Pipeline Workshops™: Making Money in Home Building is Really Easy.

(We welcome BuilderMT and Sales Simplicity President Tom Gebes as a guest writer on Escape from Averageness®, as BuilderMT invests in the capabilities of its clients through their sponsorship of Pipeline workshops™;  here, Tom reports on variation and errors in two front-end processes that impact both margin and velocity)

Making money in home building is easy.

Want to see how you do it?  I’ll tell you.

First, focus on the front-end of your business, and break the home-selling process into two parts:  1) Prospecting and Contact;  and 2) Options Selection and Contract.

The Prospecting and Contact includes all your website lead tracking, and it is largely driven by your CRM, or whatever software you have in place to track web visits and automate the contact with the prospect.

The Options Selection and Contract part of the process is managed by your sales automation software system, which must be linked to an options management system (more on that later).

Now, here’s the trick to profitability.  In its most essential form, the gross profit margin (GPM) you expect to make as you convert your prospect to a contract should match the gross profit margin you actually experience at closing, with no slippage.

Sounds simple, right?  The core message here is that margin protection is what drives profitability.

 

Predicting Profit

Let’s take a deeper dive.  In your financial planning, it’s relatively easy to dictate what margins you expect to make.  Your workflow software should allow you to set margins as a percentage across multiple categories of products, e.g. 15% for commodities, 25% for appliances, 17% for flooring, etc.

You should be able to automatically apply those margins to the price you pay vendors for those products.  When you are applying those percentages, you take into account the labor, storage, loss, carrying costs, and waste of installing that particular option.

Simple enough, right?

The bugaboo comes when you take those ideal GPMs, developed in a planning environment, and protect them during two of the most-volatile stages of home building: the options selection process, and the construction process.

Let’s break those down.

Your gross profit margins are most at risk in the options selection process.  The main risk you have is when intersecting options are poorly managed, and options that should not be selected by your customer are nevertheless ordered.

 

Field Volatility. The Profit Killer

What kind of errors can you expect?  Let me count the ways.  For instance, a third garage bay is ordered by your buyer, and your new sales person is more than happy to sell the upgrade… except that on this lot, with this plan, the third garage bay violates the setback.  It’s not so bad if that error is caught in time, but if you don’t have the systems in place to detect the “option clash,” you will design and build the wrong home, and have to tear out the error.

Guess who eats the cost?  You do, the builder.  And guess what gets dinged?  The GPM on that house.

 

Eager Sales People

Here’s another more-subtle example.  You just finish a pep talk with your sale people, urging them to sell an additional $300 per house in upgrades.  Eager to please, your top rep pushes bay windows.  It’s a big hit.  She sells three of them on the first day.  Your estimator is pleased with himself because he catches the selection, and orders the extra windows and lumber… but he forgets to order the shingles for the roof kick-out.  The missing shingles means the roofer can’t finish, and he bills you for another half-day, just to come back to do that job.  Ouch.

And while you’re waiting for him, it rains, and the drywall in that corner of the house is ruined.  Double ouch.

You can already guess who’s paying for that one.  You, the builder.

In three decades of home building, I can easily cite a hundred examples like this.  And each one subtracts dollars from the idealized GPM you set forth in the planning stage – margins you do future corporate profitability forecasting with – only to see the volatility in the field lay waste to your plans.

At the end of the quarter, when your CFO presents his numbers to the CEO, the CEO says something like this:  “What the heck happened?  We forecasted aggregated GPMs at 22% and they came in at 16%!”

And the CFO responds:  “We had an execution problem, sir.  On 15 or our 22 starts, options were spec’d that shouldn’t have been ordered, because they didn’t fit with that model, and the tear outs and corrections killed us.”

The next thing that the CEO says cannot be printed.

 

Solutions: Software

How to fix this mess?  You need software that marries the Prospecting and Contact and the Options Selection and Contract processes;  software that automates and organizes the library of options, so only the options that fit on a model/lot/community are even allowed to be selected.

That software should have cross-over capabilities, so the options that are properly selected populate your estimating and purchasing systems, which in turn communicate with your supplier and component manufacturer.

These systems exist and run smoothly.  However, in my experience, it takes lots of pain before builders wake up to the fact that $1 spent on software saves $10 or $20 on operations, year in and year out.

So, set your margins, and protect those margins with software that regulates and automates the design and construction of your homes.

Tom Gebes is the co-founder of BuilderMT, and the president of BuilderMT and Sales Simplicity. BuilderMT and Sales Simplicity are both MiTek® companies. MiTek is a Berkshire Hathaway company.

 

Come.  Participate.  Learn.

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on February 28 – March 1, 2018.  The cost is $895.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting and Continuum Advisory Group

Sponsored by BUILDER, BuilderMT, and Specitup.

For more details:  www.buildervelocity.com