Factors Leading to Construction Company Success: Comparisons of the Perceptions of Production and Small-Volume Home Builders

Introduction and Review of Literature

According to Hersey & Blanchard (1988), “We operate according to perceived reality and not on the basis of reality itself.”  Ries & Trout (1994) stated, “People cling firmly to the belief that reality is the world outside of the mind and that the individual is one small speck on a global spaceship.  Actually it’s the opposite.  The only reality you can be sure about is in your own perceptions.”  Given these statements, most business owners and managers are prone to make important decisions based on their perceptions of the factors they consider most important to their success, whether or not these factors represent reality.

It has been argued that some of the most influential factors contributing to the ongoing success of a construction firm are its management systems, procedures and practices (Adrian, 1976; Lussier, 1995; Strischek, 1998).  In fact, business failures, including those of home building companies, typically seem to be characterized by a lack of management skill and experience (Flahvin, 1985; Gaskill & Van Auken, et al, 1993).

A thorough review of the literature has revealed only one significant study addressing management’s perception of factors leading to the success of construction companies.  In that research, the authors selected a random sample of more than 1,100 small-volume home builders and asked each one to list, in priority order, the top five things that contributed most to the success of their companies (Hutchings & Christofferson, 2000).  In other studies using nonfinancial predictors for success, the analysis of the data indicated that careful planning and the use of professional advisors were two factors directly linked to successful businesses (Gaskill & Van Auken, et al, 1993; Lussier, 1995).  Nonfinancial predictors were factors other than the use of financial ratios etc., such as management experience and education, planning, and the use of advisors.  Of all the management practices addressed in the literature, one of the most universal was planning.  Not surprisingly, many indications point to strategic planning as one of the most important tools used by successful businesses (Bryson, 1995; Constance, 1997; Strischek, 1998).

Other factors perceived to be important in construction companies include implementation of accounting systems and regular review of financial statements (Adrian, 1976; Gerstel, 1991; Schleifer, 1990), change order procedures (Adrian, 1976; Gerstel, 1991; Strischek, 1998), the creation of quality performance standards for subcontractors (Gill, 1968; Shinn, 1995), estimating and scheduling procedures  (Shinn, 1995; Strischek, 1998), implementation of strict purchase order systems (Gill, 1968; Shinn, 1995), control of job-site safety (Gordon, 1997), ongoing training and education (Bednarz, 1997), and the use of checklists for quality control (Gerstel, 1991).

Research Purpose

In a previous study by the authors, using small-volume builders (companies producing 25 or fewer units per year) as the population of interest, owners and managers were asked to identify factors contributing to the success of their own construction companies.  The purpose of the current research was twofold.  First, to identify and report on the perceptions of owners and managers of production home building companies (companies producing more than 25 units per year) regarding the factors contributing to the success of their businesses; and second, to report on differences in their perceptions as they compared to the perceptions of the small-volume builders in the previous study.  

Limitations

This study was limited to companies that reportedly produced more than twenty-five new homes per year, and the results are compared to the results gathered in a previous study of companies that produced fewer than twenty-five new homes per year.  Only data from companies whose main source of revenue was from the construction and sale of new homes was used in both studies. 

The Data and the Treatment of the Data

In an effort to identify and report on what the perceptions of owners and managers were regarding the reasons for the success of their production home building companies, a nationwide survey was conducted by mailing written questionnaires to owners and managers of 775 companies.  These companies were randomly selected from the population of builder members of the National Association of Home Builders who reported building more than twenty-five new homes per year. 

According to the most recent information available, there are approximately 38,860 builder members of the NAHB nationwide reporting at least one new home started during the year.  Small-volume home builders starting fewer than 25 new units for the year numbered 26,083, while 12,777 production builders starting more than 25 units per year represented the remainder of the population (Bajwa, 2002).

As with the previous study, rather than compiling a list of management practices suggested by the review of literature and then asking builders to determine which were the most important in their business, owners and managers were asked to prioritize the top five things that contributed most to the success of their companies. 

Description of Companies Responding to the Survey

The following observations were made in comparing the sales price of the homes between production home builders and small volume builders:

Two other items of note are that the average total sales revenue for the production builders responding to this survey was $32,556,146, with an average of 133 homes built per year. 

For production builders, pre-sold homes represented 61 percent of all sales as compared to 51 percent for small-volume builders.  Thirty-four percent of the homes sold by production builders were sold on speculation as compared to 28 percent for the small-volume builders.  Not surprisingly, it was found that the vast majority (90 percent) of the actual production work performed on new homes was done by subcontractors.  Except for a few companies that allowed sweat equity by home buyers (less than 1 percent of the total work performed), in-house laborers accounted for the remainder of new home production. 

