Benchmarking Management Practices of Residential Construction Companies Producing 1 to 10 Units Annually

Introduction

In 2005, annual revenues of $649.8 billion were generated from the building of new residential construction within the United States, dwarfing all other categories of construction (ENR, 2005). Of the residential builders performing this huge amount of work, small-volume home building companies producing 10 or fewer units per year historically make up the majority of home building firms in the United States (Carliner, 1999).

According to Thomas Schleifer, a researcher and industry consultant who has identified common management errors that often lead to company failure, “A contracting business has only three primary functions: getting the work, doing the work, and accounting for the work, or put in other terms, marketing, operation, and administration” (Schleifer, 1990). It has been proposed by a number of researchers that identifying and implementing specific management practices in a construction company can be one of the most influential factors contributing to the ongoing success of that firm (Strischek, 1998; Lussier, 1995; Schleifer, 1990; Adrian, 1976). In fact, small 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, & Manning, 1993). By identifying and benchmarking important management practices identified in small-volume home building companies, a measuring stick can be provided against which owners of these types of firms can compare their own business practices.

The Statement of the Problem

The purpose of this research was to first, identify important management practices used by small-volume home builders; and second, to measure and report the current level of use of these pre-selected management practices in small-volume home building companies that reportedly produced one to ten new homes per year.

Limitations

This study was limited to companies that subscribed to Professional Builder and reportedly built one to ten new homes per year. In addition to providing demographic data regarding small-volume home builders, this research was structured to identify and measure the level of use of some of the most important management practices recognized by industry experts that are implemented by small-volume home building companies in the United States. This study, however, was 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 a few of the possible confounding factors that might contribute to the success or failure of a small-volume home building company.

Research Design and Methodology

In an effort to describe current management practices of small-volume home builders, a nationwide survey was conducted by mailing written questionnaires to owners and managers of 513 companies. These companies were randomly selected from the population of home builders subscribing to Professional Builder that reported building one to ten new homes per year. It was assumed that builders subscribing to Professional Builder Magazine were no different than other builders building one to ten units annually.

To collect data describing the current management practices of small-volume home building companies, a written questionnaire was sent to the owner(s) of each company selected to participate in this study. A list of builders who subscribed to Professional Builder Magazine and who reportedly built between one and ten units annually was stratified by zip code. Seven hundred builders from the list were then randomly selected.  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 some of the management practices addressed, respondents might find it necessary to access records not immediately available during a personal interview (Leedy & Ormrod, 2005).

The questionnaire used in this study was designed to identify the use of management practices in small-volume home building companies and was developed by utilizing a three-fold approach. First, literature related to management practices employed by home builders was reviewed; second, owners of home building companies, accountants, and university faculty whose areas of research addressed issues in construction company management were interviewed; and third, questionnaires from similar studies conducted previously were utilized. These questionnaires had been developed over a period of several years, relying on input from a subcommittee of builder-members of the Business Management and Information Technology Committee of the National Association of Home Builders (NAHB), a committee whose members included home builders, accountants and businessmen with extensive experience in owning and operating residential construction companies (Hutchings & Christofferson, 2004).

Analysis of the Data

Description of Companies Responding to the Survey

Of the 700 builders randomly selected from the Professional Builder Magazine list, 513 were verified to have built 1 to 10 units annually.  Of the 513 questionnaires sent, the total number returned was 129. This represented an initial response rate of 25.15 percent (129/513). Of the 129 returned questionnaires, 114 were considered responsive (22.2 percent). The number of responses (n) to specific questions addressed in this study ranged from 70 to 114, with the lower response rates dealing exclusively with demographic data regarding the companies. However, the great majority of questions received 114 responses. For reporting purposes, responses to individual questions were rounded to the nearest one percent.

A number of interesting factors surfaced from the information provided by the companies that responded to the survey. For example, it was discovered that the average company had been in business for 19.4 years. A possible explanation may be that companies that had been in business for some time recognized the benefits of data collection and analysis, whereas “younger” companies may not have perceived enough benefits from this study to warrant the time necessary to complete the questionnaire. Most of the companies claimed membership in some kind of business organization. Forty percent were members of the NAHB, and 22 percent were members of a local chamber of commerce.

More than half (60 percent) of the responding companies reported that they paid bonuses to employees. Twenty-three percent paid standard, set bonuses; 20 percent offered bonuses based on individual employee performance; and 17 percent awarded bonuses based on overall company profitability.

Even though emphasis has recently been placed on safety training, 70 percent of those companies responding to the survey indicated that they did not have a written safety plan, and 60 percent admitted that they didn’t offer safety orientation classes of any kind to new employees. Only a few companies (12 percent) required more than 4 hours of safety training for each new employee. Based on this information, it is interesting to note that companies tend to dedicate more time on safety training once employees are on the job. Although 18 percent of the responding companies spend less than one day per employee per year, 24 percent of the companies report that they require more than one full day of safety training per employee, with 10 percent requiring at least 4 days.

Companies that responded to the question regarding the number of homes built indicated an average of 4 homes sold during the year, with an average sales price of $462,672. This points out that the average company was marketing homes to move-up buyers. In fact, almost half (47 percent) of the reporting companies marketed their new homes to second- and third-time buyers. Another 20 percent targeted primarily first-time, move-up buyers, while only 11 percent marketed entry-level homes. Speaking of marketing, some 23 percent of the companies reported that they had a website that was used for selling their new homes. However, 70 percent of these small-volume builders did not even have a company website.

