Top 10 Builder Business Tips Summary for 2008

April 14, 2008

10.        Make sure you are in Business for the Right Reason

Being a business owner is tough; being a builder is also tough.  Make sure you really want to be a builder in the long run because the next two years are going to be real tough.

9.         Create a Vision

All great enterprises started as someone’s vision.  You need to have a vision of your business as the guiding focus for improvement.  Now is the time to step back and create a vision of your company.

8.         Mission Statement & Business Plan

All businesses need to have common goals and a plan to achieve their goals.  The mission statement is written to guide decision making toward common goals.  The internal business plan is going to be your road map to improve your business.  I strongly encourage you to take the time necessary to create both.

7.         Budget/Financial Score Card

Budgeting is a process of projecting cost over an extended period of time and planning expenditures.  Financial planning encompasses a plan on creating wealth and measuring your financial performance.

6.         Board of Advisors

Create a board of advisors, formal or informal, that can review your internal business plan and financial scorecard.  Have them offer their advice on a periodic basis, maybe quarterly.  Your board should be composed of colleagues within and outside your industry.

5.         Build your Team: Employees and Vendors

Create the best team you can of value adders, both inside your company like employees, and outside your company like vendors and professional services.

4.         Improve Efficiency & Time Management

Evaluate where your time is spent, eliminate wasted time, and increase the efficiency of productive time.

3.         Improve Marketing

Marketing attracts potential customers to you.  Find low cost effective means to market to your target audience as rates are very low right now.

2.         Systems & Procedures

Create systems and procedures that will impress potential clients today while also being indispensable when you start getting busy.  Most builders are creative, some are organized, but those with great systems will always be the most profitable.  Use home building software, it’s easy and will make your life so much easier.

1.         Get the Clients Before Incurring Variable Costs

Home buyers are hard to find.  Insure the dollars you spend can be quickly and reliably turned into a profit.  Optimistic spec building is a luxury of the past, and possibly the future.  Find ways to conserve cash until the economy picks up.

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Posted by aelsbury

No. 7 Do Your Financial Planning

April 8, 2008

A study in 2006 concluded that small residential builders that created and adhered to a formal budgeting process were 26% more profitable than other builders. In these slow times, I’m willing to bet those same builders are doing even better than their competitors.

Budgeting and financial planning go hand-in-hand for builders. Budgeting is a process of projecting cost over an extended period of time and planning expenditures. Financial planning encompasses a plan on creating wealth and measuring your performance. Last week we focused on the business plan. You need to have a clear picture of your business, customers, competitors, and market conditions before you develop a budget and financial plan, otherwise your numbers will not be accurate or even useful.

Let’s start with Accounting 101. Hopefully you have two sets of accounting records. One set is used by your accountant for tax reporting and submitting to your creditors. The format is pretty standard and its use is very limited. Depreciation and capitalization are important concepts for financial accounting. The second set of books is your managerial accounting records. This set of records makes more sense to a builder as it is a guide to show you how you are performing and where to improve. Fixed costs and variable costs (job costing) are important concepts for managerial accounting.

 
Most builders spend plenty of time trying to control the variable costs for each job, which affects the short term. I recommend also creating a line item budget for your fixed costs. Fixed costs include employee wages and benefits, insurance, rent, equipment, marketing and advertising type expenditures. These are expenditures that you can control in the long term. You should periodically do a break-even analysis to insure you are covering your fixed costs. A break-even analysis will provide you the information on how much you need to sell to cover costs.

 
Builders like to build things and to let bean counters worry about the accounting. Remember, your home building business is a business and the numbers are extremely important. You should have an accounting reporting method that is always tracking financial performance. The three main accounting reports are as follows:

  1. Profit and Loss Statements: Project revenues and expenses out on a quarterly basis for the next year, and on a yearly basis for the next three years of operation. P&L statements are your guide to long term profitability.
  2. Cash Flow Statements: Project all cash receipts and disbursements out on a month-to-month basis for each of the next 12 months to 3 years. Cash Flow statements are your guide to short term sustainability.
  3. Balance Sheets: Project your assets, liabilities, and retained earnings (capital) at the end of the first, second and third years. Balance Sheets are your long term wealth scorecards.

Measuring and tracking financial performance is like shooting free throws. How many free throws can you make out of 10? Most people think 4 or 5. Unless you keep score, you don’t really know. Go shoot 10 and tell me how many you really made. You won’t improve unless you keep score.

