A New Approach to Project Budgeting for Residential Builders

Most builders are under the assumption that they do things differently than their competitors. They believe the way they operate; from trade relations to job costing, is different than all other contractors.

All GCs understand the importance of working within a budget. A budget is usually driven from an estimate or a contractual agreement from a third party to perform work per the defined specifications. In the commercial and land development world, it is important to establish an upfront agreement with a trade partner on a job that takes a year or more to complete with many variable costs. Producing purchase orders for those jobs helps to establish sound communication and eliminate mistakes.  

The reality is, whether you are building residential or commercial construction projects, you are manufacturing a product. To be successful, you must think in terms of a high-production manufacturing facility: keep your costs low, volume high and build exactly to buyer/owner specifications every time.

Don’t think this strategy is for you? Start with some common ground. When building a residential or commercial project for a buyer/owner, the cost of the job and projected profit should always be made known before any work starts in the field. Establishing pricing for the project and creating purchase orders per the project scope is a good way to accomplish this goal.

Additional change orders—otherwise thought of as customization and changes to the original scope—is a contractor’s chance to pre-define ways for the buyer/owner to change the building plan and materials to custom fit their individual needs. This is quickly becoming a key differentiator in an effort to attract buyers or remain maneuverable in the commercial world.

Many builders in today’s residential construction market must operate as if they are custom—for “up-sale” opportunities on options and selections—but deliver within production time frames, for buyer satisfaction and volume benefits. The challenge most builders have is having a buyer make all selections up front and not changing anything throughout the entire build process. This is why just-in-time (JIT) stage release could be helpful to your business.

What is Just-In-Time Production?

JIT means you plan out which options you will sell by floorplan, at what point(s) you need to notify the trades involved of the selections made, and when each trade will start their contracted work. As you progress through the project schedule, trigger release points (such as the completion of the foundation) that will notify the builder to release the next round of purchase orders in order to begin the next stage of construction.

Releasing through a specific stage of construction will cut off the offering of one or many options affected in that particular release. This leaves the flexibility to make changes to selections and add additional options until that release point allows a GC to appear more custom to buyers, increase options sales and deal with trade partner and material changes over the life cycle of the construction project.

This means builders can give buyers more time to make material selections, such as carpeting and hardware, further extending the sales window and increasing the opportunity for up-sale revenue. However, most builders do not advertise this to buyers, but educate their sales and design staff on the timing of the change potential, which keeps them up to speed with the actual progress of the home.

Building on Speculation

In a good market, many builders may increase the number of homes built on speculation, which in turn increases volume. The JIT release strategy becomes even more important when dealing with a spec house that is sold during actual construction, at a price point at which buyers expect to make changes. A house built on speculation may have all of the original selections complete, but, with no buyer, the contractor has no idea what changes a potential buyer may demand.

Releasing through a specific stage of construction and only notifying trades just-in-time elevates the early release of information that might be inaccurate or subject to change. So, even in a speculative project, you can still sell like you are custom, but deliver like you are production.