Sustainable Land Development Today - February 2009 - (Page 22)

SLDT FINANCE FINANCE Takeoff and Cost Management A return to profitability by addressing operational “latte factors.” By Clark Ellis irtually all large U.S. homebuilders are losing an average of $2,000 to $4,000 per home due to inaccurate takeoff procedures, inflated waste factors and careless use of materials on site, according to research conducted by FMI’s Residential Building Practice. FMI has analyzed building materials packages for more than 500 different house plans in multiple divisions of the nation’s top home builders between 2006 and today. If a builder’s division completes 250 homes per year, these losses will reduce its annual proﬁts by about $500,000 to $1 million — a signiﬁcant drain of its proﬁtability. V However, with home prices falling nationwide, builders who want to stay in business have no choice but to run much tighter operations. Where the Profits Are The top areas of physical waste in their homes are found in framing and siding (including brick veneer), rooﬁng, concrete and drywall. The reasons for this waste are as follows: Not paying enough attention to details. Most builders do not know exactly how much of what materials go into their homes. That lack of detailed knowledge means they are cheating themselves out of a powerful negotiating tool to use with trade partners. But the builders are not alone: Even their trade partners would be hard-pressed to give an accounting of the stock they use because they tend to pass the buck for takeoffs to their suppliers. Of course the supplier is in the business of selling building materials, and while most suppliers want to be accurate, they are so busy that they only have time to do estimates rather than takeoffs. In fact, many shipments are inaccurate, with too much of one item and too little of another. The result: repetitive ﬁeld orders that never make it into the budgeting process. That hampers the builder’s ability to accurately analyze the cost of building a plan. Generous waste factors. Regardless of who ﬁgures the materials order, trade contractors always add a waste factor to cover damaged material, theft and installation mistakes. Most add 10 percent to 15 percent, but the actual waste is higher, since takeoffs are rounded up to the next highest number before the waste factor is added in. Bundling of materials and labor. Contracts that roll materials and labor into one price give little or no incentive for suppliers or installers to use materi- The Problem Call it the home builders’ “Latte Factor,” a term that describes why someone who spends $4.99 per day at Starbucks can’t afford to save a couple of hundred dollars each month. A few bucks a day may not seem like much, but it adds up to a hefty annual expense. The same process is bleeding proﬁts from builder divisions. Material takeoffs are rounded up to the next highest number, then padded with generous waste factors. Inaccurate deliveries aren’t identiﬁed as such, so the builder pays for stock it never receives. Materials are then used inefficiently, so more has to be ordered to make up the shortfall. But while a few studs here and a few sheets of plywood there seem like no big deal, they add up to thousands of dollars in unnecessary expense on each home. A few years ago, when everyone could get a mortgage, prices were rising and buyers were standing in line, the most important objective was to build and sell homes quickly. Material conservation was not nearly as critical, particularly with the amount of price inﬂation that was present in most major markets. 22 February 2009 Sustainable Land Development Today als wisely, and they hide the potential savings. For instance, if drywall is selling for $10 per sheet, most builders assume that reducing the drywall takeoff by ﬁve sheets will save them $50. The truth is that the drywaller charges a price per sheet that includes materials and labor. If that price is $35 then the builder can actually save $175. Over-extended job supervisors. Many builders have cut costs by reducing staff. With fewer job supervisors, the ones who are left are responsible for more jobs than before. So when a package is dropped at the site, they do not have time to verify the count. They also do not have time to hold trade partners accountable. When a trade partner comes up short, most supers automatically stamp the ﬁeld purchase order, and the true cause of the shortage is never identiﬁed. There is no incentive for the trade partner to conserve material, and all shortages get coded as takeoff errors, regardless of the true cause. This makes accurate estimating and budgeting impossible. Transferring material from lot to lot. This is another practice that plays havoc with estimating. If a framing, siding, rooﬁng or drywall crew is ﬁnishing a house on one lot and it’s short of materials, it will often take some from the house next door, leaving a shortage on that job. This has a domino effect as more homes are built. The effect on the construction manager and purchasing manager, who are trying to determine the correct material quantities, is much like the popular carnival game “Whack a Mole”: Each time they think that they have the problem ﬁgured out, it pops back up on another lot! Unclear lines of responsibility. Many builders lack a system for ensuring that unused materials get returned and credited. The ﬁeld supervisor may think it is

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Sustainable Land Development Today - February 2009 Contents Our Voice Modern Flood Disasters Origin of the Sustainability Movement SLDI in Focus Calendar Build Smart Product Innovation Takeoff and Cost Management Industry News Products & Services Advertiser Index Editorial Board SLDT Resources Last Word

Sustainable Land Development Today - February 2009

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