 
Here are some money saving tips for 2008:

  • Be selective about capital purchases as every business has a limit on how much debt it can handle. A loan for “must-have” equipment may make financing that unanticipated “really-must-have” equipment very difficult next month.
  • Spend less with wise decisions. Most builders are slower now, so take the time to research more and make better informed decisions.
  • Try bartering to save money on goods and services you need. Remember, the barter must be win-win for both parties, so offer something as valuable as what you’ll be getting.
  • Make sure you know where every dollar you spend goes. When you make a purchase, ask yourself how it will improve your company’s bottom line. Will it improve sales, bring new leads, or improve operating efficiencies?
  • Cut with Precision. Large corporation cost-cutting in hard times is to employ a wide sweeping cost reduction policy. For small business like yours, cost-cutting needs to be implemented with detailed precision. Exercise care and judgment in determining what and where to cut and to what level.
  • Don’t cut your marketing efforts. Now is the least expensive time to establish market dominance. Eliminate wasteful marketing dollars, but not marketing efforts. Track your marketing results and simply cut the unproductive efforts. Find new ways to market on the cheap and keep your name out there.

Next week’s topic is about surrounding yourself with smart people who can help you.

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Posted by aelsbury

No. 8 Writing your Mission Statement and Business Plan

March 31, 2008

Mission statements and business plans are terms better known in the corporate world than they are for small residential builders. Well, builders who want to be successful better become more familiar with these terms.

Last week, we went through creating a vision of your company. This week we are going to create the road map to bring that vision into reality. It’s time to write a mission statement and create a business plan.

Wikipedia defines a mission statement as a brief statement of the purpose of a company or organization. I like to think of a mission statement in a more useful way. A mission statement should guide employee behavior. Our employees carry a business card with our mission statement printed on it. If they are unsure of the right course of action, they should be able to pull out that card and the mission statement should direct them on the correct course of action.

I recommend that you do the same thing, whether it’s just you or you have 20 employees. Everyone in your company should be working with the same mission. A mission statement should be somewhere between 1 and 3 sentences. Take the time to carefully write it so that it is your overriding guiding principle. It should universally apply to all functions of your business including hiring and firing decisions, money matters, or dealing with customers and suppliers.

Once you have written your mission statement, you need to roll it out to your employees. Explain to them the purpose of a mission statement and how they should use it to guide their actions and to make decisions.

Next, I recommend creating an internal business plan to use as a road map or step by step improvement plan. Business plans are typically used for attracting outside investors. If you are interested in a typical business plan, then you can learn more from the Small Business Administration at http://www.sba.gov/smallbusinessplanner/index.html (you will need to copy & paste).

In this case, we are creating a business plan to be used by only your company. It will lay out the game plan to operate your firm. It will be your blueprint and guide you towards achieving your business goals. A typical entrepreneur has a good business idea but is rarely qualified to manage all areas of a business. A builder running a business is similar. Much of the value in creating the plan is taking the time to think about the areas of your business that are beyond your core strengths. To many times we get caught up working within our business that we rarely take the time to work on our business.

The sections of your business plan to create are as follows:

  • Company Description: Take the time to understand and write down your true business. There is a big difference between 1) building unique custom homes for buyers in the spec market, and 2) delivering a customer focused custom home building experience.
  • Goals & Objectives: Set and describe your short term and long term goals and objectives. Insure you incorporate step by step milestones to reach your company’s vision. These should be both quantifiable and measurable. Increasing sales by $250,000 every quarter is quantifiable and easily measured.
  • Marketing & Sales Plan: Explain how you will sell your homes and services, and how you will move into new markets. Identify the specific marketing techniques you plan to use. Document how you plan to identify, contact and sell to potential customers. Create an advertising plan that allocates resources for media, print, direct response, and public relations. Design or reuse product literature and marketing brochures.
  • Operations and Management: Establish a plan to better execute the construction process. Evaluate whether you should be implementing new building techniques or different materials. Now may be the time to jump into the year 2000 and automate some processes using home building software. There are plenty of estimating, construction scheduling, change order, and selection management software available on the market.
  • Financial Forecast: Analyze your financial needs and profit projections. Even though you may enjoy being a builder, you need to earn a profit. Forecast your overhead, labor and material costs to understand where improvements can be made. Compare your costs of doing business to your competition. This topic will be expanded upon next week.
  • Plan for the Future: Your business plan should be continuously updated. In this section, you are making a list of things to keep your eye on. You are looking ahead to possible changes coming in the future, almost like making predictions. Keep an eye on competition that is entering or leaving your market. Periodically scan the industry to see what new products are being introduced. Set aside time to attend industry shows and take educational classes.

