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Finding Hidden Profits: A Guide for Custom Builders Published by: National Association of Home Builders (NAHB) 1 Calculate How Much Profit Is Enough, 1 Allocate Your Overhead Costs, 4 Maintain Your Profits to Maintain Your Salary, 10 2 Take Charge of the Project, 11 Make Communications Personable, 13 Identify the Primary Players, 15 Outline the Allowance Process, 20 4 Make Allowances a Profit Center, 27 Define Allowance Parameters, 29 Explain Allowances in the Contract, 29 Use Allowance Change Orders, 32 5 Write Profitable Change Orders, 35 Write Effective Change Orders, 43 6 Control the Specifications, 47 Protect Yourself with Builder's Specifications, 48 Write Thorough Specifications, 48 Develop an Inclusive Document, 56 8 Prepare a Custom Draw Schedule, 71 Separate Draw Requests and Change Orders, 76 9 Assign Responsibility for Mistakes, 79 Anticipate Common Field Problems, 81 10 Join the Team Early in the Process, 85 Implement Value Engineering, 86 Minimize the Impact of Construction Conditions, 92 Analyze the Financial Data, 98 Develop a Business Summary, 98 A Sample Set of Specifications, 101 B Sample 10-Draw Schedule, 121 Figure 2.1 Progress Report #13, 16 Figure 2.2 Owner Hot Button Detailing List, 17 Figure 4.1 Allowance Summary Sheet, 31 Figure 5.1 Change Order Summary, 38 Figure 5.2 Change Order Example, 42 Figure 10.1 Preconstruction Value Engineering Consulting Agreement, 87 Figure 11.1 Decision Summary List, 94 Figure 12.1 Project Evaluation Sheet, 96 Figure 12.2 Annual Business Summary, 99 Case Study #1.1 Watch Those Percentages! 9 Case Study #2.1 What Warning Is Sufficient? 14 Case Study #3.1 Do You Want to Work with this Client for 12 Months? 24 Case Study #5.1 Use Change Orders, 39 Case Study #5.2 Include Product Care in Your Specifications, 44 Case Study #6.1 Even When You Are Right, You Could Be Wrong! 50 Case Study #7.1 Have a Rock Solid Contract, 58 Case Study #8.1 Enforce Your Contract, 72 Case Study #8.2 Minimize the Amount Held, 73 Case Study #8.3 Make Sure Earnest Money Is Sufficient, 74 Case Study #8.4 Once Authorized Time to Pay, 75 Case Study #8.5 Find a Way to Make the System Work, 76 Case Study #9.1 Make Notes, Notes, Notes . 80 Case Study #9.2 Stick to Your Responsibilities, 82 Profitability in construction is directly proportional to the contractor being organized, professional, and a capable manager. Anticipating problems and solving them ahead of time is one of the main experience factors used to differentiate among custom home builders. In my experience as a longtime director of my local NAHB chapter and an advisor for members, I have learned that builders, suppliers, and subcontractors always can improve their business skills. I am always learning. I have found that making money is directly proportional to organization and proper administration of the business aspect of home building. Profit is the money received by a company when it sells a product or service for more money than it costs to produce it. For the purposes of this book, profit is the money a builder earns from a project after the hard costs for materials, labor, and administrative expenses are paid. With this money, the builder is able to maintain a cash flow, make investments, and develop new projects. Profit is different than your salary. Your salary is an annual amount that your company pays you on a regular basis in exchange for your knowledge, expertise, and management abilities. Why? Because profit dollars are determined by markup. Markup represents the difference between the cost to the builder and the selling price to the owner. Markup is a percentage based on the projects cost. The more accurate your costs, the higher the total amount on which markup is calculated. For example, the total costs for time and materials, fees, permits, etc., for a custom home is $450,000. With a 10 percent markup, the selling price of the home is $495,000, with a profit of $45,000. If you add in $50,000 for your overhead and salary, the cost of the custom home increases to $500,000. The selling price is $550,000 with a 10 percent markup and your profit increases to $50,000-with your overhead costs and salary paid. The $550,000 selling price more accurately reflects your costs and the profit due your company. A man is attending his high school's 20-year reunion. This man is a billionaire and runs a store chain with more than 100 stores. All the attendees are curious about the successful classmate who never did well in school and was horrible in math. Well, the billionaire still isn't very good at math, but he sure knows how to make money. In truth, the successful classmate operates on a 100-percent markup because he doubles the price of everything he sells. Judging by his success, he has figured out how to include his overhead costs in the cost of the items to maximize his profit. The percentage of profit is relative. When sales volumes are large, a business usually can operate on a smaller markup or percentage of profit. Contractors building custom homes, however, often have a limited amount of resources, labor, skilled help, and time. Usually, a limited number of high-end custom homes are bat each year, so profits must be determined on a small number of projects, each of which has a high selling price. Because your profits are dependent on a few projects, it is essential that you protect the profit you have in a job and look for additional profit centers. Allowances and change orders both are potential profit centers for custom home builders. Accurately price the item to include time and materials, overhead costs, and your profit. A professional image based on quality and excellent management skills is yet another source for profits. Builders recognize that they must pick the client as carefully as the client selects a builder. A professional image results in more opportunities, which in turn allows the builder to be more selective and command a higher markup. Finding Hidden Profits.- A Guide for Custom Builders provides tips and suggestions that will enable you to both protect and increase your profits in seven areas: * Determining overhead, salary, and profits * Detailing builder specifications * Writing comprehensive contracts Many builders overlook the opportunities for making a profit from these custom home tools. Following the procedures outlined in the following chapters will help you profitably manage individual projects and achieve your business goals. (Finding hidden profits: a guide for custom builders was posted and is owned by: Ester Figueroa) |
esterfigueroa@chicagopartsnetwork.com (Ester Figueroa) for more information.
