In most cases, money is made on a new custom home before a shovel is put in the ground. Once construction starts, variances happen and margins slip. During these rough economic times, it’s crucial for custom builders to keep their costs under control from the beginning to the end of a project. A custom builder I know recently won a job over three other bidders by presenting ideas that reduced the price per square foot of the house, music to the ears of even high-end-home clients. Whether you work in a design/build environment or from an architect’s set of plans and specifications, it always makes sense to develop plans that are efficient to build. Even in the custom business where clients demand truly unique homes, steps can be taken to reduce costs. Here are some ways to do this:
- Enlist your trade contractors’ assistance in reviewing the plans and specifications. Ask them for input on how to build the project more efficiently, saving you money and assisting them in improving their margins.
- Encourage your client to make decisions on selections as early in the process as possible. Strive to minimize allowances and change orders during the project because once construction starts and changes occur it is more difficult to maintain or improve your gross profit.
- Develop a detailed take-off list for the materials that you plan to purchase, such as framing lumber, trim, windows, and doors. A detailed material list will give you less opportunity for waste.
- If possible, have someone in your company take off the framing, finish, and other materials. If it is more economical for one of your vendors (such as the lumberyard) to do your takeoffs, develop a system to check their accuracy before placing 100% reliance on them.
Conrol trade contract costs by having a detailed scope of work and getting bids up front. The biggest problem many custom builders have with controlling trade contract costs is not spending the time to get bids up front. They bid the job using unit prices and wait for the trade contractor to submit an invoice and hope that the invoice comes in close to the estimate. I am all for loyalty to your trade contractors; however, to minimize price creep you may want to get bids from multiple trades. Custom builders who issue formal subcontract agreements with their trades rarely see direct cost overages in this area.
- When pricing the job, do not be afraid to ask for the margin you deserve. Take into consideration items such as overhead, insurance, employee salaries and benefits, and transportation costs.
In addition, I can’t say enough about the importance of developing a system to compare your actual costs against your estimated and committed costs. A good integrated job costing system will assist you in controlling construction variances. Strive to keep variances between estimated and actual costs below 1%. Review your job cost reports weekly and use the information to take corrective action on potential problems before it is too late.
Investigate variances while the job is ongoing and make changes to make up for them. For example, if excavation costs came in higher than you had budgeted for, make adjustments that will make up for this variance.
In order to survive in today’s market it is of critical importance to monitor and control your job costs. In my next article I will continue to examine this topic by looking at purchase order systems and keeping labor costs down.
Steve Maltzman, CPA, is president of SMA Consulting in Redlands, Calif. He can be reached at smaltzman@smaconsulting.net.
