Turnkey Solutions Tarnish
Wieland is unique among production builders in that it has its own distribution network of subsidiary companies through which products flow to its jobsites. This network, says Auer, and the increasing availability of labor that the downturn has produced, alleviates the need for Wieland to seek suppliers that offer turnkey installation programs. Auer believes her company can negotiate lower prices for products and labor than a turnkey provider could offer.
During the last boom, turnkey providers flourished. But with new-home starts and permits way off, their star faded, “especially now with labor beating down our doors for work,” says Tompkins.
“Drywall selling at $110 per 1,000 doesn’t hurt, either,” says Brown, who has seen the gap close between turnkey and itemized pricing.
Masco Contractor Services and the SelectBuild subsidiary of Building Materials Holding Corp., two of the industry’s biggest turnkey providers, saw their sales and profit plummet last year, even as both companies grew through acquisition.
Gross joined Castle & Cooke from Dunmore Homes, the now-bankrupt firm that apparently wasn’t helped much by purchasing products entirely from turnkey suppliers. Castle & Cooke has turnkey arrangements with its framers of dimensional lumber and trusses, “although we have explored buying those products ourselves and bringing them on-site.”
The problem, Gross says, is Castle’s volume, as its Bakersfield division only built 107 homes last year. And he prefers turnkey solutions for certain construction stages because “we’re not in the cabinet business, and we’re not plumbers. The ‘in’ number is what matters to me,” referring to the total cost of installation.
In fact, many builders still see turnkey as the most efficient way to meet their construction demands, particularly companies that are getting into value engineering, which incorporates a deeper cost analysis of the supply chain, from design to finished product, at every step in between.
“When installation is good, that’s a big value for our members,” says Smithers of CBUSA, to which Capital Pacific’s Maza adds that he favors a turnkey approach because “we want our suppliers to be wholly responsible” for their warranties. His division uses turnkey framers and truss makers, as well as four local window distributors that make products “that meet our standards.”
Up for Bid
Their embrace of national purchasing agreements or turnkey solutions can be seen as part of a larger strategy by builders to reduce the suppliers they use to lower their construction overhead. But these kinds of arrangements can put anointed suppliers in an uncomfortable position.
During a panel discussion of smaller builders conducted during the recent International Builders’ Show in Orlando, Fla., several participants indicated they had moved away from bidding jobs and were more rigid about what they were willing to pay for products and services. Some of these same builders, though, took great pains to say they need to strike a balance in their purchasing that lets their subs make money.
Those comments reflect the dilemma builders find themselves in as sales languish and home buyers demand lower-priced houses that still have the features and options they crave.
Consequently, bidding out jobs isn’t going away anytime soon. Baft says that McBride has been “opening everything up for bid again. We’ve already gone back to our key vendors twice [for price concessions], and we’re going back a third time. Business is tough right now.”
“Customers are only willing to pay $500,000 for a house we had been selling for $700,000, so we have to find, what, 20% reductions somewhere,” says Brown of Arthur Rutenberg. But in this economic environment, builders can’t just dictate terms and expect their suppliers to jump.
“It’s more like getting an estimate for $12,000, and going back to the supplier and asking how we can get the price down to $9,000,” says Brown. The answer might require adjusting a house’s lighting design or window placement to lower the installation price.
The question is whether this kind of give and take is transitory, or becomes the industry standard when the housing market finally recovers.
–John Caulfield is a contributing editor to ProSales.
