As reported last month, the majority of the nation’s 400 largest builders see the future through a four-part lens:  Their own building operations will be significantly larger;  that growth will come at the expense of other builders;  the industry will see a drastic consolidation in the number of homebuilding operations;  and the current delivery systems will become obsolete.

Builders that intend to thrive in anything close to this environment will need to work harder than ever to improve operating performance and increase profitability.  But . . . where do you start?  Where do you focus?

In our opinion, there are two make-or-break issues that homebuilding companies must address in order to significantly improve performance – the structure of hard construction cost and the length of process cycle time.

Setting aside momentarily the issue of improving hard construction cost, it’s easy to see why cycle time drives operating performance.  Improving the length of time required to sell, design, build, and close a home:

? reduces cost (by eliminating waste, inefficiency, and poor quality).
? increases production capacity (by leveraging the investment in fixed expenses).
? improves cash flow and reduces working capital requirements.
? improves quality.
? increases profitability.

We gathered a wealth of knowledge about cycle time in Reference PointÔ, our annual survey of management practices conducted among the chief executive officers of companies listed in Professional Builder’s Survey of Housing’s Giants.  This year’s survey, conducted in the fourth quarter of 1997, was cosponsored by American Metro/Study Corporation.

We first asked these executives about the length of time required to build a house (from the time a purchase agreement was signed until title closed), and the amount of time that process could be shortened (Figures 1-2).  As expected, the length of the process varied by builder type and size, but the overall average was 141 days;  the estimates for shortening the process also varied slightly by type and size, but were in a very tight range surrounding an overall average of 25 days.  The average improvement ranged from 14% to 21%, with an overall average of 18%.

Another set of questions asked these executives to rate the opportunities for improving cycle time, and the percentage of effort (in terms of time or money) they would allocate to those opportunities (Figure 3-4).  Again, responses varied by builder type and size, but overall, a significant number of builders rated project scheduling and coordination (56%), supplier and tradecontractor partnering (39%), plan design, drawings, and specifications (35%), and contract and change order approval (35%) as “high-priority opportunities”.

Cumulatively, however, these four opportunities only accounted for slightly more than half (53%) of the effort (18%, 12%, 13%, and 10%, respectively) these executives were willing to invest in improving the length of their contract-to-closing process – an indication that most of them have a very comprehensive view of the effort that will be required.

Finally, we asked these executives to rate their satisfaction with the cycle time of their contract-to-closing process (Figure 5).  Overall, only five percent of the nation’s leading homebuilders indicated they were “very satisfied” with their current cycle time, while over twice that percentage (12%) said they were “not at all satisfied”.

The story doesn’t end there.  Improved cycle time gains true stature and value when it is understood for its role as a multiplier of the effort to improve the structure of hard construction cost.  Why?  Because the primary reason for reducing variable cost is to improve gross profit, but the primary reason for improving cycle time is to increase productivity.

And bigger, more profitable building operations is a result that fits very well with the Giants’ strategies for growth.
 

Fletcher Groves is a Vice President with Service and Administrative Institute.  He can be reached at (904) 273-9840.  Randy Warner is Director of Florida Markets for American Metro/Study Corporation.  He can be reached at (813) 273-6200.