blog by Glenn Cottrell of IBACOS, as seen on Builder Online
What would you do with $10,000? Before you answer, multiply it by the number of homes you build. If your production is in the double digits, and especially four digits or more, that’s real money. Money you can plow back into your business, hire and keep the best people, improve, grow, and weather whatever storms may come your way.
The real question is how to get it. The answer is: Quality.
I can see your eyes rolling right now. After all, quality is the most subjective term in the housing industry, much less a dollar amount you can point to on a pro forma. It’s nuance, not numbers. If anything, quality (whatever it is) costs money. It darn sure doesn’t make money.
I’m telling you it does … or can! Maybe $10,000 a house if you play all your cards right and stay in the game long enough. The ante’s a buck; a dollar to make 10. Before you throw in, though, I’ll put my cards on the table.
A while back, I was floored by an informal study that found a small group of public builders holding an average of $7,200 per house in reserve to pay for warranty work, construction defects, and related litigation. In essence, banking on the cost of failure, the price of poor quality.
Sure, some reserves to fight or settle claims are a part of our business, but $7,200 a house? There’s got to be a better way!
WHAT DO YOU THINK?
Do you hold money on each home you sell to pay for warranty work and callbacks? Does it make sense to spend more money on quality construction?
There is, and it’s not hard to understand. It’s just hard (at first) to do, though I’d bet any production builder still upright after the recession is well on his way already.
Simply, it makes more sense to invest in prevention and appraisal than it does in failure, and for so many reasons – from just delivering a better product to keeping your people happy, keeping customers happy, freeing up working capital, lowering costs. Not beating up subs or suppliers for a discount you’re just going to spend later to fix a problem. Not talking to lawyers.
To prove it, we analyzed industry reports and consulted renowned experts to conjure a typical production builder, came up with a set of real-world metrics and created reasonable formulas for quantifying the value of quality.
Every time we got close to thinking we might be over-reaching, we dialed back our assumptions. We asked a handful of high-quality builders to sense-check them. How many dumpsters are reasonable to eliminate? How many days can you realistically reduce cycle time? How many more homes can a site super actually handle? We kept it real.
When we plugged in real numbers and saw the results, we trimmed those back, too. And still, the ROI was a far cry from 1-1.
Let me be clear: I’m not saying you’ll get the full $10k for every grand you invest in quality, and certainly not off the bat. You may suffer only a 600% return, or maybe just 300%. Even then, I’d wager it’s worth a knock on your CFO’s door.
What I am saying is that we can all get better, spend a little to make a lot more. The ability to precisely determine where to start investing in quality is the only way to get the greatest return.
But then, quality has never been easy to quantify, right? That is, until you hold back $7,200 a house to pay for failure and realize that’s exactly what you’ve done.
I think it’s time to flip that around.