Over the past several years I have seen many custom building businesses grow in both volume and profits. However, I’ve seen other companies with growing top lines but stagnant or even declining margins and net income. These struggling builders learned the hard way that until a company has the necessary systems and procedures in place, an increase in volume often leads to lower profits.
The recent market boom has brought this reality home to custom builders across the country. As small builders grow in volume, there seem to be four issues that surface again and again: recruiting, developing, and retaining management talent; evaluating and selecting management systems and software; implementing efficient production policies and procedures; and controlling cost creep.
Management Talent. As custom home building companies grow, the boss can no longer do everything. This often surfaces as missed opportunities and confusion among the existing staff as the workload grows and bottlenecks keep the organization from responding to pending problems and opportunities.
Before starting the process of expanding your team it is critical to have an organizational chart that details your company’s jobs and who does them. By looking at who does what, the organizational chart becomes a tool for identifying future hiring needs. The next step is to develop job descriptions for each position in your organization and then take a look at your current personnel. Do you have the right people in the right positions? One way of answering this question is through the use of personality profiling systems, which have the added benefit of helping staff members to gain a better understanding of why they and their co-workers behave the way they do. This helps avoid common personality conflict problems.
With the groundwork set you can begin to recruit new managers—from inside or outside the company—so you as the owner can delegate more of your work.
Software and Information Systems. As a company grows to the next level, it may be necessary to upgrade information management systems or at least find out whether staff is using the system to its fullest. Ask yourself some of the following questions:
- Are you not getting accurate information out of your system? The GIGO Principle—garbage in, garbage out—is often the biggest culprit of inaccurate information. If you are entering bad information into your computer you will not be able to get accurate reports.
- Have you set up your system properly? Many computerized management systems provide flexibility in the setup of job cost, general ledger, and other basic database items. This flexibility can be good, but if you don’t treat it right it can give you inaccurate data. Challenge your current chart of accounts and job cost structure. Is the data really going where you want it to go?
- Are there features in your software you are not using? Most custom builders are only scratching the surface in using the features available in their computerized management system. Review the manual, attend a training session, or speak with other users of the software to help you determine if you are using your current system to its fullest capabilities.
- Do the people operating the system really know what they are doing? Poor operator training is one of the major problems I find with custom builders who think their systems are inadequate. Don’t be afraid to invest in proper staff training.
After challenging your system you may determine that it is worth the time and investment to switch to a new computerized management system. Where do you start? First, determine what features you don’t like about your current setup. Then talk with fellow builders to see which systems they are using. Make sure to ask them how their system is handling the features you feel are missing from your current system. The next step is to get a demonstration of the system; many vendors offer working demos and others will come to your office and give you a demonstration.
Before making your final purchase decision, get a list of references. Talk to the references about specific system features, but more importantly ask about the documentation, training, and support offered by the vendor. Remember, one of the main problems with computerized management systems is poor training and support.
Production Management Systems. In a growing company, the owner can often no longer be on each jobsite each day. Before turning over the reins of field management to other staff members, you should develop a production manual that includes the following ingredients:
- Trade contractor scopes of work
- Trade general and payment terms agreement
- Preferred construction technique documentation
- Trade specific phase completion checklist
- Construction specifications
- Scheduling templates
- Quality control checklist and results monitoring
Controlling Costs. Most owners of growing companies begin to notice their direct costs creep upward. This is a result of not being able to control every single detail in the same manner as when you were only building a house or two at a time. Direct costs increase when you take shortcuts on your estimates—not getting quotes from trade contractors or properly taking off material because you run out of time to prepare a bid.
