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

It is the first quarter of 2020.  RB Builders is aiming – once again – to extend its reputation as a builder that thrives on both the margin and velocity sides of Return on Assets, by expanding into a new geographical market, via the late-2019 acquisition of its seventh existing homebuilding operation.

Although, it is the smallest of RB Builders’ acquisitions to-date, in terms of market segment, this newly-acquired division is in-line with all but one of the previously acquired operations.  Much like its predecessors, it has historically generated operating results and business outcomes that are lower – in this case, considerably lower – than what RB Builders considers acceptable.  Like its predecessors, this new building operation has acceptable current land/lot positions.

RB Builders has already completed the newly-acquired division’s management technology conversion, and has started the conversion of its business and operating processes.  Despite the size and performance-related challenges, RB Builders is confident that it can continue its exemplary track record of unifying, developing, and improving the capabilities of existing teams at the builders it has acquired, transforming them into teams that reflect RB Builders own savvy, motivated, and mutually-accountable homebuilding team.

This road has become a familiar path for RB Builders.

HISTORY OF RB BUILDERS:  Twelve years earlier, at the beginning of 2008, 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”.

This transformation process had four key components:

(1) a team-based performance compensation plan directed at achieving targeted results above a baseline related to a single business outcome, with payout based on the achievement of a series of progressively-weighted milestones;

(2) a method of sharing numbers that produces full operational and financial transparency;

(3) an accounting approach that connects operating performance to business outcomes, via actionable data;

(4) a focused process of continuous improvement, consisting of a prioritized series of consecutively-ordered initiatives, with short durations aimed at achieving defined, targeted, and measurable results.

Along the way, there had been a number of initiatives, some dealing with workflow, one dealing with scheduling, some dealing with the value stream and trade partnering, others dealing with buildability and product value.

As a result of this program, RB Builders had made massive strides.

During the initial five-year period (2008-2012), figured on a same company basis, annual Revenue had grown from $50 million to more than $121 million, an increase of almost 250%.  During the same period, the number of closings had increased more than 225%, from 200 to 453 houses per year.  Despite margin pressure, overall Gross Margin had increased slightly, from 22% to 24%;  as a result, RB Builders’ Gross Income had out-paced Revenue, growing by more than 250%, from $11 million to almost $30 million.

During this same five-year period, Operating Expense had increased 30% (from $8.5 million to $11 million), but far less than the same-period increase in Revenue.  As a result, RB Builder’s Net Income had risen from $2.5 million to $16.5 million, more than six times what it had been before the company began its transformation;  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.  In 2008, the average amount of work-in-process had been 100 houses under construction;  by the end of 2012, the company been able to reduce its average work-in-process to 80 houses under construction, despite doubling the number of houses being closed.

In 2008, RB Builders had sought an inventory turn of 2.5x, which was actually an improvement from 2007;  in 2012, by keeping its work-in-process at 80 houses and closing 453 houses, RB Builders had been able to more than double its physical inventory turn, from 2.5x to 5.7x.

In 2008, RB Builders had been able to turn the value of its financial assets three times;  in 2012, it turned the value of those assets almost five times.  Because it had managed to maintain 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 moved all of its raw land holdings and developed lot inventory off of its balance sheet and into subsidiaries, a move which would have further improved Asset Turn – and ROIA – had those two measures been restated to reflect the remaining assets.

By any measure, it had been a remarkable transformation.

The six divisions that RB Builders had previously acquired have all met – or remain solidly on-track towards meeting – their own multi-year plans for significantly increasing closings and Revenue, and doing so without incurring any increases 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 2019, RB Builders acquired this, its seventh homebuilding operation (RBB-7).  Unlike the outlier 2017 acquisition, RBB-7, despite its smaller size, was thought to be in-line with RB Builders’ M&A pattern, because of similar product offerings, in the same price range.

For managerial accounting purposes only, RB Builders had converted RBB-7, as it had done with all of its acquisitions, to a Contribution Income Statement format based on a variable costing approach to cost allocation.

In its final year of independent operation, RBB-7 had closed 32 houses, on which it generated $8.0 million in Revenue;  with its $6.72 million in restated Cost of Sales now reflecting only its direct, variable costs, the division had generated $1.28 million in Gross Income, resulting in a 16% Gross Margin.

With its $960,000 in restated Operating Expense now reflecting only its indirect, non-variable costs, the operation had produced $320,000 in Net Income, resulting in a 4% Net Income Margin.

Since it carried an average work-in-process of 16 houses under construction throughout 2019, RBB-7 had a calculated cycle time of 180 days (despite job schedules that called for 120 days);  since cycle time and inventory turn are reciprocal measures, the 32 closings achieved with an average work-in-process of 16 houses under construction meant that the division had also turned its physical inventory twice (2.0x) in 2019.

Adopting another RB Builders’ mandate, and moving all of its raw land holdings and developed lot inventory off its balance sheet and into subsidiaries, RBB-7 showed a restated average work-in-process of $2.28 million (the average per-unit LIP balance of $142,500 consisted of a $75,000 average lot takedown and a $210,000 fully-funded LIP balance (100% of cost, 84% of the $250,000 average sales price).

An average work-in-process of $2.28 million and Revenue of $8.0 million gave the division an asset turnover ratio of just over 3.5x.  For 2019, with its Net Margin of only 4% and its restated asset turn of 3.5x, RBB-7 had achieved a Return on Invested Assets of only 14%. 

As this newly-acquired division’s management team, here are the questions the business case exercises raise for you:

Q;  How will you address a mandate that your newly-acquired division increase its annual closings by close to 25% during its first two years, 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?  What will your ROBIMI (Return on Building Information Modeling Investment) be?

Q:  What cost accounting practices will need to change in order for you to comprehend the type of operating decisions that must drive the targeted economic outcomes?

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

Q:  How will you answer RB Builders’ contention that variation – evidenced solely by your 2019 calculated cycle time – is costing your division $640,000 per year in lost Net Income, an outcome that will persist each and every year, until it is addressed.  A fact to keep in mind:  in 2019, your division only had Net Income of $320,000.  Is what they are asserting even possible?

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:  As you analyze it, are you willing to consider replacing, over time, your fully-outsourced building model (requiring a larger, shallower geographic footprint) with a fully-integrated building model (which allows a narrower, deeper footprint)?

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?  How will you build a shorter, straighter pipe?

Q:  Can 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?

You can always ask us to send you the business case.  You can complete it, grade it, and figure out how well – or how poorly – you did.  Were you able to answer the questions?  Were you able to solve the problems?

If you find as unacceptable – what we’ll call your “degree of attunement” – you should come to the upcoming 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 October 21-22, 2020, 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.

Sponsored by Specitup and Simpson Strong-Tie.

Details:  www.buildervelocity.com