By adopting the following simple but smart ways to work more efficiently, reduce waste and make better returns without increasing your prices, this year could be your most profitable yet.
It’ll result in a win for all involved, and you’ll find that they apply, no matter what size your business is.
1 Don’t take on risky, low-margin projects
If you are doing work of a high-risk nature, or below your normal margins, you are probably better off not to do it. Remember, the more difficult or high risk the project is, the margins and contingencies will need to be set accordingly.
I have seen many builders come unstuck thinking they can do demanding projects on slim margins. It always ends in tears.
Do work that you are competent in and that consistently returns a fair margin. Increased volume at lower margins never translates into increased profit.
2 Don’t give things away
Every time you include something at no cost or low margin you have to work that much harder to catch up financially. Put upgrades into your specification as options with a cost, and let the client decide if they wish to incur the extra expense.
3 Design and build product for your customer — not yourself
One of the biggest mistakes builders make is that they think customers want a home and options that the builder would like. This often leads to design and construction costs that may be beyond the client’s budget and, consequently, put pressure on the builder’s margins. Survey your customer’s needs and build to their needs, not yours.
4 Eliminate waste and excess material usage
If you evaluate your construction techniques, significant savings can usually be made. Make sure you check delivery quantities for error (yes, many mistakes are made) and always return excess material for credit and not to your yard.
Failure to do so quickly can end up with damaged material that is only fit for the skip. If you could reduce the number of waste skips on each site from three to two, consider the savings over a year.
5 Develop clear scopes of work and checklists
Train your onsite staff and sub-trades on the scope of work they are expected to complete. Check sheets help eliminate oversights which, in some cases, could be very costly. Call backs and maintenance will also reduce significantly.
6 Don’t start until you have detailed drawings and all product selections are made
Accurate, detailed and complete working drawings, along with completed colour and product selections, are a must if you are expected to work efficiently. You are better off delaying the start of the project until these are available. Commencing on less than full information will cost you through delays, rework and cost overruns.
7 Value engineer the drawings
If you’re in a design-build situation or are given the opportunity early in the design phase, significant savings can be made by builders analysing the drawings for construction inefficiencies. New or alternative materials can be considered along with different construction techniques, saving time and money for the home owner with the added bonus of increasing the opportunities for you to have better margins.
8 Keep a tight control of budgets
Implement a formal purchase order system with good descriptions and quotes on all orders. This controls cost slippage and makes checking your monthly accounts so much easier.
Don’t be frightened to negotiate hard with trades and suppliers because if you don’t ask, they are not likely to offer a better deal for loyalty or volume.
I have seen many builders work a lifetime with little return, whilst all those trades down the food chain have done handsomely from the work he has provided — all because the builder remained loyal to those sub-trades and forgot to periodically check if those trades prices were still competitive.
9 Improve your estimating
If your estimates are not accurate, how can you ever expect to know how much margin to charge or if you are making a profit? Detailed back costings should be kept against the original estimates.
You do this as a check against the accuracy of your estimating. Failure to do this correctly means you’re in the dark, and it’s a sure way to end up going broke.
10 Programme your work
The more efficiently you work, the more you can achieve, and your earning potential increases accordingly. For example, if you consistently build four homes in any one year and through good programming you increase that to five homes using the same resources, your income increases and your overheads reduce.
This message is simple — get yourself and your trades organised and with the cloud-based technology now available, it’s becoming easier to communicate programme dates, purchase orders and variations without even having to pick up the phone.
11 Standardise and systemise procedures wherever possible
Wherever possible make construction details and work administration practices consistent from job to job. Train your staff and sub-trades fully in these systems.
Efficiency will increase through repetition, and you will have peace of mind knowing it is a tried and true reliable detail or system.
You cannot expect to grow your business efficiently unless you put systems in place that can be followed and replicated between projects.
12 Watch staff levels
It is important that staff levels maintain a balance with onsite work and sales volumes.
Builders tend to be eternal optimists when it comes to that next job starting, and often leave hard decisions of reducing staff until it’s too late. This point has never been more pertinent with the residential construction boom in Christchurch now past its peak.
13 Keep an eye on your sales volumes
As I’ve mentioned in earlier articles, you are better to do less work at higher margins than lots of work on smaller margins.
Do not discount your prices to increase your volume — it’s a sure one-way ride to the builder’s scrap heap. Always look six months ahead, and if enquiries are down now, then there’s nothing surer — you will be quiet in six months’ time.
Some builders fall into the trap of being so busy trying to complete their current work load that they lose sight of where the next projects are coming from. Keep an eye to the future.
14 Monitor advertising and promotions
Advertise and promote yourself in boom times and while you are busy for two good reasons. First, you will be able to afford it and, second, because the gestation period for new projects is so long, if you wait until you need the work it could be too late.
15 Actively develop your referrals
We all know the value of a referred client. They come to you on recommendation and, on the strength of this, a sale is likely to occur.
Not many builders actively work on getting referral business, but this can be done very cost-effectively with outstanding results.
16 Look at your management systems
It may be time to upgrade your computer system to a fully integrated estimating, ordering, back costing and accounts system. Monthly accounts with profit and loss, along with accurate back costings on each project, is a must in our line of business.
Get your accountant to set your system up so you can produce monthly management accounts in house. You are better to invest in quality systems before hiring more staff — it is so easy to become top heavy.
17 Always get paid in full before allowing clients to take possession
One of the biggest financial traps for a builder is to allow a client to take possession of a new home prior to getting payment in full.
Mark my words, if you allow this to happen you will end up either not getting a portion of your final payment or it will take you a very long time to get it, with ever-changing reasons or building faults that seem to appear as reasons why you are not getting paid.
18 Build the project right the first time
This, out of all of the above, is probably the most effective way of improving your bottom line. Rework, call backs and maintenance all cost money, time and resources, the cost of which will come from your company’s profits.
It affects you in two ways — first, the direct cost of fixing the problem and, second, the loss of earnings while you carry out the remedial work.
Really, it’s a no brainer — put the time and effort into getting it right first time so that you don’t need to return. The client will be happy, and so will you with increased earnings and lower hassles.
I hope these tips help make a difference to your business in 2016. Also, I really appreciate all the kind messages of support and encouragement for the articles I have written over the past year, and hope that in some small way they have a positive impact on your business in what is a very hard industry to operate within. It is an honour to be able to write these for Building Today readers.
• This article contains the author’s opinion only, and is not necessarily the opinion of the Registered Master Builders Association, its chief executive or staff.