I recently had the opportunity to moderate a panel of builders who have been winners of BUILDER magazine’s prestigious America’s Best Builder Award. They included Jeffrey Abrahams, CFO of Touchstone Homes in Atlanta, and Stephen Rolston, president of Land Ark Homes in Ottawa, Canada. In this column I will highlight some of the best practices that were discussed by the panel.
Financial Management. The No. 1 key to the success of top builders is that they understand their numbers because they have strong accounting systems in place. Many custom builders simply report their internal financial reports on a completed-contract basis, without recognizing any of the revenue or costs from their houses until they are complete. Others use the cash method, only recording transactions when cash is received or disbursed. Still others employ the accrual or billings method, which recognizes costs when invoices are received and revenue when draws are billed to the customer.
The best practice is to report costs and earnings from pre-sold homes using percentage-of-completion accounting. This method recognizes gross profit, cost, and revenue throughout the life of each contract based upon a periodic measurement of progress. It is most desirable for pre-sold homes because it more accurately matches costs with revenues and, therefore, profit for a given period.
A good accounting system is critical to developing an operating budget that will let a builder measure his results. An operating budget provides the custom builder with a basis for determining the appropriate mark-up percentage as well as targeting the amount of gross profit needed in the upcoming year to cover overhead and to provide a reasonable profit. To really make the best of an operating budget it is important to not only look at expenses for the year but also to identify estimated operating expenses month by month. This will make it easier to analyze financial results compared with the budget.
Abrahams begins the annual budgeting process for Touchstone Homes in late June. He notes that it is particularly difficult to budget during times of economic uncertainty. “The one thing that is for certain in a market like this is that the budgeting process becomes increasingly more important,” he says. “If you don’t have a plan then you have no method of measurement.”
Tracking his numbers gives him a basis for making decisions and analyzing scenarios that is especially important during unpredictable periods. The best custom builders spend time not only preparing but also interpreting what their financial reports are really saying. By analyzing the numbers a custom builder can find out a lot about where he has been and get a better understanding of where he is going.
Sales and Marketing. In today’s economic environment many custom builders are “beating the bushes” for new clients. The best think creatively when it comes to marketing. For example, one thing that sets Steven Rolston’s company apart in his marketplace outside of Ottawa is exceptional customer service, and he uses it to market his company. “Better service, I think, speaks for itself,” he says. “Our process and documentation just ooze the fact that we are trying to attempt to address a lot of people’s fears. If we can walk them through the process … then it can set their mind at ease that this process is going to be one that is enjoyable in getting their dream home.”
These are some other marketing approaches of successful custom builders:
- Keep in contact with past customers and prospects via an electronic newsletter.
- Host seminars for prospects, explaining the design/build process or any other process that makes the company stand out.
- Have an exciting, up-to-date Web site.
- Have the entire team constantly soliciting referrals, including asking for referrals during warranty work.
- Pay for a party hosted by a client who invites friends who may be good future prospects. Provide marketing materials at the event.
- Sponsor a charitable event that a client supports.
- Advertise in a smaller publication that is frequently seen by potential clients (i.e., an opera program or at the country club).
Work with vendors to get co-op advertising dollars. Production and Production Support. Top-notch builders develop strong relationships with their trade contractors. Rolston, for example, has long-term relationships with most of his trades but isn’t afraid to shop around. “Every spring we go through this exercise to see who is going to carry the balance of the work for our year. But generally speaking when these people were hand picked a number of years ago we found they were very competitive and they did great work and that’s why we hired them,” he says. “It’s that level of dedication and quality that goes over and above anything.”
Strong lines of communication between the office and field and between the project manager, superintendent, and trades are critical to success. Develop, update, and communicate your construction schedule to your trades regularly. Develop quality-control checklists that your superintendent can use to make sure that the work is being done to the quality standards you have established.
