Even-Flow A Big Idea for Smaller Builders

Even-flow is a hot management concept among production builders. Big, publicly-held Giant builders are even embracing the idea, despite those behemoths' well-earned notoriety for forcing large numbers of houses into production all at once — to boost closings at the end of each quarter, in desperate efforts to impress Wall Street.

March 01, 2006

Land Mines For Custom Builders
Even-Flow's Biggest Booster
Day Is Different

Even-flow is a hot management concept among production builders. Big, publicly-held Giant builders are even embracing the idea, despite those behemoths' well-earned notoriety for forcing large numbers of houses into production all at once — to boost closings at the end of each quarter, in desperate efforts to impress Wall Street. But it's now hard for anyone to ignore the direct correlation, documented by builder after builder, between regularized housing production, customer satisfaction and profitability. Why should even-flow be any less effective at 12 houses a year than at 12 a day, 12 a week or 12 a month?

Growing evidence suggests small custom builders may find regularizing the flow of work through their companies and their on-site operations just as beneficial, and even easier to do. Here are a few ways small builders may have a leg up:

  • Even-flow requires a sales backlog. This allows construction starts, completions and every event in between to be scheduled with clock-like precision. Construction has to be separated from sales, which are subject to the vagaries of the marketplace. That's a tough nut for many production builders, who often want to grow their companies as fast as possible. They start houses as soon as the sale is completed. But most small builders have already committed to limit production, and the growth of their companies. If a custom builder's business plan calls for building 12 to 24 houses a year, he's already more than halfway into the culture of even-flow. All that's left is to dictate that those 12 houses will be built at a steady, one-a-month pace throughout the year, rather than in bunches.
  • High-quality custom builders can "slot" construction starts. If a custom builder has a strong reputation for building a quality house, he already has the market power to sell into slotted construction starts. High-quality is the essential first step to even-flow production. The builder's reputation for quality means customers will be willing to wait a couple of months for construction to start, especially when the builder explains how regularized production improves the quality of workmanship. Even-flow production also allows builders to schedule closing and move-in dates with precision as much as six months in advance.
  • Improved quality and better margins come from operating a production system as close as possible to full capacity. Even-flow allows moving many trade crews directly from one house to the next, so the trade contractor can schedule his best crew onto the builder's jobs week after week, and months in advance. Similar to a manufacturing production line, even-flow involves workers — rather than the product — that move down the line. Small builders on even-flow can get by with fewer trade crews. In fact, they can often build each house with exactly the same trade crews forming teams that are intimately familiar with the builder's standards, and with each other. So the hand-offs from one trade to the next improve. If a builder does 12 houses a year, and each one takes four weeks to frame, he can keep the same framing crew moving from one house to the next, all year. That's full capacity. Fewer than 12 houses a year may leave gaps in a system. But a rate of 12 to 24 lends itself to an even-flow system that almost manages itself.
  • Even-flow requires a centralized scheduling system, with every house built exactly the same way. All work processes must flow in precisely the same sequence. This is a tough one for many production builders who often employ multiple construction supers — each with his own ideas about the right way to build a house. It's often a paradigm shift of major proportions to get them all building houses in the same sequence of events. Small custom builders usually have only one or two supers managing field operations. And a small builder is likely to already impose one way to build every house — his way!
  • Any start slots that are not pre-sold can be filled with specs. Many custom builders already start a few homes a year as specs. Especially in high-demand markets, building several specs a year is a proven strategy. The key is not to finish them as specs. Slotting spec starts can fill the gap between sales peaks. Builders should be sure the plan they build as a spec is a winner that meets the next sales cycle head-on. Custom builders should also remember to have a process in place to allow an after-start buyer to change the colors and finish selections as long as those choices are made well in advance of the installation date.

Here's How To Do It

Atlanta semi-custom builder Harcrest Homes built 60 houses last year for $29 million in revenue (averaging 3,800 square feet, priced at $483,000). But founder Carl Riden was only building 10 houses a year when he started regularizing his production in the early 1980s. "It was really just a repetitive schedule then, rather than true even-flow," Riden says. "But in 1984, I got up to about 40 houses a year, and that's when I started slotting construction starts. We'd start a house a week for four weeks, then skip a week. Maintaining that pace puts you at 40 for the year."

