In today’s market of cash-strapped buyers and builders, negotiating new home prices has become a complicated, multivariable equation with one question at its center: how slim can your margin go?
Builders hate even being asked that question. Labor has never been more expensive, and although buyers are slowly re-entering the market, their needs are more specialized than they were before the Recession, and it can be a balancing act to provide a product buyers want, at prices you can afford.
As Scott Sedam writes for Pro Builder, builders might benefit from changing the way they do business to give them more control over every step of the construction cycle. Other industries can provide a model. As he says, the construction industry simply “hasn’t been subject to the same level of scrutiny as other industries over the years for the application of lean principles and effort to reduce waste in product and process.”
It’s time for that to change. According to Sedam, there are five or six “buckets” you can clean up in your budgets to make your margins a little rounder.
- Bucket #1: Land. One-third of your total land costs stem from development (the remaining two-thirds, of course, come from entitlements and the land itself). Experienced builders know how to work with land to minimize the cost of development. To this end, thinking about utilities early in construction can save you money down the line as well as headaches.
- Bucket #2. Waste. You probably already know how much waste you produce, and it makes you wince, whether in board feet and dollars. It’s an easy fix to learn how to reduce waste on a jobsite. Learn how here.
- Bucket #3. Sales process. This is where lean management techniques come in. Decide what you’re building, down to options and selections, and stick to it. Standardize your product and communicate it clearly to customers and you winnow your future stack of VPOs.
- Bucket #4. Cycle time. A better building process is all about reducing cycle time. Learn how to tighten up your cycle time here; you’ll thank us later.
- Bucket #5. Work with your supplier.
Your supplier is your secret weapon when it comes to managing your budget, and the more open lines of communication remain between your business and theirs, the more problems can be avoided down the line, resulting in a smoother transaction on both sides—and a lean competitive advantage for you.