Here's a scary Halloween story for you: In some markets, a few tract home builders say they have cut their construction costs to $35 per square foot.
Here's an even scarier thought: Some of what they're doing has nothing to do with promoting bidding wars among dealers or feasting on cut-rate lumber.
And now for the scariest thought of all: If small builders copy what the tract guys have done, dealers may look back on these days as a time of plenty.
Consultants, reporters, and dealers who cater to big builders all say that many of the nation's largest homebuilders have entered a second phase in their recession-induced campaign to wring the costs out of construction. They haven't stopped trying to reduce prices, but big builders have progressed into other, more profound changes in the way they do business, experts say.
Some firms in the Builder 100 are starting to put up easier-to-construct, "lighter" homes with more features that younger homebuyers want, at construction costs 36% below the $55 per square foot that they used to spend on such tract housing. (Construction costs for the average U.S. home total $82 per square foot, the National Association of Home Builders estimates, so a similar 36% drop would trim the national average to $52 per square foot.) And the public is responding to these new, low-priced homes; KB Homes says its Open Series accounts for half its total sales this year, while Shea Homes' contemporary Spaces series has generated "big crowds and enthusiastic press," reports Builder, a sister publication to ProSales.
Dealers can be forgiven if, at first glance, they don't see anything special about such projects. ProSales handed copies of Shea Spaces floor plans to a designer and estimator at Schoeneman's Building Materials Center in Sioux Falls, S.D., and to a similar duo at Wisconsin Building Supply in Green Bay, Wis. The designers quickly pulled out plans they had created that matched, feature for feature, just about everything the big guys did.
When estimators at those yards did takeoffs of the Shea plans as well as their in-house designs, they ended up scratching their heads regarding the big builders' claims that their designs were cheaper. In Sioux Falls, a 1,475-square-foot house designed by Schoeneman's Jim Rasmussen was estimated by coworker Randy Engeltjes to have $31,721.17 worth of materials. Engeltjes figured a quite similar 1,460-square-foot Shea home would have $29,587.55 in materials. In Green Bay, a 1,495-square-foot ranch home designed by Wisconsin Building Supply's Ron Chekouras brought a materials estimate of $30,951.26, while estimator Tom Leick figured that a 1,465-square-foot Shea Spaces design would require $28,311.93 worth of materials. "I don't know how [big builders] numbers come in the way they did" given the low building costs cited, says Chekouras.
Don't be misled by these comparisons, however. When figuring the costs of big builders' new homes, the estimators applied traditional rules of thumb to the projects. But big builders aren't following the old rules. In four key ways, the old practices are changing.
New Rule No. 1: Attack Overages
Homebuilding, particularly when practiced on a big-builder scale, historically has been a sloppy business. Estimators commonly write takeoffs that call for 10% to even 20% more lumber than they believe is needed to build the house.
"Some builders have craftsmen," notes Casey Voorhees, who teaches estimating classes nationally. "Others have wood butchers."
This adding of extra sticks can't really be called padding the order. Estimators say that while they almost certainly hear complaints if they provided too small an overage, they rarely hear when they delivered too much. "On average, if I send out a package with $30,000 worth of materials, I'll get back about $500," says Engeltjes, who's been doing estimating for 17 years. Engeltjes says he isn't surprised if he visits the site of a $600,000 house (and in South Dakota, $600,000 buys a lot of house) and sees a 16 cubic yard dumpster full of materials that have been wasted.
"If you ship it, it will get used," says Clark Ellis, founder and principal at the Continuum Advisory Group, Cary, N.C. "You don't get calls from the framer saying, 'There's too much.' People will cut three feet off a 14-foot length and throw the rest away."
But why should dealers care about excess, they typically argue, if their customers don't? Because the big builders' attitude regarding overages is changing.
Ellis says the buzzword among savvy big builders is "unitization" focusing on units of materials used and not just profits. He has been urging builders to do a comprehensive materials analysis for each home plan, tallying the total amount of wood needed plus a modest overage for mistaken cuts.
Mike McCrobie, 84 Lumber vice president of construction services and manufacturing, has noticed the change.
"Right now, the thing that's the biggest challenge for us is understanding the budgeted takeoff vs. the average takeoff," says McCrobie, who deals with a number of national and regional builders. He says 84 has reached the point where "We can fine-tune those models to where there's a minimal amount of waste. And we can fine-tune the labor [required], too. ... It's about managing pennies and nickels."
To a lot of builders, knowing how many studs go into a house remains unknown territory. Some major dealers, among them Stock Building Supply, Carter Lumber, and 84, no doubt are capitalizing on this knowledge when they offer turnkey construction packages to builders.