Let’s summarize. All businesses, whether a one man shop or multi-national corporation, need to have common goals and a plan to achieve their goals. The mission statement is written to guide decision making toward common goals. The internal business plan is going to be your road map to improve your business. I strongly encourage you to take the time necessary to create both.

Next weeks topic is your financial scorecard.

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Posted by aelsbury

No. 9 Create a Vision of Your Company

March 24, 2008

All great enterprises started as someone’s vision.  You need to have a vision of your business as the guiding focus for improvement.  Now is the time to step back and create a vision of your company.

If you made it through last week’s step #10 ‘Why Are You a Builder?’, then I’m assuming you are serious about improving your business.  You already have all the basics of being a builder, like preferred vendors, subcontractors, a pick up truck, cell phone, and an office with a computer to read this tip.  Now it’s time to re-invent your business. Re-inventing your company starts with a vision of what is should look like.

It’s tempting to roll up your sleeves and plunge right into the details of changing your business: evaluating new building products, looking at new developments, and sizing up your competition. It’s possible to get so caught up in changing what you already know that you lose sight of the big picture. Before you get lost in the details, take a step back and create a vision.

Find some place where you can think uninterrupted for an hour.  Set aside time to just think.  Sit back and imagine what a great building company yours could be without a ‘only if’.  Really focus on what you envision your company could be in 1 year, 2 years, 5 years, or even 10 years from today.  Involve others in your brain storming if you’d like.  Toward the end of the hour, start writing down the new vision of your company.

Ask yourself these two questions to get started:

  1. What do I wish I was doing right now during slow times that would be attracting new clients?
  2. What could I be doing in 2 years when the housing industry is good that would attract the best clients?

Your reinvented company needs to be demanded by home buyers.  Successful businesses rarely create something new first, and then second, find someone who will buy it.  The same is true for you.  Your company should be creating a value that is being demanded by home buyers.  Think about what home buyers want and that you can deliver. 

A great place to start is figuring out who should be your target customer.  Is it the double income professionals with 2.3 children who have little spare time and wants square footage and value?  Is it the empty nesters that have plenty of time, yet want low maintenance?  Maybe your target customer has limitless spending and wants you to serve up all their decisions during catered meetings.  Figure out the demographics of your target customers.  Your vision should include marketing to and selling to your target customer, as well as, service levels and quality of the actual homes.

Women are the new decision makers, they can not be ignored.  According to a study done for Traditional Home Magazine, women are involved in 74% of the home building decisions.  I’ve personally seen builders’ loose potential clients by solely asking the man questions during initial meetings.  I mention this for two reasons.  First, women should strongly influence your thinking when defining your target customer.  Second, your re-invented company vision may be focused on serving the needs of women decision makers.  Your meetings can be scheduled to coordinate while kids are in school.  Your future floor plans can incorporate larger laundry rooms and care-free whirlpool style tubs.

What makes you unique or different?  Most builders could make money the last 10 years during booming times, but now only the best are making money.  There was such a demand the last 10 years that all builders had clients.  Now you have to stand apart and be different from your competition.  It helps to evaluate your competitors, but don’t model your business after them. You don’t want to be like them, you’re in business to beat the competition. Learn your competitors’ best practices and learn from their mistakes.

Develop a unique selling proposition.  Once you know your target customer, figure out a unique value that you can deliver better than anyone else.  At least better than anyone within an hour drive.  Create a means to clearly and convincingly demonstrate the concrete, tangible benefit or result your clients will get when they decide you are their builder.  Home buyers will pay you in relation to value, not in relation to the time or cost you invested to deliver that result or benefit.

Take advantage of recent trends.  Pick the trends that fit your selling proposition.  There are plenty of builders moving into ‘Green Building’, 50+ housing, and flexible housing to name a few. 

