From U.S. News’ Best States special report just out, here’s their findings for America’s top 10 states for affordability based on cost of living and housing data.
Imagine, now, all states, every city, most sub-markets, with affordable housing. I’m talking real, relative affordability, the kind that clearly ties household incomes to attainable choices to rent or to own, without dramatically accommodative mortgage interest rates necessarily in the mix.
It’s unimaginable, right?
Two primary forces conspire against such a scenario. They’re well-known; they’re entrenched; they’re practically accepted as costs of doing business, to be factored into all business models, and managed around. One is land-use regulation, the broad catch-all term for local, county, state, regional, and national fees, hook-up charges, permits, inspections, taxes, etc., the veritable “highway-robbery” that layers into more than 30% of a home’s price tag.
The other, no less insidious, paralyzing, and powerful enemy of builders delivering a full panoply of good new houses and communities at price tiers that actually meet the need of those with fully-varied means–and I’m speaking of for-rent as well as ownership here–is productivity loss in construction.
Now, one of these forces appears to be completely external to residential builders’ and developers’ operational control or influence. So, most of the business community assumes that in some form or other, these byzantine practices of fixing cost and time on to the process, and ultimately, onto the backs of would-be buyers or renters will continue. And, likely, get worse, barring genuine feats of wonder from President Trump, who feels that such fees and regulations should come way, way down. Maybe there’s hope yet.
The other force, productivity loss, falls within home building company leadership’s realm of responsibility and accountability. Productivity and a business model should align. Businesses resilient enough to thrive today and work tomorrow need agency around productivity.
But, for many in the home building and residential development, agency and productivity disconnect the moment you introduce subcontractors, local officials, and other vendors into a local project site equation.
Attorney Barry LePatner, author of “Broken Buildings, Busted Budgets: How to Fix America’s Trillion-Dollar Construction Industry,” understands this notion about as well as anybody. Authors of the vaunted new McKinsey & Company report, “Reinventing construction through a productivity revolution” borrowed heavily on LePatner’s research and observations, and managed to omit one of the more important, elegant, and helpful insights into “why?”
LePatner’s narrative exposes a critical dynamic that’s part of construction projects’ DNA, the information gap–or asymmetry–between worker-laborer-technicians and those who manage them, the supervisors. Laborers, for instance, have greater, more precise, more evidence-based knowledge of levels of effort, time value as money, and, in many cases, material resources needed for tasks than supervisors.
LePatner, well ahead of the good folks at McKinsey, explores the implications and consequences of that asymmetry, and notes that it plays out in thousands of decisions, judgments, assessments, etc. that wind up as inertial, productivity-sucking concessions to “that’s the way we’ve always done it” thinking and behaving in construction.
One of the gross effects, which the McKinsey analysis takes stock of, is that “owners” or supervisors or, in the case of home building enterprises, the divisional executive management, tend to take the low bid on just about every estimate. Then they find out that the correlation between low bid and actual cost is tenuous at best.
What frustrates me about the McKinsey “take-aways” is that they’re self-serving. Maybe you won’t see them that way. Here they are:
Examples of innovative firms and regions suggest that acting in seven areas simultaneously could boost productivity by 50 to 60 percent. They are:
- reshaping regulation;
- rewiring the contractual framework to reshape industry dynamics;
- rethinking design and engineering processes;
- improving procurement and supply-chain management;
- improving onsite execution;
- infusing digital technology, new materials, and advanced automation;
- and reskilling the workforce.
Well, then, there goes agency when it comes to change. If all it takes to capture productivity losses in construction is to change absolutely everything, then a small firm or a midsized company, or even a big builder might say, “thank you very much, let me know when you’ve got that figured out.”
McKinsey’s insights are not so much off-base as they are self-aggrandizing. The challenges, phrased as they are, lead back to McKinsey business solutions.
But they don’t address what a home building company, an operator whose business model is to leverage productivity to create a chain of value in the form of homes and communities on residential real estate, can and should do today about the productivity crisis, which plays out in labor capacity and cost stress, as well as in affordability vacuums in new home supply.
One way of addressing lost construction productivity at the micro, firm-based level is to go [back] to school on what productivity is in home building operations, and how that impacts your business model.
Fletcher L. Groves, Clark Ellis and company have created a firm-level action plan around a) understanding the role economic productivity plays in a home building business model, and b) teasing apart operational workflows to understand one of the biggest flaws in construction operations management, “critical path” planning.
Linear critical path roadmaps lead to events and issues that challenge either a timeline or a budget, Groves argues. Critical chain maps, on the other hand, take into consideration all possible impacts to timelines and budgets in anticipation of their occurrence and factor them into profitable, iterative business flows.
Groves and Ellis have a back-to-school session, called the Pipeline Workshop, coming up April 5 & 6, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida. They’ll take participants through four “Velocity Accelerators” that directly impact firm-level productivity and business model resilience through the current cycle and for cycles to come. The Accelerators–Epic Partnering, Business Process Improvement, Critical Chain Management, and Business Information Modeling–can and should do a number on many a business and operations model.
And the good news is, you don’t need every other participant in the entire construction ecosystem to change all at once to benefit from it. Here’s the link to information on the next Pipeline Workshop.
Once there’s clarity on productivity and what it yields in terms of economic profitability that can span business cycles, the role of technology and innovation, and the need for investment in both, will also be clearer.
We’ll be exploring issues, challenges, and opportunities around productivity, its impact on labor expense, and technology at a what-it-looks-like-in-your-organization level at our upcoming Housing Leadership Summit, May 8-10, at the Ritz Carlton, Laguna Niguel. It’s theme this year is Build, Measure, Learn, and we’ll look at culture, strategy, and execution all through the filter of data’s more and more pronounced role in the endgame: your success in improving the lives of people through resilient housing and communities.
“The way we’ve always done it” will kill your company’s chance of success today and tomorrow if you let it.
