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First Look: The Alliance's New Offsite Solutions Business Value Calculator
WHAT IT IS: A Beta tool for comparing cost and value of onsite and offsite construction more holistically—beyond the direct costs of framing labor and materials.
WHY IT MATTERS: Comparing direct costs alone won’t give you a complete picture. This tool should provide a helpful methodology for comparing total costs (direct and indirect) and determining which numbers work in your favor.
Want the working Excel version? Contributing members and partners, log in to the members only section of our website. Not a contributing member or partner? Learn how you can get a copy.
HERE’S THE BACKGROUND ON THIS NEW TOOL
At the Alliance we talk a lot about the benefits builders can enjoy by using offsite construction methods, including the ability to complete more homes with fewer workers in less time. Much of this discussion has been based on general observations and anecdotes from builders using offsite, but our goal is to put as many numbers to those benefits as possible.
Our Roundtable event in Phoenix last November as well as April's Innovation Summit in New Orleans included presentations by offsite providers such as Katerra, Entekra and Raney Construction. For instance Buddy Raney offered a well thought out financial analysis of offsite's costs and benefits for his builder customers, an analysis we will share in an upcoming post.
But builders have been telling us that they want some advice on how to make a similar analysis that's customized for their particular business. That was the motivation for the new Offsite Solutions Business Value Calculator featured here, which the Alliance developed in partnership with IBACOS. Glenn Cottrell, who leads IBACOS’ PERFORM business and quality management work with builders, drove the development effort. This is still a Beta version, so we are asking Alliance members and partners for feedback on what the final version should include and how it should be structured.
(If you haven’t already, open or print this PDF before you continue reading.) As you can see, the tool is a spreadsheet with cells that compare the numbers for onsite and offsite construction. Builders can plug in the most relevant numbers for their operations.
The example here is for a hypothetical company that builds 250 homes per year. Current costs for stick framing are in the left-hand column while projected offsite costs are in the right-hand column.
Let's look at it section-by-section.
The builder in this example wants to switch from stick framing to open panels. The estimated reduction in Build Cycle Time from 100 to 92 days will allow the builder to complete an extra 21 units per year, bringing annual volume up to 271.
The model assumes the builder can sell the additional 21 homes.
We have left a lot of the cells in the Direct Costs section blank in this example. That's because costs for framing, insulation, plumbing, electrical and HVAC will depend on the type of offsite solution you choose. The beauty of this model is that it's flexible enough to accommodate those different approaches.
This builder is switching to panels, so while there's a difference in framing costs, the mechanical costs should stay the same. It doesn't matter whether you fill in the numbers or leave them blank, as it doesn't change the savings opportunity.
Were the builder considering closed wall panels or modules, the Direct Cost numbers would obviously be very different, considering any impact on insulation costs and how much of the mechanical infrastructure the panels or modules included.
Soft or indirect costs include those things that aren't direct construction costs but are nevertheless critical to the builder's success. These include taxes, insurance and loan interest.
The soft costs may be where most of the returns are.
For example, General and Administrative expenses are fixed, so they will be lower on a per-unit basis thanks to being spread across more units.
The same goes for loan interest. With shorter cycle times, the builder will likely be able to complete those 271 homes for the same amount of borrowed money that it was costing to build 250 stick-framed homes. The total interest cost doesn't change, but it's spread over more units—resulting in lower per-unit interest.
Other items in this section are hard to quantify. For instance, how much added margin can a builder expect if the offsite solution makes the schedule more consistent and strengthens subcontractor loyalty by eliminating dry runs? How much of a reduction in interest can the builder expect from the ability to turn loan money over more quickly? And how much in real estate taxes can the builder save by completing and selling homes in 92 rather than 100 days?
We don't know the answers to these questions. They’re judgment calls each builder has to make.
TOTAL SAVINGS OPPORTUNITY
These and other indirect cost savings show up in the Total Savings Opportunity for the offsite solution at the bottom of the spreadsheet. Note that Direct Costs for offsite construction are actually $3,350 higher, but Indirect Cost Savings are $3,817. That nets out to a savings of $467 per unit.
Total profit per unit has now risen from $36,000 to $36,467, and total profit for the operation from $9,000,000 to $9,882,565. The builder has made an extra $882,556 (or roughly 10 percent) by switching to an offsite solution, thanks in large part to the per-unit profit from those 21 extra homes.
The point is that you need to go beyond a first cost comparison when comparing onsite and offsite. Otherwise you will miss the full picture and risk overlooking some real bottom-line benefits.
WE NEED YOUR HELP!
We do know that the categories listed here are far from complete. Benefits you have suggested to us range from a lower cost of re-grading (because there are fewer delivery trucks tearing up the jobsite with offsite construction), to the fact that weather delays are less likely to stop work when the house only takes two days to dry in rather than eight. Fundamentally, we have heard that while this tool is heading down the right road, we need to consider some additional value propositions.
We're depending on you to suggest those options. Once we have gotten it, we will revise this tool and publish it in a form that everyone in the Alliance can use in their decision-making process.
Let us know what you think. Visit the members-only section of our website, and comment on our Value Calculator discussion thread in the Offsite Construction Solutions Community Forum.
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