Management Practices of Residential Construction Companies Producing More than 25 Units per Year in the United States

Introduction

Driven by the best financing conditions available in years, new-home sales for 2002 are expected to be at an all-time high of 975,000, well above the previous record of 908,000 units set in 2001 (Garczynski 2002).  Historically, revenues generated from the building of single-family housing dwarf all other categories of construction (King, 1999).  According to the director of the Data Service Center of the National Association of Home Builders (NAHB), home building companies producing more than twenty-five homes per year are responsible for the majority of new home construction in the United States (Bajwa, 2002). 

It has been claimed that some of the most influential factors contributing to the ongoing success of a construction firm are its management practices (Adrian, 1976; Lussier, 1995; Strischek, 1998, Hutchings & Christofferson, 2001, 2002).  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).  Identifying important management practices used by production home builders will help provide benchmarks against which owners can compare their own business practices.

 The Statement of the Problem

 The purpose of this research was to identify the current level of use of pre-selected management practices in home building companies that produce more than twenty-five new homes per year.

Limitations

 This study was limited to companies, builder members of the NAHB, that produced more than twenty-five new homes per year.  Only data from companies whose main source of revenue was generated from the construction and sale of new homes was used. 

Delimitations

This research is intended to describe some of the most important management practices implemented by production home building companies; however, it is not intended to describe all possible factors which might influence those companies.  For example, such things as leadership abilities of owners/managers, inherited wealth of owners, and their reputation in their communities are but a few of the possible confounding factors that might contribute to the success or failure of a company.  These are a few examples of possible topics for further research.

The Data and the Treatment of the Data

According to the most recent information available, at the time of this study there were 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 home builders starting more than 25 units per year represented the remainder of the population (Bajwa, 2002).

In an effort to describe current management practices of production home builders, 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 production builders, members of the NAHB who reported building more than twenty-five new homes per year. 

The questionnaire was designed to identify the use of management practices and was developed by utilizing a two-fold approach.  First, literature related to management practices employed by home builders was carefully reviewed; and second, owners of home building companies, accountants, and university faculty whose areas of research address issues in construction company management were interviewed.  From these sources, a comprehensive list of management practices was developed.  This list was then reviewed by members of the Business Management and Information Technology Committee of the NAHB, including home builders, accountants and business persons with extensive experience in owning and operating residential construction companies.  Using the information collected from all those involved in the development process, a final questionnaire was created and tested for understanding and readability during the summer of 2002. 

Research Design

In order to collect data describing the current management practices of those residential companies to be surveyed, a written questionnaire was sent to the owners of each company that was selected to participate in the study.   There were at least two major reasons for utilizing questionnaires in this research.  First, it would be financially impractical to conduct personal or telephone interviews with so many owners; and second, in order to answer questions regarding numbers of homes built, prices of homes sold, and other financial topics, respondents might find it necessary to access records not immediately available during a personal interview (Leedy, 1993). 

Description of Companies Responding to the Survey

A number of interesting factors surfaced from the information provided by the companies that responded to the survey.  Respondents built an average of 133 homes per year, with average total sales revenue of $32,556,146.  Six percent of the homes sold for less than $100,000, while one-third (33.0 percent) sold for between $100,000 and $150,000. Twenty-five percent of the homes sold were priced between $150,000 and $200,000, 23 percent sold for between $200,000 and $300,000, 12 percent sold for between $300,000 and $500,000, while only one percent of the homes sold by these production builders were priced at more than $500,000 (see Figure 1 below).

Pre-sold homes represented 61 percent of all sales, while 34 percent of the homes sold were built on speculation.  Condominium sales (4 percent) and finished lot sales to other builders (1 percent), accounted for the balance of annual revenues reported.

Not surprisingly, almost all of the production work performed on new homes (90 percent) 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.

Of those production home builders responding to the survey, just over half (54 percent) provided reliable financial information regarding revenues and costs of construction.  For those companies disclosing reliable financial information, the total yearly revenues was $32,556,146.  Hard costs of construction (not including land) totaled 51.6 percent of sales revenues.  This figure includes materials, subcontractors’ costs and in-house labor costs, but does not include sales commissions or interest on money used for construction.  Land costs at market value represented one-fourth of total revenues (25.2 percent).  Based on these figures, the average production builder was left with 23.3 percent of total revenues for company overhead expenses and profit distributions.  Only 6.25 percent of those participating in this study were subsidiaries or divisions of larger companies.

