a unit-cost guide like R. S. Means' Building Construction Cost Data will tell him that for every 100 square feet of wall surface, he'll need 120 linear feet of siding and two man-hours to install it.

The final step in estimating is a detailed takeoff to get firm bids. Some builders hand this task off to suppliers and subs. Others do their own takeoffs, not only to ensure accuracy but to be able to compare competing bids on an apples-to-apples basis.

Takeoffs are hard work, but simply quoting a list makes it very difficult to differentiate yourself. More important, it takes away the opportunity to make recommendations that could lower construction costs.

But let's assume the worst of all worlds: You quoted the list aggressively-in other words, you're not making as much money as you should be-and got the job. Where's the opportunity to add value?

Actually there are plenty of opportunities. Budgeting is relatively easy; the real trick is making sure the project gets built the way it was budgeted.

It's no secret that subs don't always use the materials you deliver the way they were intended to be used. You may or may not be able to catch a problem on the first job, but you can the next time around if you keep an eye on the dumpster.

A recent survey by the National Association of Home Builders (NAHB) Research Center found that the average 2,000-square-foot home generates about 50 cubic yards of trash, and builders spend just over $500 per home to get rid of it.

Wood scrap-either solid-sawn or engineered-accounts for over half of what goes into a jobsite dumpster, says NAHB. If you could cut that in half either by sending different lengths or monitoring how the framers use what you deliver, you'll put $125 on your builder's bottom line.

A second issue in building to budget is construction quality, and once again, you can have a direct impact on your customer's bottom line. Defective materials (for example, twisted studs that have to be replaced) often get the blame, but they're actually a minor factor, according to James Adrian, PhD, author of Ten Steps to Increase Jobsite Productivity. Adrian says the most common causes of "redo instances" are that the worker either lacked the skills to do the job, or received incomplete or incorrect instructions.

Either way, the bottom line takes a big hit. According to another NAHB survey, the average builder receives four to five callbacks per home at an average cost of $350 apiece. That's $1,575 in lost profit on every home your customers build.

You're in perfect position to do something about it because of your access to manufacturers and installation instructions. Whenever you deliver products that require instructions, make sure a copy goes to the jobsite with the delivery, and a second copy goes to the superintendent.

Defects don't always result in callbacks, but reducing a builder's exposure to potential future callbacks is almost as good. The key is to be able to cite specific problems you prevented. If the average callback is worth $350 and your builder says he only "gets caught" 20% of the time, each incident is worth $70.

A third issue is the plan itself. Particularly with a new plan, it isn't uncommon to find out only after construction begins that some assemblies either can't or shouldn't be built the way they were drawn.

When the subs come up with more cost-effective ways to frame those details, incorporating their changes into your next quote will lower your price and give you a leg up on competitors. If their changes add to the cost, your bid will be more accurate than your competitors', and that's equally valuable.

All this depends on your ability to spot and solve potential problems, of course, and that means spending time on your jobsites studying how your builders build. Suppliers are plentiful; skilled labor is scarce.

If you develop the expertise to "co-manage" your jobsites, you can become all but indispensable to your customers-and you'll gain negotiating leverage the next time your bid is $250 too high.

The Need for Speed

By far, the most critical factor in a builder's profitability is jobsite efficiency. The faster they get each home built, the faster they move on to the next one and the more homes they can sell.

The basic measurement of efficiency is called cycle time, and it can be defined in different ways. Some builders track only the number of days the home is under construction, usually around 90. Others take a broader view, covering the entire process from pre-construction through the closing to account for the interest builders pay on construction loans, the ongoing overhead cost of managing their business, and the "lost opportunity" cost of not getting on to the next project.

And the numbers are huge. According to the NAHB Research Center, the average cost of building a new home is $291 per day.

First the bad news: Average cycle times in the industry have been slipping badly. In a 1997 survey conducted by Professional Builder magazine, builders estimated their cycle time at 141 days. An apples-to-apples follow-up study done in 1999 found that cycle times had increased to 168 days. At $291, those 27 extra days equal $7,857 in lost profit per home.

Now you know why your customers blow a gasket when you blow a delivery.

The good news is that suppliers are not the primary problem. According to NAHB, 67% of builders say labor is the most frequent cause of delays; only 9% cite material deliveries as their biggest headache.

As a salesperson, your primary responsibility to is make sure it stays that way. While you don't have total control over whether deliveries arrive on time and as promised, you're usually the one who takes the heat when they don't. Considering how critical delays are to your customers, it's well worth a little extra attention. Here are the rules:

First and foremost, communicate clearly. Delivery directions, product descriptions, and other specs need to be clear not just to you, but to whoever will fulfill the order.

Second, never promise more than you can deliver. Yes, you need to meet customers' expectations to keep them. But you're better off losing an occasional job than losing a customer permanently because you have a reputation for telling them whatever they want to hear.

Third, watch your special orders like a hawk. Make sure they get ordered on time, then keep a tickler file so you know when they're due. It's tempting to order specials long before they're due so you don't have worry about them. The problem is that, the longer they sit in your warehouse, the more likely they are to be damaged.

A good rule of thumb is to place special orders so they arrive one delivery cycle before your builder needs them. That way you can get a replacement if you need one without holding up the job.

Fourth, inspect what you expect. Spot-check deliveries when you visit customers' jobsites, to make sure banded loads have corners wherever they're needed, and that they're set on bearings and covered if necessary. Finish materials should go into the house or garage to keep them dry and prevent theft.

To whatever degree possible, framing packages should be built in the opposite order that the material will be used so the subs don't have to tear the pile apart to get what they need first. They should be set no more than six to eight feet from the foundation, running perpendicular to the wall and parallel to the direction of the floor joists so materials can be slid off easily.

If you spot a problem (and particularly if you solve it) before your customer sees it, you'll actually gain credibility. Get the problem solved before you address the cause, and then handle it-tactfully-with your yard crew.

The Value of Value

One of the toughest challenges in construction supply is quantifying the value of good service. Most of the time it happens in a negative way-builders don't notice until you make a mistake.

That's why the time you spend on jobsites learning how your builders build is so valuable. The goal should be to learn more about the construction process than your customers know, and while that may seem like a stretch, you actually have an advantage. A builder knows what he knows; you have access to dozens of builders, and can pass tips and tricks to all of them.

Not every aspect of a business relationship is quantifiable, but in the long run, it works exactly like a bank account: If you avoid making withdrawals, even small deposits add up over time.

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