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.