Riden retired last year, after selling his remaining interest in Harcrest to partner Mike Smith, but the even-flow system the two perfected remains standard operating procedure. It also gives an insight into how such a system works and the benefits it produces. Riden and Smith are adamant that even-flow is the best way to run a building company, even for small custom builders.

Riden says the best part of the system is the loyalty it builds between a builder and his trades. "I started this because my framer could frame a house a week and I didn't want to use anyone else. When we'd skip a week, he'd have to go somewhere else for that week. But all the trades knew they could count on doing the exact same work on our jobs every Monday, Tuesday and Wednesday for four weeks in a row.

"When you make it even, it just makes everybody's job so much easier," Riden says. "In 28 years, we never missed a closing date because of a scheduling problem. The trades knew they could trust me, and I trusted them."

Shown on page 64 is the Harcrest Homes slotting schedule as it exists today, along with the building schedule the firm's sales agents use to sell those slotted construction starts. The 20-week construction cycle shown in the slotting schedule makes special note of the rough plumbing date, which occurs for each house on the Monday of week seven. "That's a landmark for us because it's when the house is dried in," says current Harcrest president Mike Smith. "If you follow the progress of the house on lot 51 at our Willowstone subdivision, it started construction with a slot in the first week of January, then hit rough plumbing on Monday, February 13, and is scheduled to close on Friday, May 19. All of our houses start on a Monday and close on a Friday."

Not shown here, because of its large size, is the spreadsheet Harcrest uses to schedule each work process that takes place on every day throughout the 20-week construction cycle. "We actually start tracking a house a month before it hits permit week, which is where the slot is," Smith says, "and five weeks before grading and foundation. That helps our interior designer to know who's coming her way for selections appointments, and the supers to know when they need to schedule the pre-construction meeting with the customer. That happens the week before the Monday construction start slot."

The computerized schedule has tabs for each of the trades that show the exact work scheduled, up to eight weeks in advance.

Harcrest typically sells the next available slot or schedules a spec start into any unsold slot. "But you notice that this spring, in Willowstone, we have a gap in our sales for April slots, followed by a couple of sold slots in May," Smith points out. "Those buyers asked for those slots because they wanted closing dates in late September and early October. We looked closely at that before deciding if we would hold our pricing that long. But we decided it was okay because we have a regularly scheduled price increase in April, and this pricing reflects that increase."

Harcrest requires buyers to make all option and upgrade selections before the construction start slot. "We try to keep a six-week gap between contract and start date," says Mike Smith, "to give customers plenty of time. We don't want to rush them, but we also don't want to give them too much time. They get two meetings in our design center with our interior designer."

All selections are confirmed, along with any changes to the house plan, in the pre-construction meeting where both the super and the sales agent meet with the customer. "We don't want any changes at that meeting," says Smith. "What we're looking for is confirmation that we have everything right."

When that happens, every item in the construction process falls into place with precision: "We know that at 10 A.M. on the Thursday of week 17, the carpet guys will be laying carpet in the house," says Smith. "The cabinet guy always installs his cabinets on Friday of trim week, so on the Saturday of the previous week, the countertop guys will be in the house measuring. They need about a week of turn-around time, so they can get the granite down before the tile guy starts. We want every trade to be able to do 100 percent of their work on the day they're scheduled. No call-backs. Just one trip."

