The Saga of RB Builders, Part VII: Pre-2012: A Changing Market

(The Saga of RB Builders is being presented as a nine-part series on Escape from Averageness;  editor’s note:  The Saga of RB Builders was actually written in 2007, and looks back from the then-imagined perspective of 2012.)

 

The story did not stop there.

As RB Builders did its now-customary results-based planning and budgeting for 2012, the company found the housing market in mid-cycle, with stronger demand and higher margins than 2007-08, but not as strong a market as 2010-11.  It was a different playing field, in part due to market conditions, and in part, due to the company’s improved operations.

In the time since it had started its Results-Based Consulting arrangement five years ago (the company still used the name, despite its intrepid, results-based consultant having been gone for two years), RB Builders had clearly become a more productive building operation.  The company’s average cycle time had dropped to 112 days (in 2010), and RB Builders now believed it was capable of generating twice as many closings as it had in 2007, with the same level of work-in-process and the same amount of production capacity.  That would put RB Builders’ average cycle time at 90 days, well below the 180+ day average durations it had in 2007.

However, as the company was preparing to enter 2012, concerns about market conditions outweighed the possibility of higher productivity, and brought into question whether – and how – RB Builders could utilize any additional capacity or productivity.  The GI Baseline for 2012 was set at the actual performance from 2010 (with overhead adjusted for inflation), although using 2010’s performance put the 2012 GI Baseline below what the company had achieved in 2011.  Nevertheless, they agreed that the GI Target for 2012 needed to reflect the results that could happen if RB Builders found a way to utilize the additional capacity and productivity under the anticipated market conditions (Table 3, below).

Table 3 (capture)

The housing market had enjoyed a three-year turnaround, following the two-year downturn at the close of “The Age of Homebuilder Entitlement”.  2012 would see lower sales prices, particularly if the company intended to close almost 25% more homes.  If the company achieved its 2012 GI Target, RB Builders would be a larger homebuilding company, but it would not be a more profitable homebuilding company.  The prospect of still another downturn in the housing market turned the company’s attention back to the risks inherent in a market/industry where capacity exceeded demand.

RB Builders knew that it had never really achieved the “more-for-less” proposition its trusted, results-based advisor had helped them envision back in 2007.  The best it had been able to do was “more-for-the-same” – more Revenue, more Gross Income, produced with the same level of work-in-process and a slightly higher level of Operating Expense – an improvement from the “more-for-more” proposition it started with, but nowhere near “more-for-less”.  In the improving housing market of 2009-2011, “more-for-more” had been sufficient;  in a deteriorating housing market, it would no longer be.