The housing slump has put extra strain on the always-tough relationship between builders looking to trim construction costs and suppliers grappling with smaller orders and shrinking margins. But the downturn is also forcing these trade partners to call a truce–however temporary and sometimes one-sided–in order to form a common front in their fight to survive this frail economy.
With so many builders foundering, suppliers, including pro dealers, face the unenviable predicament of trying to keep customers afloat for their own self-preservation, but without bringing themselves down in the process.
"The good news in vendor relations is that if it's not working, people are a lot more open-minded about changing the terms of an agreement," says Ed Brown, vice president of purchasing and construction for Arthur Rutenberg Homes, a North Clearwater, Fla.-based network of 35 franchised custom builders operating in three southeastern states. "You can work the bugs out of things, whereas in the past those bugs just whizzed by you."
"Suppliers are an extension of our company," adds Dean Tompkins, director of purchasing for Cleveland-based Payne & Payne Builders, which put up 26 custom homes in 2007. Tompkins concedes that price dictates his purchases of commodities such as lumber. "But our choice of other suppliers is determined by the services they provide," he says.
The Arizona division of Capital Pacific Holdings has managed to reduce its hard costs by between 16% and 18%, which Dave Maza, the division's purchasing director, attributes to the cooperation he's been getting from contractors that supply products and labor.
"It's a shared problem," says Maza of the erosion in buyer demand that caused his division's production last year to drop 30% to 314 homes. "If we can't build homes, contractors can't stay in business."
The housing slump has also rekindled the ongoing debate among builders about the advantages they derive from buying products directly or from turnkey providers that install what they sell. Those advantages often depended on a builder's construction velocity, but now are diluted–although not entirely eradicated–by market conditions that have reduced most builders' volumes dramatically.
No builder wants to admit that it has relinquished control of its purchasing, typically a company's last stand to save money. Fischer Homes, which builds about 1,000 homes annually in three Midwestern states, is using the same centralized method of purchasing out of its Crestview Hills, Ky., headquarters that was in place five years ago, says purchasing manager Phil Westerfield.
However, several builders concede that they are involving their trade partners more in the process, sometimes out of necessity.
"Some contractors' buying power with suppliers is actually stronger than ours," says Deryk Gross, purchasing director for the Bakersfield, Calif.-based home building division of developer Castle & Cooke. Letting trades handle certain purchases is fine with Gross because, he says, his company "isn't set up to be a lumber management company."
And while Castle & Cooke explicitly specifies the products and brands it wants in its homes, "if a trade brings us a product of equivalent value, we'd consider it if the product offers a price advantage without any loss in quality," Gross says.
Maza isn't opposed to what he calls "or equal" products, either. "We have a very limited bid list, so we're pretty confident in the contractors we use," he says.
The trust between builders and suppliers, though, can be built on a wide range of criteria. Atlanta-based John Wieland Homes & Neighborhoods, which specifies everything that its contractors buy, audits its trades for their pricing, warranty claims, worker's compensation claims, and scope compliance.
McBride & Son Enterprises puts a premium on the "value," which includes service and reputation, that a supplier delivers, says Rick Baft, purchasing director purchasing for this Chesterfield, Mo.-based builder.
Custom Builders USA (CBUSA), a Washington-based management company that coordinates purchases for 430 custom builders, surveys its members several times a year about vendors and their products and makes purchasing decisions based on those results. "A good vendor is likely to have more market share with our members," says Bill Smithers, CBUSA's chairman and CEO.
Arthur Rutenberg Homes uses a system in which each division evaluates suppliers monthly on a scale of 1 to 5 on value, product quality, billing, training, and other factors. "All of their scores have been going up," says Brown, an indication to him that suppliers are working harder to keep builders' business.
Such evaluations have become a two-way street, too. Payne & Payne, for example, recently entered into partnerships with several trades where it designates which ones it will use and works with them to streamline their job stages. "How can we help them is what we're asking," says Tompkins.
Capital Pacific polls its trades regularly to understand how its purchasing impacts them. "I may be getting a great buy on something that's screwing up a super's bonus," Maza says.