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Inventory, lumber prices, a sellers’ market, and low mortgage rates all drastically changed between 2020 and now. Even though supply isn’t there, it’s a seller’s market, so you have to keep building because you know you can make a profit on them.
But the challenge builders face is in completing these houses on time and protecting margins. In order to do this, you need to maintain control of your business. With high volume sales and lack of control, you get high variance and low profit. If you don’t have tight controls of your back office, you ultimately lose margin on the project.
In a recent webinar, Managing the Chaos of Home Building, Jeremy Jackson and Rusty Pelt discuss why it’s important for home builders to understand how each department can leverage technology to make data driven decisions across the business in order to maintain control.
Their job is to sell, sell, sell. However, huge demand is outpacing construction capacity and eating up a lot of inventory. Raising prices is not slowing down demand and some builders are halting sales while production catches up.
The shortage delays are also impacting sales because it’s causing construction and closing delays. As a result, communicating with buyers is key. Leveraging your CRM to create consistent communication post-sale can ensure that you’re providing them with a good buying experience, which is important for reputation management.
With these price increases, builders are looking at incorporating escalation clauses and cancellation clauses in sales contracts. Also, builders are looking at doing more spec homes and not offering them for sale until later in the construction process, when they have a better understanding of their cost.
Reports to Use:
An intermediate budget review prior to pricing a home for sale using the Backlog Report (high level summary report) and/or the House Scrub Report is just what you need. The Backlog Report gives you a high-level summary of projected cost to complete and projected margin. For example, you can use this report to quickly identify the house margin percent, and if you’re seeing margins outside what you’re comfortable with, you can run the House Scrub Report to drill down further and look at the specific job. This report shows budgets, actuals, open WOs/POs, and balance to complete.
The Purchasing department is trying to control costs and minimize variances. In today’s market they are faced with:
All of these factors are working against you making money. Using the “gut feeling” isn’t as easy as it used to be. Given the lack of consistency of materials costs, you need more data to make an educated decision and make sure you’re not letting any profit slip away.
Reports to Use:
It’s important to know the starting point—know your base, know your options—by performing a preliminary budget/purchase order review prior to starting a home or releasing Work Orders/Purchase Orders with the Combined WO/PO Report. This report gives you the summary of the totals for all WOs/POs, house budget summary for all cost codes, detailed contact list, and material list by cost code, as well as a WO and PO detail sheet.
The goal of the production department is to build homes as quickly as possible, while maintaining quality.
You need to update schedules every day and approve WOs/POs to make sure that everyone on the team is up to date, as well as making sure that your schedule is accurate and reliable for your vendors. With the market as chaotic as it is, you want your system to do the work for you, so you can operate more efficiently and not chase people for information. Also, you want to work with the purchasing department to ensure that they are aware of any lead time issues, so they can adjust WO/PO releases as needed.
Reports to Use:
Use the ITK for scheduling and WOs/POs approval; this way everyone knows the construction status of each home, eliminating calls from purchasing, sales, accounting, and your vendors. The ITK Schedule Calendar view lets you see potential overloads on vendors and lets you manage delays and take proactive action.
You also want to use the Schedule Exceptions report to track delays, so you get more data to make better decisions. It allows you to see the vendor, reason, and days lost. Use the exceptions for data that you can work with down the road.
Vendor work acknowledgement lets the vendor accept or reject schedule dates within the ITK, so you can keep your schedule accurate.
In MarkSystems, you can also use the Milestone Matrix Report to track construction status of all jobs, using as many milestones as you would like. It can be run for any combination of companies and developments as well as track slippage.
At the end of the day, management is focused on answering two questions: “Are we going to be profitable?” and ”Why did it take so long?” Ultimately, they want to see what the margin was on each home and find ways to protect that margin. However, you don’t want to wait until the end to know how profitable you really are for your community.
Reports to Use:
The key reports for management focus on margins. The Job Profitability Report provides you with a high-level view of your margins that can be run for a series of developments and is used for closed homes.
Budget Analysis Options Separate with Gross Profit is a specific job margin report based on actual cost and revenue and is also used for closed homes. It shows both base house margin and option margin separately.
The Custom Projected Margin Report takes the Backlog and House Scrub reports and combines the information. It can be run for all companies and all developments. It captures all different costs—those that are coming up as well as those that have happened. It gives a projected cost to complete for each line item and summarizes it. The report can show you whether your homes are priced correctly to maintain your margin goals. A corresponding detail table can be generated to show information for specific jobs and provides you with flexibility on how to calculate the project costs.
Building homes is chaotic in normal times. Given today’s market, it's more important than ever for you to have the processes and systems in place to keep your business running smoothly and to provide you with the information you need to make better decisions. Watch the webinar Managing the Chaos of Home Building to learn more.
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