Comparing and Contrasting Perceived Reasons for Success in Production and Small-Volume Home Building Construction Companies

Introduction and Review of Literature

If the contributing factors most important to the success of home building companies could be indisputably determined and listed in order of their importance, owners and managers of home building companies could focus more of their efforts on these areas. Because such a list of management practices is so difficult to pinpoint (Hutchings & Eggett, 2002), it is important to understand what perceptions owners and managers have regarding the success of their companies. Using accumulated personal knowledge and experience, those judgments and perceptions of successful practices are based on what the owner or manager perceives as most important. Blockley & Godfrey (2000) state that “People’s judgments, decisions, and behaviour are based on their perceptions. Since judgment is so central to construction, an understanding of measurement is of profound practical importance to achieving the improvements we are looking for”. According to Hersey & Blanchard (1988), “We operate according to perceived reality and not on the basis of reality itself.”  Ries & Trout (1994) also state that, “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”. Home building company owners and managers make important decisions based on their perceptions of the factors they consider most important to their success, whether or not those factors in reality have any bearing on the success of their company.

Previous studies of the perceptions of factors leading to success from owners and managers in both production and small-volume home building companies reported that while some of the perceived reasons for success agreed with existing literature, many others did not (Hutchings & Christofferson, 2001; Butler, Christofferson & Hutchings, 2003). A study of which factors are perceived to be most important by production and small-volume home building construction company owners and managers is important, because it will give insight into where improvements may be made in comparison to research by leading experts.

A knowledge of which factors lead to success or which factors lead to failure is critical in an industry with the third highest incidence of bankruptcy in the United States behind only Internet and food service companies as reported by Schaufelberger (2003). Some authors report that among 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, are often characterized by a lack of management skill and experience (Flahvin, 1985; Gaskill & Van Auken, & Manning, 1993).

A review of the literature found only two studies addressing management’s perception of factors leading to the success of construction companies. The two studies asked each respondent to list, in priority order, the top five things that contributed most to the success of their companies (Hutchings & Christofferson, 2001; Butler, Christofferson & Hutchings, 2003). 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, et al., 1993; Lussier, 1995; Gibson, Wang, Cho, & Pappas 2006). 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 reported as important to 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

The first purpose of this study was to benchmark the perceptions of owners and managers of production and small-volume home building companies within the United States. The second purpose of this study was to compare and contrast the perceptions of owners and managers of production and small-volume home building companies regarding the most important factors leading to the success of their companies.

Limitations and Delimitations

One limitation is that owners and managers may have provided a list of practices at the time of this study that might differ from a similar list that would be provided at another point in time, depending on current events in their company. Another limitation is that perceptions of importance for the same company could vary slightly, depending on the position of the person responding to the survey. No effort was made to categorize completed questionnaires by the position of the respondent. Some delimitations are the following: This study was limited to small-volume home building companies that reportedly produced from 1-10 new homes per year and production home building companies producing from 51-150 new homes per year. Only data from companies whose main source of revenue came from the construction and sale of new homes was used with both builder types. All companies contacted came from a database provided by Professional Builder magazine. Respondents were asked to list the top five factors leading to success in their company, and some respondents may have identified more than five factors given the opportunity.

Methodology

A nationwide survey was conducted in the summer of 2004 by mailing written questionnaires to two groups of home building companies selected randomly from a database of companies that subscribed to Professional Builder magazine. Questionnaires were mailed to 513 small-volume home builders reportedly producing fewer than 10 new homes per year and 447production home builders reportedly producing between 51-150 new homes per year.  

As with the previous studies, 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 to their business, owners and managers were asked to prioritize the top five things that contributed most to the success of their companies. Responses were then compiled, categorized, and ranked. After establishing individual categories, these were sorted into seven distinct group categories.

Description of Companies Responding to the Survey

Production home builders responding to the survey reported average annual revenues of $21,964,228 per company. With an average sales price of $246,079 per home, this translates to just over 89 homes sold per company during the year. Small-volume home builders reported closing an average of 4.01 homes per year, with an average sales price of $462,672, almost double the average sales price of production home builders. Average annual revenue per company for small-volume home builders was $1,855,317.

It should also be noted that these companies, both small-volume and production home builders had been in business for some time. Production builders averaged a little more than 21 years in business, while small-volume builders averaged a little over 19 years in business.

Analysis of the Data

The overall response rate to this survey was 25.9 percent (249 / 960). The response rate for production builders was 28.9 percent (129 / 447), while the response rate for small-volume home builders was 23.4 percent (120 / 513). A few questionnaires were discarded because it was obvious that the respondents were not home builders. Almost all of the respondents listed five things that contributed to the success of their companies. A very small percentage of those who answered provided 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, the second four points, etc.

