Here at the BuilderScrap office, we recently came across this interesting article on the HGTV Pro website. This article explains how it is easier to cut costs to increase your margin than to raise prices in a sluggish market.
With housing starts in the doldrums in some markets, home builders need to make every dollar count to remain cost-competitive while still providing top value. Builders can cut their construction costs in myriad ways, says Charles C. Shinn Jr., president of the Lee Evans Group/Shinn Consulting in Littleton, Colo., and all will pay off.
“If you can reduce construction costs by only $10 per cost code, you will significantly increase your profits,” he stresses. 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 provides the most effective way to boost profits, he notes. 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.” He points to at least 20 areas where costs can be cut:
1. 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 profits. “Direct costs are the only variable in the pricing formula,” he says.
2. Improve your working drawings.
By making all drawings uniform and detailed, you avoid missing details and create consistency that ensures no change orders or lost productivity by crews.
3. Design and specify homes for your customers.
Survey customers to learn what they like (and don’t like) and what they are willing to pay for. Then tailor the homes to those preferences. “Fall out of love with your homes,” Shinn suggests, and give homebuyers what they want, not what you want to give them.
4. Analyze standard specifications.
Ensure they truly are standard and put an emphasis on the areas that customers perceive to create high value. Conduct a cost/benefit analysis to cut back where possible, and offer alternatives as options and upgrades. 5. Don’t overdo standard specifications.
“Extra amounts of standard features have diminishing value and eliminate potential areas for upgrades,” Shinn warns.
6. 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.
7. Analyze low gross-profit plans.
Determine where the plans have excess specifications, and work to reduce those cost areas wherever possible.
8. Create a true purchase-order system to control all charges.
“Do not accept invoices, and pay only the purchase-order amounts you approved,” he says.
9. Issue complete construction-start packages prior to start.
Completeness ensures no change orders or redundancies in finishing each stage. However, this approach does require customers to make all selections before the project starts.
10. Improve estimating and purchasing.
Conduct your own in-house detailed quantity take-offs. “Don’t leave this to your trades and vendors,” Shinn warns. All agreements also should be documented, and they should be based on unit pricing instead of lump-sum bids.
11. Value-engineer your plans to ensure they are still efficient.
Consider new and alternative materials that may have been introduced and proven since the plans were drawn up.
12. 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.
13. Conduct “As-Built Audits.
” These investigations allow the superintendent and estimator to ensure materials are being used correctly and the proper amounts are specified.
14. Gain control of construction-cost variances.
“These can equal or exceed profits,” Shinn warns. Using a purchase-order system will help document where variances occur. Analyze them to find why they arise.
15. Don’t get wed too closely to your trade contractors.
“Sacred cows cost a lot,” he says. Always obtain at least three competitive bids always, and be willing to release a job to a new trade contractor if he meets your criteria.
16. Question the engineers.
Evaluate the design of the structural system, trusses, floors and HVAC to ensure they continue to be the most efficient approaches.
17. Improve negotiating techniques with your vendors.
Do your homework and focus on the most important areas, Shinn says. These include payment and volume discounts, displays, sales training, collateral, delivery arrangements, backorder penalties, rebates and a host of other options.
18. Break up turnkey trades.
You can save as much as 15 to 25 percent if you buy materials and labor separately, he estimates. It creates more challenges for the superintendent, but it unbundles processes and drives out hidden costs.
19. Improve material inventory and control.
Create a system to protect delicate and fragile products, including entry doors, countertops and tubs, so damage doesn’t eat into profits. Monitor your Dumpster to ensure waste is not growing, and keep a close eye out for diverted materials. Be sure to return unused or damaged materials for credit rather than throwing it away.
20. Standardize your construction processes everywhere.
“Be consistent and reliable, efficient and effective,” he stresses. “Establish a culture of discipline.”
Controlling direct construction costs is critical, Shinn says. “In today’s housing slump, with the need to reduce sales prices to maintain volume, it is extremely important to reduce direct costs to maintain profit and become a superior profit builder.”
We thought this article was really interesting as now is a crucial time for everyone within the construction industry to manage their costs. BuilderScrap can help cut construction costs, by lowering the amount of waste sent to landfill, as well as providing a source for low cost building materials.