  • Green building is still be defined, but is based on being planet friendly regarding materials and energy use. 
  • 50+ housing, as amply named, is based on designing a house to suit the needs of people over 50.  If your target customer is over 50, then it goes without saying that your homes better include certain features like hand rails, ramps, and be on one level. 
  • Flexible housing is advantageous for those who want the flexibility of turning a work out room into a bedroom once children join the family, then into an office once the children are off to college, and then back into a spare bedroom once the in-laws come to visit.  If you can communicate the flexibility of a house to potential clients, they will see the value for themselves as well as being able to resell the house to fit someone else’s needs.

How will technology fit into your vision?  Think about what technology are home owners demanding now, as well as, in the future.  It’s a safe bet that home buyers who can afford a home theater will want one.  Also think about how you want technology to help you become more efficient.  Would you like to automate your sales process, scheduling, or material ordering? I’ve written plenty about technology for builders in the past, so I’ll leave it at that.

Hopefully I’ve given you some ideas to think about when creating your vision.  Remember, set aside at least an hour to create your vision and write it down.  Next week, we are going to transform that vision into an action plan.

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Posted by aelsbury

Top 10 Builder Business Tips for 2008

March 17, 2008

I am counting down the top 10 business tips for builders over the next 10 weeks starting today.  Your business strategy and tactics as a builder should be different during these tough market conditions.  As a minimum, these 10 tips will help you survive until the market improves.  Hopefully, you use these tips to thrive and rise above your completion. Tips are presented in chronological order starting with the activity you should do first.

No. 10  Why are you a builder? 

Quick joke: Jerry, a door to door salesman rings the bell. Little 10 years old Johnny opens the door.  Jerry looks down to see a big fat cigar pinched between Johnny’s teeth.  Surprised, Jerry asks “Is your Mother home?”  Johnny blows smoke at Jerry and smoothly replies with a grin, “What do you think?” 

The answers to some questions are not always as obvious as in that joke.  This is a tough time to be a builder.  This is the longest downturn most of you have ever experienced.  For many of you, it’s the first down turn you’ve experienced. We need to ask the obvious question.  Why are you a builder? 

If you were marginally successful 2 years ago when business was booming, then chances are you are really struggling during these lean years.  It may be time to pick another means to earn a dollar.  Being a builder is tough.  Most builders work long hours, carry significant risk, and are always fighting daily fires.  There’s no shame in moving to an easier and more profitable venture.   

Don’t be like my friend Glenn.  As mortgages dried up during this slowdown, he saw his business declining.  He was smart enough to move on to something else, unfortunately he moved into home appraisals, which obviously is experiencing the same downturn. 

It may be time to eliminate the risk of owning the business and work for someone else.  Hopefully you are skilled and have connections to get on somebody else’s payroll.  There are minimal barriers to exiting now and re-entering later as a builder when the housing market picks back up. 

Do you love being a builder?  You’re going to devote a lot of time and energy to running your business and building it into a successful enterprise, so it’s important that you really enjoy what you do.  Let’s take it a step further.  Do you love being a builder, or do you love running your own business?  Are the negatives of running your own construction business greater than your passion to be the owner?  If you like running a business, then you could pick an easier industry.  If the construction process is what you like, then you could work for someone else.   

How about your family?  Are you able to balance the commitments of your business and your family?  Being a builder means long hours, weekends, and the pressure to earn a profit.  Having a family means long hours, weekends and the pressure to earn a profit.  Its ironic how both have the same demands and can be tough to balance. There needs to be both self gratification and financial rewards, for you and your family. 

My point is simple. The first step is a gut check to see if you have what it takes to be a builder.  You are either staying in the building business and need to plan for the long haul, or you are out and need to consider an exit strategy.  

If you are still crazy enough and have the passion to be a builder, then over the next 9 weeks we are going to take steps to improve your business.  Next week starts with your unique strategy.

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Posted by aelsbury

Improve People Performance

March 10, 2008

Everyone wants to improve how much they accomplish in a given day or week.  Managers and business owners try to improve the performance of their staff.  You need to understand human nature before you try to improve yourself or others. 

Stay with me for a bit to understand how human nature relates to business.  Here are some examples of human nature:

  • Most people do not like change, its human nature.
  • Some people do not like to make decisions, its human nature.
  • Some people work better on their own, while others work better in teams, again its human nature. 

You can NOT change human nature.  You need to learn to how to adapt and to expand the comfort zone of human nature.  It is far easier to work within the laws of human nature than it is to impose your will.   Are you struggling to make a change?  Do you think human nature is playing a role in the success of your implementation?  Think about the following examples that may be appropriate for your situation. 