A grid was developed to categorize and score the responses of both the production and small-volume home builders. Unique responses were identified along one axis of the grid. The other axis contained a list of the valid questionnaires from each respondent. 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). The researchers then separated the responses for each type of builder (production or small-volume). Each response was analyzed and assigned to a specific category. For example, handwritten responses such as “workmanship” and “quality production” would have been assigned to the category entitled quality workmanship and products.

Following a preliminary compilation of responses into unique categories, subsequent reviews further refined the categories. The final list of unique categories showed the two builder types sharing 34 specific responses. Production builders listed 18 additional categories not mentioned by the small-volume builders, and the small-volume builders listed 14 categories not mentioned by the production builders. In only one case was a category that was not mentioned by the other builder type ranked in the top 20; this category was entitled attention to detail, which was ranked 10^th by the small-volume builders and not even mentioned by any of the production builders. Each of the other unique categories not mentioned by one or the other builder types was ranked 22^nd or lower; most of these received three or fewer responses.

After sorting and compiling the responses into unique categories, these individual categories were then combined and organized into logical group categories. An analysis of the group categories using bar charts will be presented below after treatment of the individual categories.

Although some of the group categories defined in this study generally agreed with important factors from previous research projects, when taken as individual categories, the agreement with the literature was marginal. One study in particular described the top six reasons for failure among contractors, identified by bonding companies, as: poor estimating and job cost reporting; poor project management; no comprehensive business plan; poor communication; poor financial management; and factors beyond a contractor’s control (Strischek, 1998). Even though  management style was among the top 10 categories for production builders and among the top 20 for small-volume builders, not even one respondent identified project management specifically as an important factor. Neither was the business plans category identified by a single respondent, even though strategic planning was ranked about the same as project management.

A somewhat surprising result was that the two parts of the number one factor leading to failure in the list by the bonding companies, poor estimating and job cost reporting, were ranked medium to low by the respondents in this study. Estimating ranked 32^nd and cost control ranked 12^th by production companies, and the same two were ranked 27^th and 18^th respectively by small-volume builders.

Communication, an important part of successful construction operations, has been identified as a factor in conflict and potential litigation when done poorly (Emmitt & Gorse, 2003). Despite this and the ranking in the above-mentioned list, the production builders ranked communication 39^th, and the small-volume builders ranked it 27^th. Production builders did perceive that a good economy was an important external factor, with the ranking falling just out of the top ten at number eleven; but the small-volume builders ranked it only 24^th. Only one production builder mentioned any of the other factors beyond their control as being important, placing interest rates in the 48^th spot; while only one small-volume builder cited luck in the same category.

Individual categories that were noticeably different and also those that were very similar between the two builder types were identified as those separated by more than 10 spots in the rankings and those within 2 spots in the rankings. Honesty, integrity, and reliability was highly important to the small-volume builders, being ranked 2^nd, but was only ranked 12^th by production builders. Daily hands-on management was another category important to small-volume builders, ranking 5^th, while being ranked only 26^th by production builders. A similar theme was identified in the work ethic, attitude, commitment category, ranking 9^th and 21^st respectively. Two other related categories showed the same pattern, with referrals and repeat business ranking 14^th and 29^th; and personality and people skills ranking 17^th and 48^th.

The production builders saw location of communities and quality lots as important, in 4^th place, compared to 14^th place by the small-volume builders. Other categories not previously mentioned were effective management style, which was ranked 8^th and 19^th; strategic planning and goal setting at 10^th and 23^rd; and flexibility and ability to make changes, which was ranked 14^th and 32^nd, respectively.

Of the factors given nearly equal importance, the most notable was quality workmanship and products, which was ranked 1^st by the small-volume builders and 2^nd by the production builders. The only category seen as more important by the production builders was good employees and teamwork. Customer satisfaction and customer relations was also separated by only one spot, ranked 3^rd by small-volume builders and 4^th by production builders. Reputation and name was ranked the same by both groups at number 3; good subcontractors and subcontractor relations was ranked by both at number 6; and fair pricing, low costs, best price, value was ranked at number 14 by both production and small-volume builders. Customer service and competitive pricing  were within two and one spots of each other, respectively, with the production builders lower at 19^th on the former and the small-volume builders lower at 20^th on the latter.

Other items of note are that only one production builder mentioned an outside consultant as being important, ranking in last place at 52^nd; and not even one small-volume builder listed outside advisors as being important, even though the review of literature revealed this was an important factor to business success. Accounting systems, change order procedures, and safety were found to be important in the literature but ranked only 18^th and 26^th, N/A and 32^nd, and 38^th and 27^th by production builders and small-volume builders in that order. Presumably some of these companies have purchase order systems and other management systems, but neither group mentioned purchase orders specifically. Only production builders mentioned any type of management systems, ranking them 25^th overall despite management systems in general and purchase order systems specifically being mentioned as important in the literature.

