During a question and answer session at a recent industry conference, a home builder asked Moody’s Analytics chief economist Mark Zandi for his thoughts about the labor
7 Big Mistakes Custom Builders Should Avoid
Don’t fall into the trap of these 7 homebuilding mistakes.
As we struggle to survive the housing downturn, it's sometimes easy to forget the importance of sound business practices. We could be tempted to make business decisions based on the urgency of the moment rather than on long-term impact.
So it's imperative to step back; think problems and opportunities all the way through; decide on a course of action; and then act in a reasoned manner. If you do this, there's a good chance of avoiding what I call the Seven Deadly Sins of Custom Home Building:
- Failure to plan. Just like a construction project, your business needs a well-thought-out "blueprint" if it is to succeed in the long run. Your plan doesn't need to be a 100-page document, but it must be committed to paper. Written plans are much more likely to be successful than ones that rest in your memory.
- Failure to have clear agreements. If there's one thing that will sink a business, it's a poorly crafted construction contract. Most builder/client conflicts arise from disagreements about what was promised and what was delivered. Clear and concise wording of the contract; a complete set of plans and specifications; and good documentation of all communication are essential. The same philosophy should be used with trade contractors and vendors — clear, fair and complete written agreements.
- Forgetting the cyclical nature of the construction business. Housing is and probably always will be cyclical. All builders should recognize this, accept it and be ready for the next cycle.
- Failing to engage the Realtor community. Most custom builders rely on referrals for much of their business. Although referrals are great, they're a largely passive form of marketing. Realtors can be an excellent source of prospects at a relatively low cost, especially when you consider the cost of a full-blown marketing and sales effort.
- Dragging schedules. Although many builders are good at tracking the job costs of a project, most do not take into account the cost of a week or month's delay in the construction schedule. Homes that take longer to build than they should, whatever the reason, are a key factor in below-average financial performance. Watch construction time as closely as you watch job-cost dollars.
- Hiring too quickly and firing too slowly. Why do builders wait until the last minute to recruit, train and hire employees? Conversely, why do they wait until the bitter end to let someone go? Some of it has to do with worrying about making the wrong decision, especially on the hiring side, and avoidance and denial on the firing side. Take time to find the right people to help make your business a success, and recognize, accept and act on an individual who is not making the grade.
- Building the wrong spec house. Building specs is a good way to increase revenues and profits as well as smooth the flow of work for your business. The problem is that specs are a different animal than build-to-suits. Applying the principles of one to the other can result in financial failure. Specs need to be built for the broader market, not an unidentified custom client. Additionally, most custom builders refuse to understand that spec-home buyers are usually drawn to the things they can see, rather than the things they can't.
These are at the top of my list of mistakes that custom builders make, but they certainly aren't the only ones. Traps and pitfalls abound in the custom home building business. The more you know about them, the less likely you are to be caught out by one.
|Nationally recognized speaker and trainer Tom Stephani, MIRM, GMB, MCSP and CAPS, specializes in custom homes; infill housing; light commercial projects; and developing commercial and residential land.|