Analysis of the Data

The response rate to this survey (approximately 12.5 percent) was a little higher than typical response rates for NAHB management surveys that have had no financial incentives.  In other words, owners were asked to donate their time to answer the questionnaire without being paid.  Almost all the respondents listed five things that contributed to the success of their companies.  A very small percentage of those who answered gave fewer than five responses.  Because the answers were given in priority order, listed one through five, a scoring system was devised to compile the results.  The first answer was assigned five points; the second was given four points and so forth, with the fifth answer receiving a single point.  In the case of those who gave fewer than five answers, the same point system was followed for the responses given, with the first response receiving five points, etc.

A grid was developed in order to categorize and score the responses.  Fifty-seven unique responses were identified along one axis of the grid.  The other axis contained a list of the valid questionnaires.  All responses were entered into a spreadsheet, and individual scores were recorded.  The scores were then totaled and ranked from highest to lowest (See Appendix).  Of the fifty-seven different factors listed by production home builders, thirty-three were also listed by small-volume builders in the previous study.  Twenty-four of the fifty-seven were responses that were unique to the production home builders.

It is interesting to note that small-volume home builders’ perceptions in the previous study did not necessarily agree with the literature regarding factors contributing to company profitability.  For example, strategic planning, considered to be one of the most important factors to the success of a business was considered important to the success of a company by only a handful of small-volume builders.  Additionally, only one production builder felt that seeking outside help from professional advisors was important.  This corresponds with the results found in the study of small-volume builders, when not one company reported seeking the help of outside consultants.  In fact, of the management practices addressed in the literature, few were considered important by company owners in either of the two studies.

Factors that were noticeably different between the two studies included perceptions regarding the importance of location, cost control, management systems, honesty and integrity, corporate culture, and customer communications and relations.  It was interesting to note that the importance of management systems was ranked relatively high (number 10 out of 57) by production builders but was not even mentioned by small-volume builders.  Location and cost control were also ranked high for production builders, ranking third and eighth respectively, while those same factors were only ranked fifteenth and thirtieth for small-volume builders.

Both the small-volume builders and the production home builders considered quality of workmanship and products to be the most important factor contributing to the success of their companies.  However, the margin between the factor of quality workmanship and products and the other factors, as perceived by production builders, was not as pronounced as was the case with the small-volume builders. 

Honesty and integrity was ranked number two by small-volume builders but was only perceived to be important enough to be ranked twenty-third by production builders.  Corporate culture, and customer communications and relations were ranked numbers 26 and 27, respectively, by production builders.  However, corporate culture was not mentioned by any of the small-volume builders.  On the other hand, honesty and integrity, and customer communications and relations were ranked much higher by small-volume home builders, ranking 4th compared to the ranking of 27th by production builders.  One other notable difference was that small-volume builders ranked good subcontractors/subcontractor relations as the third most important factor; whereas, production builders only ranked it twelfth.

Besides quality, other factors that seemed to share approximately equal importance with both groups were 1) good employees/teamwork, 2) effective sales and marketing, 3) reputation/name, 4) focus on product design, and 5) good economy/good market.  Also worthy of note is that with the exception of reputation/name, some of the biggest differences in perception between the two groups were found to be in the more intangible factors, such as work ethic/commitment/attitude, and those factors already mentioned above, including honesty, integrity, and customer communications/relations.   

After listing the individual responses for production builders in rank order, similar responses were grouped according to categories.  The categories included 1) business and management practices, 2) business profile, 3) planning, 4) marketing, 5) external factors, 6) quality, service and warranty work, and 7) personal attributes.  Responses in each category were then totaled. 

Of the categories listed above, marketing was perceived by production builders to be the most important (see Figure 1).  This category total (24.50 percent) was noticeably higher than the total of 17.44 percent as reported in the study of small-volume builders.    

The quality, service, and warranty work category was given the next highest ranking for production builders.  It is interesting to note that not only was quality ranked number one individually by both production and small-volume builders, but also the quality, service, and warranty work category was virtually identical for production builders (20.81 percent) and for small volume builders (21.60 percent).  (See Figure 2)

The business and management practices category ranked third for production builders (see Figure 3).  For production builders, this category was 19.97 percent as compared to 14.17 percent for small-volume builders.

The personal attributes category (see Figure 4) ranked fourth for production builders (18.12 percent) compared to 28.59 percent for small-volume builders.  Production builders placed less importance on work ethic, honesty and integrity, and communications with the customer.

Strategic planning and goal setting was the only factor listed by production builders in the planning category, and its percentage (1.85 percent) was comparable to that of small-volume home builders (2.30%).  Neither group placed as much importance on planning as was suggested in the review of the literature.

