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

It is the first quarter of 2021.  RB Builders is again aiming to extend its reputation as one of the few builders that has attained sustainable competitive separation, by learning to thrive, operationally, on both the margin and velocity sides of Return on Assets.  RB Builders plans to do so by expanding into another new geographical market, via the late-2020 acquisition of its eighth existing homebuilding operation.

Despite being the largest acquisition RB Builders has made to-date, this newly-acquired division is in-line with all but one of the previously acquired operations in terms of its target market segment.  Like its predecessors, it has historically generated operating results and business outcomes that are lower than what RB Builders considers acceptable.  As was the case with its predecessors, this new building operation has acceptable current land/lot positions.

To date, RB Builders has completed the newly-acquired division’s management technology conversion, and has started the conversion of its business and operating processes.  Despite the challenges, RB Builders’ management team is confident they can continue their remarkable track record of unifying, developing, and improving the capabilities of existing teams at the builders it has acquired, and, in the process, 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:  Thirteen years earlier, at the beginning of 2008, shortly after the halcyon period known as the Age of Homebuilder Entitlement® came to an end, 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”.

It was a transformation process that had four key components:

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

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

(3) an accounting/costing approach that connected 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 important initiatives, some dealing with workflow, others dealing with scheduling, some dealing with the value stream and trade partnering, others dealing with product buildability and value, some dealing internal learning.

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 pressure on margins, overall Gross Income Margin had increased slightly, from 22% to 24%;  as a result, RB Builders’ Gross Income had out-paced its 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), far less than the same-period increase in Revenue, and as a result, RB Builder’s Net Income had risen from $2.5 million to $16.5 million, six-times what it had been before the company began its transformation;  Net Income Margin had almost tripled, from 5% to 14%.

In 2008, RB Builder’s cycle time had been 180 days;  four years later, 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 homes under construction;  by the end of 2012, the company been able to reduce its average work-in-process to 80 homes under construction, despite doubling the number of homes 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 homes and closing 453 homes, RB Builders had been able to more than double its 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.

By 2013, RB Builders had 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 only the remaining operating assets.

By any measure, it had been a remarkable transformation.

The seven 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, doing so without incurring any increases in Operating Expense, all the while maintaining lower levels of work-in-process and operating under reduced construction lines of credit.

As RB Builders’ management team described it, it was a case of relentlessly finding ways to “do more without more”.

 

NEWLY-ACQUIRED DIVISION:  Near the end of 2020, RB Builders acquired this, its eighth homebuilding operation, what it refers to as RBB-8.  Unlike the outlier, never-to-be-repeated 2017 acquisition, RBB-8, despite its considerably larger size, was thought to continue the return to acquisitions 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-8 to a Contribution Income Statement format based on a variable costing approach to cost allocation, the same action it takes with all of its acquisitions.

In its last year of independent operation, RBB-8 had closed 80 homes, on which it generated $20.0 million in Revenue;  with its $16.8 million in restated Cost of Sales now reflecting only its direct, variable costs, the division had generated $3.2 million in Gross Income, producing a 16% Gross Income Margin.

With its $2.4 million in restated Operating Expense now reflecting only its indirect, non-variable costs, the operation had generated $800,000 in Net Income, producing a 4% Net Income Margin.

Since it carried an average work-in-process of 40 homes under construction for the year in 2020, RBB-8 had a calculated cycle time of 180 days (despite job schedules calling for 120 days);  and, because cycle time and inventory turn are reciprocal measures, the 80 closings achieved with an average work-in-process of 40 homes under construction meant that the division had turned its physical inventory twice (2.0x) during 2020.

Adopting another one of RB Builders’ mandates, and moving all of its vacant land holdings and developed lot inventory off its balance sheet and into subsidiaries, RBB-8 now showed a restated average work-in-process of $5.7 million, based on an average per-unit LIP balance of $142,500, which consisted of a $75,000 average lot takedown draw and a $210,000 fully-funded LIP balance (100% of cost, including land;  84% of the $250,000 average sales price).

In 2020, an average work-in-process of $5.7 million and Revenue of $20.0 million gave RBB-8 an asset turnover ratio of 3.5x;  with a Net Income Margin of 4% and a restated asset turnover ratio of 3.9x, RBB-8 had generated a Return on Invested Assets of 15.6%.

 

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, with significantly reduced work-in-process, a likewise significantly 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 unwelcome variation – evidenced solely by your 2020 calculated cycle time – is costing your division $1.6 million 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 2020, your division had Net Income of only $800,000.  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:  How does using a different scheduling algorithm 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 14-15, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Attendance is limited to 30 attendees.  The cost is $895.00 per person.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com