Slotting Schedule
Jan. 1 51 4 2 3 4 5 6 7
8 69 71 9 10 11 12 24 13 14
15 16 17 18 19 44 20 21
22 36 82 23 24 25 26 27 28
29 43 60 30 31 Feb.1 2 23 3 4
5 6 7 8 9 80 10 11
12 53 51 13 14 15 16 17 18
19 41 69 20 21 22 23 50 24 25
26 27 27 Mar.1 2 56 3 4
5 49 36 6 7 8 9 10 11
12 59 43 13 14 15 16 81 17 18
19 20 21 22 23 18 24 25
26 35 53 27 28 29 30 31 Apr.1
2 32 41 3 4 5 6 4 7 8
9 10 11 12 13 71 14 15
16 49 17 18 19 20 21 22
23 59 24 25 26 27 82 28 29
30 May.1 2 3 4 68 5 6
7 35 8 9 10 11 12 13
14 47 32 15 16 17 18 51 19 20
Slotting schedule is the key to Harcrest operations. Houses are noted by lot number and each appears three times — the start date, the rough plumbing date on the Monday of week 7, and the closing date on the Friday of week 20.

Building Schedule
8/15 12/30
Skip - 8/22 1/6
24A Smith/Weston 8/29 1/13
44A . Thomas/Kingsbrooke 9/5 1/20
Skip - 9/12 1/27
23A Brown/Fairmont 9/19 2/3
80A Kingston Front Entry 9/26 2/10
Skip - 10/3 2/17
50A White/Weston 10/10 2/24
56A Barnett/Wilmont 10/17 3/3
Skip - 10/24 3/10
81A Wilmont w/bumpout 10/31 3/17
18A Hughes - Weston 11/7 3/24
Skip - 11/14 3/31
4A Janson/Kingston 11/21 4/7
71A Jones/Kingsbrooke 3Car 11/28 4/14
Skip - 12/5 4/21
82A Woods/Wilmont 12/12 4/28
68A Fenton/Wilmont 12/19 5/5
Skip - 12/26 5/12
51A. Lowe/Weston 1/2 5/19
69A Wilmont w/bumpout 1/9 5/26
Skip - 1/16 6/2
36A Knight/Weston 1/23 6/9
43A Weston 1/30 6/16
Skip - 2/6 6/23
53A Robinson/Weston 2/13 6/30
41A Evans/Weston 2/20 7/7
Skip - 2/27 7/14
49A Kelly/Kingsbrooke 3/6 7/21
59A. Young/Kingsbrooke 3/13 7/28
Skip - 3/20 8/4
35A Sawyer/Kingsley 3/27 8/11
32A Lewis/Weston 4/3 8/18
Skip - 4/10 8/25
4/17 9/1
4/24 9/8
Skip - 5/1 9/15
5/8 9/22
47A Randolph/Weston 5/15 9/29
Skip - 5/22 10/6
22A Meyer/Wilmont 5/29 10/13


Land Mines For Custom Builders

No custom builder should go into even-flow production without full recognition of the challenges it may present. Chief among those is that every house is different for true custom builders. Even-flow thrives on repetitive work.

Still, most custom builders specialize in houses of a certain size, style and price point, so they are often enough alike to make regularized production advantageous. "The biggest challenge will be dealing with the customers," says Mike Smith. "They will test your resolve, and you've got to be willing to stick to your plan, even if it costs you a contract now and then. If a meeting date is not convenient for the customers, they will try to change it. What do you do if that jeopardizes the schedule?

"A custom builder will need great confidence in the strength of his position in the marketplace to hold to his guns. But if the customer really wants the builder, that builder will be able to hold them to a schedule."

Colorado-based management consultant Chuck Shinn points out a couple more potential sticking points. "A lot of custom builders bid on jobs that come to them from an architect who has the primary relationship with the buyer. A builder trying to even-flow his production in that situation will probably fail. Bid jobs are bad. The low bidder is usually the guy who forgets the most stuff.

"And how are you going to sell a slotted construction start, and get the customer to agree to meet the schedule requirements, if you are only one of three bidders for a job? The customer doesn't care who builds the house. The architect is in control in that situation. A custom builder should work only on negotiated contracts, where he has a direct relationship with the customer. Then he can sell the benefits of even-flow and the quality of his work. That's the only way to make even-flow work in a custom building company. You need to have control of the relationship with the customer."

Shinn also cautions that every department in the company has to be even-flowed to match the rate at which the builder plans to start and complete houses. "You might have to add a purchasing agent to make sure the pace of purchase orders matches the selection process," he says. "Every work process has to march to the beat of the same drummer."

