Pipeline Workshops™: RB Builders: Lessons from the Pipeline©

Homebuilders should be able to determine, for themselves, how attuned they are to the critical tasks that enable them to thrive on the velocity side of economic return.  In furtherance of that end, we will make the RB Builders: Lessons from the Pipeline© business case – the same business case used at every Pipeline workshop™ – available to any builder that asks for it.

There are only two conditions:  (1) a builder has to state the intent of actually completing it;  (2) if a builder wants our methods and solutions, it has to share its results with us.

For the business case, contact me:  flgroves@saiconsulting.com

The offer comes with this warning:  as with everything else regarding Pipeline workshops™, this business case is challenging;  if you are up to that challenge, the following excerpt is taken from how the business case opens, followed by the nature of the questions its exercises require you to consider:

 

“It is the first quarter of 2018.  RB Builders is aiming to extend its reputation as a builder that thrives on both the margin and velocity sides of Return on Assets, by expanding into another geographical market, via the late-2017 acquisition of a fifth existing homebuilding operation.

“Like its predecessors, the newly-acquired building division has historically generated lower operating results and business outcomes than what RB Builders considers acceptable;  in fact, this is the worst-performing of all the acquisitions, from the standpoint of both margin and velocity.

“RB Builders is confident that it can continue its record for unifying, developing, and improving the capabilities of existing teams at acquired divisions, transforming them to ones that reflect the savvy, motivated, and mutually-accountable homebuilding team of the parent operation.

“This road has become a familiar path for RB Builders.

 

HISTORY OF RB BUILDERS:  Nine years earlier, at the beginning of 2008, and shortly after the end of the halcyon period known as the Age of Homebuilder Entitlement®, RB Builders had begun its own transformation process, with the objective of extracting itself from what it self-described as “the tar pits of averageness”.

“RB Builders had employed a program that used four initiatives (team-based performance compensation, operational and financial transparency, accounting procedures that connected operating performance to business outcomes, and a focused process of continuous improvement) to make massive strides.

“During the ensuing five-year period (2008-2012), annual Revenue had grown from $50 million to more $121 million;  the number of closings had increased, from 200 houses per year to 453 houses per year.  Despite the pressure on margins from increasing market share, overall Gross Margin had increased from 22% to 24%;  Gross Income had grown from $11 million to almost $30 million.

“Operating Expense had increased, from $8.5 million to $11 million, far less than the same-period percentage increase in Revenue.  As a result, RB Builder’s Net Income had risen six-fold, from $2.5 million to $16.5 million;  its Net Margin had almost tripled, from 5% to 14%.

“In 2008, RB Builder’s cycle time had been 180 days;  by the end of 2012, cycle time had been reduced to 65 days.  The average amount of work-in-process had been 100 houses under construction;  the company had reduced its average work-in-process to 80 houses under construction.  The reductions in cycle time and work-in-process occurred, despite a more than doubling of the annual number of closings.

“In 2008, RB Builders had targeted an inventory turn of 2.5x;  in 2012, RB Builders had been able to more than double its physical inventory turn, to 5.7x.  In 2008, it had turned the value of its assets two times;  in 2012, it turned the value of its assets almost five times.

“Because it had maintained margins while improving velocity, RB Builders saw its main barometer of economic return – Return on Invested Assets – increase almost six-fold during the five-year period, from 11% in 2008 to 64% in 2012.  In 2013, RB Builders had moved all of its raw land holdings and developed lot inventory off of its balance sheet, and into subsidiaries, which would have further increased Asset Turn – and ROIA – had those measures been restated.

“It had been a remarkable transformation.

“The four that RB Builders had previously acquired had now met – or were on-track towards meeting – their own two-year plans for increasing closings and Revenue without any increase in Operating Expense, while maintaining lower levels of work-in-process and operating under reduced construction lines of credit.

 

NEWLY-ACQUIRED DIVISION:  Near the end of 2017, RB Builders acquired this, its fifth homebuilding operation.  Ths acquisition was considered a departure from RB Builders’ M&A pattern;  this new division has a different product offering, in a different price range.

In its final year of independent operation, the division had closed 32 houses, and generated $12.8 million in Revenue;  with almost $10.8 million in Cost of Sales now reflecting only its direct, variable costs, the operation had generated just over $2.0 million in Gross Income, producing a 16% Gross Margin.

With its $1.5 million in Operating Expense now reflecting only its indirect, non-variable costs, the newly-acquired operation had produced $550,000 in Net Income, resulting in a 4.3% Net Income Margin.

Since it carried an average work-in-process of 20 houses under construction throughout 2017, the division had a calculated cycle time of 225 days (despite job schedules that were typically 150 days);  32 closings and average work-in-process of 20 houses under construction meant the newly-acquired building operation turned its physical inventory 1.6 times in 2017.

Adopting the policy of RB Builders, and moving all of its raw land holdings and developed lot inventory off its balance sheet and into subsidiaries, the newly-acquired building operation showed a restated average work-in-process of $4.56 million  (the average per-unit LIP balance of $228,000 represented an average lot takedown of $120,000 and a fully-funded LIP balance of $336,000, or 84% of the $400,000 average sales price).

Revenue of $12.8 million gave it an asset turnover ratio of 2.8x.  For 2017, with its Net Margin of 4.3% and its restated asset turn of 2.8x, the new operation had achieved an ROIA of just over 12%.

 

As the management team of the newly-acquired division, here are the questions the interrelated business case exercises raise for you:

Q;  How will you address a mandate that your newly-acquired division increase its annual closings by more than 50% over a two-year period, with less work-in-process, a smaller line of credit, and the same amount of overhead?

Q:  How will you use Building Information Modeling (BIM) to improve both the margin and velocity sides of economic return?

Q:  What accounting practices will calculating the breakeven aspect of Cost-Volume-Profit require?

Q:  How will you build a savvy, motivated, mutually-accountable homebuilding team?  A team that understands the business of homebuilding as much as it does the homebuilding business?  One in which every teammate has a significant financial stake in the outcome?

Q:  What about RB Builders’ contention that variation – evidenced by your 2017 cycle time – is costing your newly-acquired division between $700,000 and $1.1 million in lost Net Income every year?  Are they correct in asserting it?  Keep in mind, in 2017, your division only had Net Income of $550,000.

Q:  How will you implement Epic Partnering™ (RB Builders’ program/process for creating relationships-arrangements of compelling mutually-shared interests) with your suppliers and subcontractors?  What are the attributes of the partnering relationship?  What are the components of the partnering program?  What does a transformational partnering process look like?  Is vertical integration an option to consider?

Q:  How will you use Business Process Improvement (BPI) to remove non-value-adding work and make the remaining value-adding work flow faster, more evenly, more smoothly, with fewer mistakes and rework?

Q:  How will you use Critical Chain Project Management to reduce your job schedules from 150 days to 121 days, while also assuring more reliable job completion dates?

Take our offer.  Request the business case.  When you have completed it, grade yourself.  How did you do?  Were you able to answer the questions?  Were you able to solve the problems?  If you find as unacceptable – let’s call it your “degree of attunement” – you should come to the next Pipeline workshop™.

 

Come.  Participate.  Learn.

RB Builders: Lessons from the Pipeline© is the underlying business case study used at every Pipeline workshop™.  The next workshop is being held February 28 – March 1, 2018, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

Cost is $895.00;  for team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting and Continuum Advisory Group.

Sponsored by BUILDER, BuilderMT, and Specitup.

Details:  www.buildervelocity.com