Pre-sold homes represented 57 percent of all sales, while 26 percent of the new homes were built on speculation. A few companies retained some homes for rentals, etc. (4 percent). The majority (56 percent) of these small-volume builders built on lots provided by their clients; another 30 percent purchased and built on lots that were developed by someone else; while only 13 percent developed lots themselves.

At the time of this study most local economies were reported as being excellent (34 percent) or very good (30 percent). Only 24 percent of the respondents considered their local economies to be good, while 9 percent were rated as fair, and only 3 percent were considered to be poor.

Management Practices

Builders were asked what types of computer software applications they regularly used. Figure 1 indicates the responses. General accounting (75 percent) was the most frequently used software application. Estimating applications were used by 37 percent, and job-costing applications were used by 29 percent of the respondents. Purchase-order systems (8 percent) and formal scheduling applications (11 percent) were the least frequently used.

A little more than half (52 percent) of the companies responding to the survey indicated that their employees used portable electronic devices outside of the office. Thirty-six percent used digital cameras; 16 percent used laptop computers; and another 16 percent used hand-held personal digital assistants (PDA’s). Twelve percent of the companies had employees that used voice recorders, while only 1 percent used tablet computers. Six percent reported that their employees used some other type of electronic devices (Figure 2).

Only 18 percent of the respondents had written mission statements; 26 percent had written financial budgets, goals and projections; and even fewer (17 percent) had written business plans (Figure 3).

When asked about scheduling construction activities, a majority of the builders indicated that they used “daily to-do lists” (62 percent) as their primary method, while only 4 percent used CPM scheduling programs. Nineteen percent used simple bar charts; 17 percent reported that they did not have any formal scheduling procedures of any kind (Figure 4). Also of interest was the fact that 7 percent of the respondents updated schedules only monthly, while 40 percent updated weekly, and 34 percent updated their schedules daily (Figure 5).

Thirty-eight percent of the companies responding to the survey indicated that they did not hire employees. Although 40 percent of the companies responding to the survey provided ongoing in-house training for employees, only 9 percent provided any type of formal start-up training. Fourteen percent reported that they paid for professional training seminars, and 5 percent reimbursed or paid for tuition for employees attending college or technical schools. An additional 9 percent had established in-house educational programs, some of which included a list of suggested reading materials (Figure 6).

Most of the companies (60 percent) responding to the survey indicated that they regularly used the same trade subcontractors on all jobs, while 35 percent solicited competitive bids for every phase of work on each job. Only 5 percent required subcontractors to lock in their prices on a periodic basis. A few (3 percent) of the respondents locked in prices with subcontractors for specific subdivisions or communities (Figure 7).

Figure 8 reports various job sources for the companies responding to the survey. More than half (58 percent) of the homes built were referred by previous customers or by word of mouth. Real estate brokers accounted for 23 percent of the new homes. Nine percent were the result of advertising and job signage; architects accounted for 3 percent; model homes and websites represented about 2 percent each; while local Parades of Homes netted less than 1 percent of sales.

A 5-point Lickert scale was used to measure the frequency of use (1 = Never; 5 = Always) of selected management practices not described previously. Figure 9 shows the average response for these questions. With the exception of written specifications (4.0) and written change orders (3.9), it appears that small-volume home builders are weak when it comes to documentation. For example, scores for variance purchase orders (1.6), purchase orders for suppliers (2.1), quality-control checklists (2.2), work orders for subcontractors (2.3), written performance standards for trade subcontractors (2.4), and daily or weekly job logs (2.7) tend to indicate a lack of paper trails.

Conclusions

This study provided insights into the management practices of small-volume home builders in the United States. Most of the respondents focused on developing management procedures that emphasized relationships with new home buyers. At the same time, builders seemed to be less competent in developing procedures relating to internal operations such as documentation, planning, safety, and accounting. One noticeable area that could be improved was marketing; in fact, most of the reported sales were the result of word-of-mouth referrals or broker involvement.

Construction scheduling consisted mainly of “to-do” lists that were updated regularly. Software applications that were used most often by builders were general accounting, estimating and job costing. Another weakness was planning. Surprisingly few companies had written business plans, mission statements or budgets.

In summary, this study provides a basis of comparison for small-volume home building companies, allowing owners to evaluate their own management practices. The study also lays an academic foundation for continued research into investigations of management practices for the home building industry. 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.

References

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

Carliner, M., Staff Vice-President of NAHB Economics Department. (phone call, July 28, 1999). Washington, D.C.

ENR Engineering News-Record (2005, November 21). A rebound in nonresidential building markets keeps growth going. November 21, 2005.

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. Journal of Small Business Management, 18-31.

Hutchings, D. M., & Christofferson, J. P. (Summer 2004). Management Practices of Residential Construction Companies Producing 25 and Fewer Units Annually. International Journal of Construction Education and Research, 34-44.

Leedy, P. D., & Ormrod, J. E. (2005). Practical research, planning and design (8^th ed.) Upper Saddle River, NJ: Pearson Education, Inc.

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

Schleifer, T. C. (1990). Construction contractors’ survival guide. Ohn Wiley & Sons, Inc., New York. (page xi)

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