  • Let’s say you want to try something different, like a new automated tool.  Experimenting with people who oppose change will doom the results independent of the tool.  Let the daring and sporadic person try the new tool, and then if it works, roll it out to the others.
  • If you have a husband and wife team as your clients, do not force them both to make decisions.  Let human nature run it’s course and the decision maker will become apparent. 
  • Do not try to get people who prefer to work alone to be part of a team.  Thrusting individuals into a team usually leads to disaster.  People who like to work alone thrive on independence and ability to control their finished product.  Do any of your electricians, faux painters, estimators, or high end tradesman come to mind?  If you do need independents to work together, then start by asking them to work in conjunction with others, yet all being able to do their own work. Slowly add group tasks where the outcome is greater than the sum of individuals. 
  • Similarly, do not divide up those that like to work in a team as their productivity will plummet.  Many people set their work pace based on others around them.  Inserting a fast worker into a team will pick up the pace for all.  Many team workers do not like to make decisions, they prefer to do the work and let others do the thinking.  Hence, insure you have a leader on each team.  Caution, two leaders can be trouble. 

Human nature also explains why most builders are reluctant to use technology in the office.  It’s no secret that home builders as a whole are behind in using technology to run their businesses.  Technology is not in the comfort zone of the traditional home builder who relies on his hands to do the work and drives a pickup truck from site to site for status updates.  Younger builders and new builders who come from outside the building trades are more familiar with computers and home building software.  These builders are taking advantage of remodeling software, online scheduling, home buyers documenting selections online and automating construction change orders to be more efficient and productive. 

My point is to think about human nature when you are trying to implement changes to increase productivity.  For you, it may be time to push your comfort zone into the world of technology.

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Posted by aelsbury

Stop Giving Away Your Profits

March 3, 2008

I was asked to review a mailer last week by one of our clients, Brad M., which started with the heading ‘Price Reduced’.  Brad has been a friend as long as he’s been a client so there are two things I know for sure about him.  First, he’s a builder who likes to make money.  Second, you really need to tell him bluntly to get his attention as he’s pretty stuck in his way of thinking. 

I blurted out to change the heading to ‘Prices Going Up’ knowing this would catch him off guard. After he realized I was serious, I asked him “Why aren’t you selling more homes?”  It’s a simple question many of you should be asking yourself. 

Lowering the price of your spec homes or building services more often than not only reduces your profits. “Price Reduced’ is a marketing ploy used to increase the short term sales of commodity items like ball point pens at an office store.  You aren’t selling a commodity as an impulse item.  Custom homes are unique products that should be marketed and sold as such. 

Many home buyers are not buying new upscale homes right now because either 1) they can not sell the home they currently live in, or because 2) they can’t get loan approval. Neither of these reasons can be resolved by the builder reducing price. Suffice to say,

Brad didn’t use ‘Prices Going Up’ as his mailer header to incentivize his prospects to act now before the prices increase.  Nor did he use ‘Price Reduced’. Fortunately, we did discuss plenty of other ways for him to sell the two specs he’s been sitting on for over two years. 

Ask yourself, ‘What can we do to increase sales given the market condition?”  Here are some thoughts to get you started:

  • Are you marketing effectively to your target audience to bring in new prospects?
  • Do you have a successful sales process that converts prospects into customers?
  • Are you clearly communicating the benefits of being your customer? 

To summarize, stop giving away your profits by lowering prices!

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Posted by aelsbury

Can you set and keep an appointment?

February 25, 2008

Can you set an appointment in advance and be there on time?

Yes – Great, look for next week’s Builder Business Tip; you don’t need this lecture.
No – You have a problem that needs to be resolved. I talk to builders everyday, most of it is scheduled in advance. 

I cringe every time I hear “Give me a call in the morning and I’ll check when I have time.”  Another sure clear clue of trouble is when I hear “I’m not sure when I’ll have time, I’ll give you a call.”  These are coming from builders who truly want to meet, not just excuses being given to a used tool salesman. 

If you’ve said something along these lines to someone you really wanted to talk to, then you better evaluate your future.  If your time management is that bad, then you may be better off working for somebody else.  It is understandable that as a builder, you are very busy and that occasionally you will be late or miss a meeting.  It is quite another to be so bad that you can’t even schedule a meeting in advance. 

