As we discussed in a previous blog, variances can significantly erode your bottom line if not properly managed. However, to manage them, you need to need to make sure you’re tracking them correctly so you can find and analyze those variances within your home builder software.
Getting set up for tracking and reporting
As a first step to ensure you have the right tracking and reporting, you need to:
- Establish baseline estimates through detailed costs estimates
- Create a good cost code structure
- Sending out detailed purchase orders
By laying this groundwork, you will make finding and analyzing variances a much easier task
One of the best ways to track variance is through Variance Purchas Order (VPO) tracking. When setting this up, you need to make sure you do the following:
- VPO limits – establish dollar amount limits for each person who is allowed create VPOs with an approval hierarchy for items that exceed those limits.
- Notifications – there may be certain types of variances that you want to be notified of immediately when a VPO is created regardless of the dollar amount (e.g., estimating error).
- Coding – each person who can create VPOs needs training and accountability for coding them correctly. Your field person needs to recognize the importance of coding things properly so that tracking variances will get better over time.
- Pictures – take pictures of damage, excess materials.
- Back charges – hold trades accountable when possible—if someone didn’t do their scope of work, you want to make sure it doesn’t keep happening with each job. That will erode your bottom line.
It’s important for VPOs to include why, who, what, and how much. You need this information to take corrective action.
By creating detailed Credit VPOs for returned materials, you better understand the issues and adjust estimates as needed. For example, having a line item on your Credit VPO that says “Credit for Excess Lumber” is too general. However, by breaking down the “excess lumber” entry into specific items, such as specifying the number of joists or treated lumber to be returned, you get the needed visibility to take corrective action and minimize variances in the future.
It’s important to remember that you do not want to move material from job to job; this only hides and compounds variance issues.
By setting up VPOs with detailed information, you’ll get greater insight from your dashboards and reports. Set up your reports to view the variances by specific date ranges, vendors, developments, reasons, etc. And you want to look at trends—month over month or by community or across communities—so you can see the trajectory of variances on your jobs.
Timing is critical. With notifications being created at the same time as the VPOs, you can take corrective action when needed and discuss the issue with the supervisor or vendor right away. This allows you to potentially avoid the variance on the current job and make sure that it doesn't become an issue on the next one.
In addition to VPO notification, your accounting team should get a Budget Exception Report each time they post invoices/WOs/POs over budget. This is another great way to get information about what variances are happening on the job.
You’ll want to review weekly and monthly variance reports to get a community or companywide view of what’s happening in your business, as well as looking at it after the house is closed using the House Scrubs report and compare projected margin vs. actual over that job.
Set a goal and take action!
The purpose of setting up variance tracking and reporting is to take immediate action. Generating the VPO is just the first step—you need to fix the issue at its source to avoid it in the future. Since all it’s doing is eroding your profit, you don’t want it to happen again.
With all this information, it’s essential that you set achievable variance goals. Can you get to 1%? It’s possible, but you need to be diligent in taking steps to get there by having the right processes and systems in place. If 1% isn’t realistic this year, aim for an achievable target and re-evaluate that goal every year as your processes improve.
Watch the on-demand webinar “Finding, Analyzing, and Eradicating Variances” to learn how you can take steps to improve your bottom-line.