Analysis of the Data

Ninety-six companies responded to the survey, approximately 12.5 percent of those sampled.  This response rate 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.  A disappointment was that the NAHB database was not as accurate as it was represented to be.  This is evidenced by the fact that only half of the responding companies were production home builders.  The other half consisted mainly of builders producing fewer than 25 new homes per year.  The following information summarizes responses from the production home builders identified.

Builders were asked whether they used an integrated software system for scheduling, estimating, accounting, etc.  Fifty-eight percent indicated that they used integrated systems.  Only one-third of the respondents indicated that they used PDA’s (personal digital assistant – handheld computers) for company operations.  Scheduling applications on PDA’s were used by almost one out of five respondents (19 percent), while a few used them for punch list items (6 percent), daily appointments (6 percent), purchase orders (4 percent), and change orders (4 percent).  Warranty work and data base applications were also reported.  

Almost half of the respondents reported that their companies did not have a written business plan, but companies with written plans reported that they reviewed and/or revised them at least once a year (every 13.3 months).  More than 80 percent of those surveyed used outside business consultants, including technology (computers, etc.), financial and management, construction operations, and sales and marketing consultants (see Figure 2).  

Most companies (85 percent) reported that they used operating budgets and typically reviewed them at least once each quarter.  Cash flows for operations were planned on the average at least ten weeks in advance.  Financial statements for the vast majority of responding companies were prepared and reviewed regularly.  Income statements and balance sheets were reviewed at least quarterly by 83 percent of those surveyed, while almost two-thirds (63 percent) made this at least a monthly practice.  Even statements of cash flows were reviewed often.  More than half (54 percent) reviewed these monthly, while three-fourths (73 percent) of the companies reviewed their cash-flow statements at least quarterly.  In addition to creating and reviewing financial statements on a regular basis, most companies (80 percent) also reported that their accounting reports were understandable and easy to read.

Purchase orders for suppliers were used by almost two-thirds of the companies (65 percent), although only half the companies (50 percent) regularly used purchase orders with subcontractors.  Variance purchase orders explaining unplanned purchases were used by even fewer companies (35 percent).  Job cost systems were utilized to revise standard budgets (60 percent), catch double payments (60 percent), compare actual costs with estimates (77 percent), and to modify standard costs (46 percent).

When asked about scheduling construction activities, almost one-third of the companies reported using daily to-do lists (29 percent) as their primary method of scheduling (see Figure 3).  About one-fifth (21 percent) used slotting/even-flow production schedules, while the same number (21 percent) used simple bar charts.  Fewer than one-fifth reported using CPM scheduling programs (19 percent); and interestingly, one out of every six companies (17 percent) reported no formal scheduling procedures were being used.  Companies that reported using some type of formal scheduling procedure updated schedules on average about once every two weeks (every 16 days).  Of interest, the average cycle time for a new home -- from staking the lot to certificate of occupancy – was 129 calendar days.  The vast majority of production builders (86 percent) indicated that they regularly hit their target delivery dates.   

In pricing new homes, more than two-thirds of the companies (69 percent) reported that their most frequent method was to calculate costs of construction and add a mark-up to the costs.  The remainder priced their homes most often according to what the market would bear.  In fact, one out of six companies (17 percent) reported that they never used mark-ups to their costs in order to price their homes.  For those companies that used reported regular use of cost-breakdowns to determine the price of their product, the average mark-up to costs was 21 percent.  

 When estimating construction costs, it was found that many builders (29 percent) did not use any formal estimating program; however, 20 percent used Microsoft Excel, 8 percent developed their own in-house estimating software, 6 percent used Estimator Pro, 6 percent used Timberline, while BuildSoft, CDCI, and QuickBooks Pro were each used by 4 percent of the respondents (see Figure 4).  Nine other estimating systems were reported as being used, each by one respondent. 

When outside brokers were used for marketing new homes, the average commission paid was 3.6 percent of the sales price.  In-house sales persons were paid 2.5 percent.  In addition to sales commissions, production builders reported average advertising budgets of 3.7 percent of sales. 

Figure 5 below shows that about one-half of new home sales were generated from model homes (18 percent), job-site signage (7 percent), and in-house sales persons (24 percent).  Outside brokers accounted for almost one-third of the revenues (29 percent), while past customers and sales attributed to word-of-mouth represented only 15 percent of total revenues.  Other sources included home shows (3 percent) and company web sites (3 percent).

Good customer relations seemed to be very important to most builders.  Three-fourths of the respondents provided detailed written specifications to owners, allowed owners to request changes during construction, and had formal walks-through with owners during the construction phase.  In addition, almost all (94 percent) insisted upon a formal home demonstration with buyers immediately prior to closing.  Another surprising finding was that the vast majority of production home builders (90 percent) insisted on written change orders.

