Data and reports homebuilding production managers need to know

We run down the data homebuilders should track to run their production department efficiently.

August 25, 2008

CRITICAL MANAGEMENT SERIES PART 3

This three-part series details the critical data and reports upper management, sales managers and production managers should watch to run a successful company.

In the past, amenities and their prices lured buyers. But in today's market, many builders are finding that affordability and practicality trumps granite countertops and luxurious bathrooms. Tracking costs such as these directly influences money in your company's pocket. For production managers, reports and data are critical in maximizing efficiencies and analyzing materials and labor costs.

An examination and analysis of the data can help production managers learn how to become more efficient, produce products that will sell in today's environment and learn from customer feedback. From cycle time and structural costs to third-party customer satisfaction surveys, detailed reports can provide valuable information and guidance for production managers.

Cost of Construction and Value Engineering

With the housing market making a 180-degree turn, many of today's home buyers are looking for little more than affordability and maximizing their dollars. Steve McGee, president of consulting firm Unify International, says that many builders are reluctant to down-spec their homes because they are afraid that the buyers won't bite. McGee recommends tracking the spec levels of the top three to five competitors in a market to see where their specs and price points are. He says it is often the builders that down-spec their homes who have greater sales. A key to getting there is by knowing the right numbers; observing and reporting on that data on a monthly basis allows production managers to create more competitive products.

"In tough times like this, it is really about square footage and bedroom count. You might have to take some materials out of the house to get the price point down, and right now, it's all about that, not so much the amenities," says McGee.

Builders must analyze not just their profit margins but every asset and liability on their balance sheets. Chuck Graham, principle of Newton Graham Consultants in Charlotte, N.C., says that builders need to look closely at their returns on assets and capital. Graham notes it's critical that builders focus on both their EBIT (earnings before interest and tax) margin and capital turn and to report on and analyze the data on each community separately. Production managers will have to become leaner, and they can only do that through concise, careful and comprehensive analysis of their internal data and indicators.

"Our muscles with regard to value engineering have atrophied in the last four or five years. It can be very difficult to suddenly pull back and build real houses for real people," says Graham.

At Dewey Homes, senior vice president of process excellence Glenn Gleason tracks and analyzes 10 to 15 key performance indicators that can mark the pulse of their business. From sales to operations, some of the major measurements include traffic, conversion of traffic to sales, average total sales price, cost per square foot, the variance on purchase orders, cycle time and customer satisfaction. Gleason says that in times such as these, it is especially important for production managers to focus on their variance on purchase orders.

"You have your sales performance and your construction performance. Then you look at how well you are doing on a purchasing basis and how you are handling your costs per square foot," says Gleason.

At Epcon Communities, vice president of development and construction Craig Thomas uses a production schedule that each community produces. It highlights the construction of every building with certain milestones (such as pouring a foundation, framing and drywall finishing) and also matches that up with sales activity, such as how many are under contract, how many have closed and how many of them are specs. Thomas looks at the report daily; it's updated weekly and used by construction managers, superintendents and salespeople.

Thomas tracks his costs of production in a monthly "flash report" that compresses all sales and production activity in every community. On the production side, Thomas says the report tracks production costs in eight different categories, including: fees, permits and underground work; site and structural costs; mechanical costs; framing and exterior costs; interior and finishing costs; landscaping; community clubhouse and pool costs; and land, financing and marketing. Thomas analyzes the percentage of the overall budget that is being spent in each category.

"If things are above that overall average total, that means I am spending more in some categories than what I have overall. It's like an ongoing budget review to see where we stand," says Thomas.

Localizing Costs and Production Data

Just as builders must look at economic data on a national level, they should also compile their data and analyze their financial ratios per project or neighborhood. Graham says that every neighborhood can produce a different mix of margins and returns. Builders should track and analyze land costs, building costs per square foot, cycle times and other factors for each community and region. Tracking and itemizing data on a community basis can allow builders to fine-tune their operations to meet the particular production needs and challenges of each neighborhood.

"Very few companies seem to be tracking financials on a neighborhood by neighborhood basis, which is the major unit of business within our industry and lots is lost," says Graham.

At Epcon Communities, Thomas says that production managers should also carefully watch the sales reports to ensure that they are not building too many spec homes in certain communities. By using reports to analyze and increase the efficiencies of the production process, they can also decrease the cycle time and more properly allocate superintendents and resources in the field. Weekly production and timeline reports allow managers to shift resources to certain projects depending on sales projections and market demands.

"We may slow down one building or suspend the construction in favor of another because we have buyers available, so we switch over in an effort to accommodate and push forward on something that actually has a closing schedule," says Thomas.

Mike Snider is executive vice president of LGI Homes and is in charge of sales and marketing along with construction and development. Although production and sales departments may often operate independently, he says it is important to maintain synergy between the two. Snider keeps a close eye on sales but simultaneously tracks production schedules in each of the Conroe, Texas-based company's subdivisions. Following a strict formula to maintain profit margins, Snider says that LGI does not do options nor upgrades and has a predetermined number of starts for each month.

"We're watching margins. We have cost matrixes set up, but we know what we need to sell every house for to get the end results. We're shooting for a 26 to 28 percent profit margin," says Snider.

Measuring Quality and Customer Satisfaction

Brett Gardner, chief operating officer of Darling Homes in Dallas, Texas, says data and reports on customer satisfaction are one of the major drivers of their business. Darling uses an internal survey at the time of closing where the customer is asked to rank their experience on a number of levels. Sixty days after closing, they also use a customer survey by Woodland, O'Brien & Scott to capture customer sentiment. Then they conduct another survey eleven months after closing.

"We use that to continue to improve our performance. [Customer satisfaction] is everything for our company because we go to market with the value proposition of being customer-intimate. In our business model, we're all about the customer," says Gardner.

Before a house is closed and builders are thinking about customer satisfaction, quality control reports can ensure that builders are creating top-notch products. McGee says that more builders are tracking data on walk-throughs with customers and creating punch-list items to measure production performance. McGee says using PDAs and software makes it easy for builders to walk through their homes and easily generate reports. Unify International's solutions allow builders to attach pictures, audio files and other forms of documentation.

"More and more builders are tracking statistics in that area both to try and create more accountability with construction but also to create a better impression with the buyer," says McGee.

As part of quality control and how it affects customer satisfaction, Glen Gleason says that Dewey Homes surveys customers at move-in then at six months and one year after move in. Dewey uses an outside firm to conduct the surveys and then tracks the results against the industry standards. Gleason also tracks how many works orders average per home and how quickly and well they respond to those orders.

"We correlate that the better we build the house, the better the HRI (home readiness inspection), the quality of the house and the reduction on warranty items further down the line," says Gleason.

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