Categories that were not noticeably different or were very similar but seem worth mentioning include knowledge and experience in the construction industry, ranked 7^th by small-volume builders and 16^th by production builders and scheduling, ranked 11^th and 17^th in the same order. Small-volume builders also ranked good employees and teamwork in 8^th place.

The following group categories were identified by combining similar responses: 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.

The group categories of external factors (see Figure 1 below) and planning were in a virtual tie for next-to-last place based on the combined percentage score each received, given similar responses. For production builders those scores were 3.04% and 3.11%. For the small-volume builders the percentage scores were 1.15% for each. The planning chart isn’t shown here because it only contained one item—strategic planning and goal setting – organization. The strategic planning category was ranked 10^th by the production builders, but considering the importance planning received in the literature, the cumulative percentage scores of 3.11% and 1.15% don’t seem to adequately reflect the significance placed on it by the other researchers.

Although the above individual categories from Figure 1 were discussed earlier, an interpretation of the group category might be helpful. With owners and managers attributing approximately 3% and 1% importance to external factors leading to the success of their companies, another interpretation might be that they feel that 97% and 99% of their success has nothing to do with external factors. This seems like a risky assumption, given the fact that one of the top six reasons for construction company failure as listed by bonding companies was factors beyond the contractor’s control. An assessment of the relative strength of the home building market over the past 15 years might lead one to conclude that a degree of overconfidence exists among owners and managers of home building companies.

One author describes how success can be falsely attributed to actions unrelated to that success. When some individuals and organizations experience success, they attribute everything they have done and every decision they have made as having led to that success, even though their success might be in spite of counterproductive behavior (Pfeffer, 1998). Because the home building market has been robust for several years, it is possible that owners and managers falsely ascribe company success to whatever policies and systems they have implemented.

Production builders’ responses for the group category of marketing indicated that one-fifth of their company success was perceived to have come from this category with a score of 20.09% to 14.45% for small-volume builders. The difference should come as no surprise, because the production builders relied more on marketing and the location of their product than the small-volume builders who relied more on referrals or word of mouth. See Figure 2 below.

The highest rated group category was business and management practices, with a 37.48% combined score by production home builders and 27.29% attributed to small-volume home builders (see Figure 3 on the following page). This is notable because while individual categories were not ranked particularly high, the combined percentages were. Management systems and procedures as well as management skill were repeatedly mentioned in the literature as being important. Because the combined category is ranked very high, the possible implication is that even though owners and managers didn’t state some important individual categories specifically, they might have some of those systems in place but use different terminology to describe them. The difference in the two percentages appears to be the cumulative effect of the higher importance production builders attributed to different types of systems and also the higher ranking given to good employees and teamwork.

Personal attributes was the group category with the next-highest ranking for production builders. Because the small-volume builders are in much closer contact with home owners and subcontractors they likely rely more on personal friendliness and other qualities such as honesty, integrity, and reliability as well as work ethic and knowledge and experience in the industry. The aggregated percentage score for production builders was 18.47%, while the percentage for small-volume builders was 26.76% as shown below in Figure 4.

The business profile category was almost non-existent at a combined score of approximately 1%, so the final category that will be discussed is quality, service, and warranty work (see Figure 5 below). As with the group category of personal attributes, the small-volume builders attributed a significant degree of importance to this category, giving it a combined percentage of 28.36% as compared to 16.44% for production builders. It is worth noting that combining quality, service, and warranty work with personal attributes, or in other words, the two categories that complement a personal hands-on approach, yields an impressive combined percentage of 55.12 for the small-volume builders and over one-third for the production builders at 34.90%.

Conclusions and Recommendations

This study benchmarks the perceptions of owners and managers of production and small-volume home building companies within the United States. This study also provides insights into the perceptions of production and small-volume home builders regarding factors they consider important to the success of their companies and how their perceptions differ from one another. The findings indicate that neither the production home builders nor the small-volume home builders felt that external factors that were out of their control, such as a good economy or interest rates, were important factors contributing to their success. Attributing such little importance to external factors could lead to inaccurate decisions, forecasting, and implementation of policies and systems.

 If the findings were to be divided broadly into two categories or systems, entitled hard and soft, where hard systems were described as physical and soft systems were described as people, then in general the production builders place more value on hard systems, and the small-volume builders place more value on soft systems. Some of the most important contributors to success as described in the literature, such as planning, cost control, management, and management systems were generally listed as more important by production home builders than by the small-volume builders. The small-volume builders placed more value on intangibles such as honesty, integrity, reliability, work ethic, personality and people skills.

Both groups placed high value on quality workmanship and products, reputation and name, customer satisfaction, and good subcontractors and subcontractor relations.

A recommendation for further research is to determine the degree to which owners and managers actually practice these factors for success within their own 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.

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Appendix