House Plans Rescaled
Steve Scarborough, StanPac CEO, says value engineering has helped cut the company’s construction costs by an average of $10,000 per house, and by $16,000 in the Phoenix market. Through September, half of TOUSA’s divisions had gone through value engineering exercises that Vogt calls “design charettes,” which bring together several of the divisions’ departments with contractors to “optimize our designs.”
Beazer’s Callahan sees value engineering as the silver lining in the housing downturn because it’s forcing builders, manufacturers, and contractors to work toward a common goal. “We’ve brought in our suppliers, showed them what we’re trying to achieve, and asked them how they can take costs out of the process,” Callahan says. Suppliers have come up with “a raft of suggestions,” like moving the position of a window slightly in a house design so it doesn’t need to be tempered, or questioning why Beazer uses so many different types of windows in its plans, he says.
The quandary for suppliers, though, is that not only are builders constructing fewer houses, but the ones they build are redesigned to need less construction materials and generate higher investment returns. “We are providing house types at lower sales price points by reducing the square footage of the products offered and by providing fewer upgraded options as standard features,” NVR, the industry’s ninth-largest builder, wrote in a recent quarterly report.
Between November 2006 and July 2007, The Ryland Group cut the cost of nine construction materials categories by an average of 11% through fewer work orders, expanding the scope of its trades’ work, and tighter quality control. Beazer is going through what McCarthy calls “SKU rationalization,” where, for example, it saves between 56% and 70% by substituting lighting fixtures with look-alike (and presumably imported) models.
Koblinski says Pulte has also simplified and trimmed the number of its house plans. It’s down to details like counting delivered quantities of framing sticks against what was ordered, and analyzing concrete slab densities to see where Pulte might save money and still comply with local codes.
Bigger, Not Really Better
Earlier this year, Pulte closed its component plant in Manassas, Va. It still operates Pratte Building Systems, which provides framing and component products and labor for its Phoenix and Las Vegas markets. Koblinski says Pulte uses Pratte’s expertise in value engineering to help train its area managers.
A handful of big builders–including Toll Brothers, John Wieland Homes and Neighborhoods, NVR, and Hovnanian Enterprises–buttress their home building operations with internal manufacturing and distribution facilities.
Centex Homes’ CTX Builder Supply division operates six plants that make or distribute structural components and lumber. Last year, Centex told Electrical Wholesaling magazine that it could save 30% to 50% in costs by sourcing such products as lighting fixtures, flooring, nails, countertops, locks, and faucets from China, which CTX Builder Supply would repackage into kits and ship directly to jobsites.
Most builders, though, remain allergic to vertical integration, which is ironic given how often they favor suppliers that install what they sell. “It’s one less link in the supply chain,” says Callahan. Providing such efficiency has been a driver behind pro dealer and distributor consolidation over the years, but builders say they’ve yet to see the benefits of consolidation in the ways dealers serve them in multiple markets.
“I know of a couple of [pro dealers] that totally missed opportunities with builders because they withheld information from their own divisions, and they tried to squeeze every dime out of the builder,” says Ellis of FMI.
Wilson of Weyerhaeuser Real Estate Co. speaks for other builders when he states that dealers and distributors “need to get better at operating as one entity” in such areas as invoicing and delivery.
Kase thinks there’s “a lot of money that could be saved” if dealers and distributors were better organized, and Callahan hopes that happens sooner than later because “the earlier we can bring in any supplier at the stage where we’re designing the house, the better it is for both of us.”
–John Caulfield is a contributing editor to ProSales.