Production builders obviously focused efforts on satisfying buyers, but it appeared that relationships with subcontractors were based on trust and the assumption that the level of quality and competitive pricing would continue according to previous performance.  For example, only half of those responding to the survey indicated that they regularly provided subcontractors with detailed written specifications, while only about one-fourth (27 percent) provided written performance standards.  Fewer than that (21 percent), held regularly-scheduled on-site meetings with subcontractors during construction, and not even one-third of the production builders (31 percent) used written checklists to review quality.  In addition, written daily or weekly logs were not emphasized and were maintained regularly by only about one-third (31 percent) of those reporting.  Finally, fewer than half of the builders (42 percent) regularly sought competitive bids for subcontracted labor.

Four out of every five builders (81 percent) provided some form of employee training (see Figure 6).  Although only 20 percent reported some type of formal start-up training program for employees, nearly two-thirds (63 percent) conducted on-going in-house training, and more than half (58 percent) paid for training seminars for employees.  One-fourth of those surveyed were willing to pay tuition and fees for employees who attended college and/or technical schools.  With regards to monitoring employee productivity, only one-third of the companies provided employees with written job descriptions, and about the same number (40 percent) required employees to read and follow written personnel guidelines.

Conclusions and Recommendations

An important part of company management is for companies to compare themselves with similar businesses.  For example, standards of the industry for financial performance are easily accessible through a number of publishers and professional organizations, and it is common for business owners to compare their own companies’ profitability to that of their competitors.  In the same way, it is important to evaluate a management blueprint based on industry standards.  This study provides insights into the management practices of production home builders who build more than 25 new homes each year. 

Most of the participants in this study seemed to focus on systems, both to help with office management and to create good relationships with buyers of new homes.  Their emphasis was on accessing information in the form of good accounting practices, including regular reviews of company budgets and financial statements, attention to contract requirements in the form of purchase orders for suppliers, written specifications for homeowners, and strict requirements for written change orders. 

Even though the bulk of the work was performed by subcontractors, little emphasis seemed to be placed on monitoring their performance during the construction phase.  On-site meetings with subcontractors were not held regularly, and there was little use of written specifications, written performance standards, or written checklists to review quality of work.  In addition, the recording of daily or weekly logs was inconsistent.  Almost half of those surveyed indicated that they either employed no formal scheduling techniques or used only daily-to-do lists for scheduling.

The respondents spent 3.7 percent of their revenues on advertising and relied heavily on brokers, model homes and in-house sales persons to generate sales.  These sources represented three-fourths of the sales volume for production builders.  An interesting note is that company web sites were credited with only 2.6 percent of total sales.

In summary, this study provides a basis of comparison for production home building companies, allowing owners to evaluate their own management practices.  This research, coupled with recent studies targeting other segments of the home building population, continues to lay an academic foundation for future research into investigations of management practices for residential builders.  Eventually, by pinpointing specific practices used by home builders of all sizes, researchers can expand upon existing knowledge to determine how management systems affect other businesses.

List of References

Adrian, J. J. (1976).  Business Practices for Construction Management. New York: 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 D. M. Hutchings].

Evans, D. (2000, February 2, 2000). [Telephone interview with Don Evans, Director of Operations and Records Management, NAHB,] (by D. M. Hutchings, Ed.).

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

Garczynski, G. (December, 2002). New-Home Sales Hit Record Pace in November.

URL http://www.nahb.org/news_details.aspx?newsID=261. 

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.  Journal of Small Business Management, 18-31.

Hill, H. P., C.P.A., Roth, J. L., C.P.A., & Arkin, H., Ph.D. (1962). Sampling in Auditing. New York, The Ronald Press Company.

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

Hutchings, D.M. & Christofferson, J.P. (2001). Management Practices of Residential Construction Companies Producing 25 and Fewer Units Annually. Proceedings of the 37^th Annual Conference of the Associated Schools of Construction, 149-158.

Hutchings, D.M. & Eggett, D.L. (2002). Non-Financial Indicators of Profitability for Small-Volume Home Builders. Proceedings of the 38^th Annual Conference of the Associated Schools of Construction, 337-347.

 King, S. (Ed.). (1999)  1999-2000 U.S. Markets Construction Update FMI. Raleigh, NC: Author. P. 4. 

Leedy, P. D. (1993). Practical Research Planning and Design. Englewood Cliffs: Macmillan.

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

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