Many industry insiders credit Jack Robinson with inventing regularized production when he was vice president of Rayco, the San Antonio production building company that built thousands of homes a year and often topped 50 percent market share. Robinson cautions the concept was not created with small builders in mind, but concedes the benefits are there at 12 houses a year — if not below that level. "As long as it's not sales driven," he says, "You have to be able to create a sales backlog and slot the construction starts. It's hard to see it working at a rate of fewer than 12 houses a year. There's not much synergy or regularity to the processes if your starts are several months apart.

"At 12 houses a year, you could start a slab every month and a framing job every month," Robinson reasons, "and you could probably talk your framer into having a specific crew for you at the start of every month. The electrician can be assured he'll get a house on the 15th of every month. The plumber on the 20th. One a month is better than three in one month and none for the next two."

Even-Flow's Biggest Booster

Among the public Giant builders, No.4-ranked Centex Homes (with more than 37,000 homes closed in 2005) is the biggest advocate of even-flow production, and the extremes to which the firm will go to achieve what it calls "controlled flow" stand in stark contrast to most of the rest of the publicly-traded builders.

Rich Rodriguez, Centex's vice president of process improvement, says the company measures each of its divisions' closings as a percent of its pre-stated plan. "If they stay within 95 percent of their plan each month and each quarter, we consider that 'controlled,' that they are balancing their resources with the flow of units through the system," Rodriguez says. "We also measure the percent of earnings coming in each quarter. A lot of public builders consistently have 35 percent to 40 percent of earnings booked in the last quarter every year, regardless of when their fiscal year happens to fall. We want our divisions balanced between 23 percent and 27 percent every quarter. We want to spit out a set number of construction starts each quarter, based on our business plan.

"Our divisions that do the best at controlled flow are also the leaders in employee retention and J.D. Power customer satisfaction scores," Rodriguez says. "It's no coincidence. This is really important, and a lot of builders are not paying attention."

He has some advice for small builders: "If you've made the decision to limit production and the size of your company, you ought to regulate every aspect of work-flow through it. Your production capacity is set by the level of the highest spike during the year. Why not level production to meet your annual goal, so you are operating nearer to full capacity all year long? Building four houses in the first six months and eight in the next six months has to create chaos in the office and in the field. You will always maximize quality, customer satisfaction, employee satisfaction, and profits by controlling the flow of production to a steady pace."

Rodriguez also points out that a key component of public builder strategies to regularize work processes on-site is to do as much of the work as possible in an off-site plant. "There's a big push for more panelization and modularization. This is something small builders could investigate. You don't have to build a panel plant, just form a partnering relationship with a modular manufacturer. Some of the big custom houses that now take over a year to build ought to be built much faster," Rodriguez reasons.

Day Is Different

Suburban Seattle area semi-custom builder John Day built 40 houses last year, for $20 million in revenue. He is a believer in even-flow, but takes a slightly different approach to it in a number of areas.

For instance, while most even-flow advocates schedule customers to make option and upgrade selections before the slotted construction start, Day doesn't allow customers to make any selections until after framing begins. "We've found that if we try to get the selections done ahead of the construction start, people think too much and start to worry," Day says. "And on tile and carpet, we often found the selected lines had been discontinued by the time we wanted to install.

"We match our selections process to our construction schedule so we have the choices 45 days before the installation date. Just-in-time selections keep people from over-thinking and wanting to change their minds. We provide a qualified interior designer to work with them, and that also builds their confidence in the choices. The designer works for the customer, but we pay the bill."

Day also doesn't pre-sell slotted construction starts. "We won't offer a house for sale until the foundation is in and we start framing. We want to know what our costs are going to be."

Day builds on a 23-week construction schedule, but his houses — while standard in base plans — vary from 3,200 to 5,500 square feet. "The big houses take more like 145 days to build, rather than 115," he admits. "Some of the big houses are more like building two of the smaller ones, so sometimes we get framing crews bunched up a bit. But what we have is much better than the way we used to operate, even if it's not perfect."

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