Factors included in the other two categories, business profile and external factors, are listed in Figures 5 and 6.  Both production builders and small-volume builders ranked good employees and employee relations high as individual factors.  The category percentages were also comparable at 11.24 percent for production builders and 12.92 percent for small-volume builders.  The total percentage for the external-factors category was also similar for both production builders (3.52 percent) and small-volume builders (2.25 percent).  Both groups listed a good economy or market as the overwhelming first choice in this category.

Conclusions and Recommendations

This study provides insights into the perception of production home builders regarding the success of their companies and how those perceptions differ from responses by small-volume builders.  The findings indicate that the views of production home builders were more aligned with factors for success as expressed in the review of the literature than those expressed by small-volume home builders.  Unlike small-volume builders, production builders placed more value on systems and controls than intangible factors, such as communications, honesty, and work ethic. 

This study also indicates that both production and small-volume builders ranked quality workmanship and products as the number one factor contributing to the success of their business.  This finding is intriguing given the comments from well known marketing strategists Ries & Trout (1994).  They reason that “The essence of marketing is narrowing the focus,” and that “You can’t stand for something if you chase after everything.”  They go on to say that “You can’t narrow the focus with quality because there is no proponent for the opposite point of view.  Does any company proclaim itself as the ‘unquality’ corporation?  No, everybody stands for quality.  As a result, nobody does.” 

A recommendation for further research is to correlate owners’ perceptions of factors affecting their success with actual practices within their companies, and whether these factors are predictors of company success.  Further research is also needed to determine measures of some of the important qualitative factors that determine builder success.  In addition, this line of research can be expanded to other types of construction companies, including commercial, heavy and civil, and remodeling businesses.

References

Adrian, J. J. (1976).  Business Practices for Construction Management. New York, NY: American Elsevier Publishing Company, Inc.

Bajwa, B. (2002, October 22, 2002).  Director, Data Service Center, Information Technology & Telecommunications, National Association of Home Builders. Washington, D.C.

 [e-mail correspondence to Mark Hutchings]

Bednarz, T. F. (1997).  Winning Strategy; the Nine Laws of Business Success.  Air Conditioning, Heating & Refrigeration News, 32-33.

Bryson, J. M. (1995).  Strategic Planning for Public and Nonprofit Organizations. San Francisco: Jossey-Bass Publishers.

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Flahvin, A. (October 1985).  Why Small Businesses Fail. The Australian Accountant, 17-20.

Gaskill, L. R., Van Auken H. E., and Manning R. A. (October 1993).  A Factor Analytic Study of the Perceived Causes of Small Business Failure.  Jrnl. of Small Business Management, 18-31.

Gerstel, D. (1991).  The Builder's Guide to Running a Successful Construction Company. Newton, CT: The Taunton Press.

Gill, P. G. (1968).  Systems Management Techniques for Builders and Contractors. New York, NY: McGraw-Hill, Inc.

Gordon, M. (October 1997).  Safety Saves Money.  Contract Journal, 19 (3).

Hersey, P., Blanchard, K. H. (1988).  Management of Organizational Behavior.  Englewood Cliffs, NJ:  Prentice-Hall, Inc.

Hutchings, D.M., and Christofferson, J.P. (2001).  Factors Leading to Construction Company Success:  Perceptions of Small-Volume Residential Contractors.  Proceedings of the 37^th Annual Conference, Associated Schools of Construction, 263-270.

Hutchings, D.M., and Christofferson, J.P. (2000).  A Study of Management Practices in Small-Volume Home Building Companies.  Proceedings of the 36^th Annual Conference, Associated Schools of Construction, 325-332.

King, S. (Ed.). (1999)  1999-2000 U.S. Markets Construction Update FMI. Raleigh, NC: Author. p. 14. 

Lussier, R. N.  (January 1995).  A Nonfinancial Business Success Versus Failure Prediction Model for Young Firms.  Journal of Small Business Management, 8-20.

Ries, R., Trout, J., (1994) The 22 Immutable Laws of Marketing. New York, NY: HarperCollins Publishers, Inc.

Schleifer, T. C. (1990).  Construction Contractors' Survival Guide. New York: John Wiley & Sons.

Shinn, C. C., Jr.  (May, June, July 1995).  Where Did My Profits Go?  How Do I Get Them Back? Part I. The Builder's Management Journal 9, (1), 1-4.

Shinn, C. C., Jr.  (August, September, October 1995).  Where Did My Profits Go?  How Do I Get Them Back? Part II. The Builder's Management Journal 9, (2), 1-4.

Shinn, C. C., Jr.  (November, December 1995). Where Did My Profits Go?  How Do I Get Them Back? Part III. The Builder's Management Journal 9, (3), 1-3.

Strischek, D. (July 1998).  Red Warning Flags of Contractor Failure.  Journal of Lending & Credit Risk Management 80, (11), 40-47.

Appendix

Appendix (cont.)