Let’s look at some of the causes: 

There is an old phrase ‘work on your business, not in your business’.  Simply stated, if you are running a business, then you should be planning and managing, both of which can be scheduled.  If you are doing all the work and unable to set and keep appointments, then maybe you are just working independently.  Ask yourself “why am I doing this alone?”  Make sure you are doing it for the right reasons.  Working for someone else can relieve the headaches and uncertainties of running a business.  This is the case of a story I wrote several months ago about Mary the pie shop owner who worked 7 days a week making pies for little profit.  She was happier, had more free time, and made more money working for someone else. 

If you have so many ‘fires to put out’ on a daily basis that you are afraid to set an appointment, then you have way too many problems.  You may want to evaluate those doing the subpar work.  You may need better processes.  Eliminate the cause of the problems, not slap band-aides on them as you go. I can’t imagine the number of construction change orders that result from poor workmanship.

If you don’t know what’s in store for tomorrow or the next day, then you are being reactive and not proactive.  This type of person stays busy doing the last thing requested of them.  Suffice to say, the last thing is probably not the most important thing.  Don’t be one of those people who are busy getting busy; focus your attention on tasks that make progress. You better get some type of custom home building software or remodeling software that helps you organize your tasks.

My point is not to degrade those who struggle to manage their time. My point is to evaluate why you are struggling with time management and try to fix it. 

Note: Refer to my Jan 22, 2008 Builder Biz Tip on ‘Time Management’ to learn more on how to improve.

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Posted by aelsbury

Lessons about Hustlers and Statues

February 18, 2008

Are you a Hustler or a Statue? 

Both types of home builders were at the International Builders Show (IBS), but only one of them will be successful. 

I attended IBS last week which was a great opportunity to talk to dozens of builders from across the country.  Given the slow housing market, it was very interesting to observe the different strategies. There were a handful of fortunate builders who were as busy as ever because of their market or niche.  However, most builders were affected by the slowed housing market and fell into one of two camps. 

Statues- These builders are motionless, standing around doing nothing to improve.  Their plan is to wait until the housing industry gets busy again. 

Hustlers- These builders are busy taking the available time to fine tune their business.  Their plan is to improve now while they have time, so they are even better when the housing industry picks up. 

It was pretty easy to know which camp a builder belonged.  When they state “Why should I update my website, nobody is knocking on my door anyway?” it’s pretty clear they are ‘Statues’.  ‘Hustlers’ at IBS were taking classes, looking at the next eye catching feature they could build into a home, and roaming the aisles evaluating software and asking questions to improve their processes. 

Let me tell you a true story about a friend of mine.  Andy M. quit his job at a prestigious investment firm when the stock market was heading south a few years ago.  He’s not the sharpest tool in the shed when it comes to investing, so we thought he was crazy.  He started his own investment service at the markets worst time.  But, he had a plan.  No one was investing money, so the investment companies became ‘Statues’. He hustled to contact as many potential investors as he could.  Nobody else was calling, so numerous clients switched to his service.  Jumping ahead a couple years when the market bounced back, he is now the rich guy driving his new convertible to his new estate.  Andy M. was smart enough to be a ‘Hustler’ while his competitors were being ‘Statues’. 

The same story can be told about builders today.  Are you a ‘Hustler’ or ‘Statue’? 

‘Hustlers’ are being proactive right now doing some of the following: 

  • Implementing home building software and remodeling software that can streamline management functions like estimating, customer relations, selection documentation, online scheduling, customer communication, automated change orders and other integrated solutions.
  • Updating marketing methods like websites, news letters, brochures, email campaigns, and search engine optimization.
  • Evaluating new building techniques like green building, which can also compliment marketing efforts.
  • Improving human skill sets by attending classes and seminars. 

Just like your high school coach, I encourage you to be a ‘Hustler’!

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Posted by aelsbury

Documenting Construction Change Orders

February 11, 2008

Why is it so hard for home builders to document change orders?  It’s obviously a problem for many of you.  ‘Change orders’ was Googled 10,572 times in the last 30 days.  ‘Construction change order’ was Googled another 2,027 times.  That tells me pretty clearly that home builders are looking for help with change orders; so I’ll address it. 

Change orders have a negative connotation.  They are costly to both builders and home buyers, as well as, they typically slow down the construction schedule. Home buyers cringe when they hear the term ‘change order’.  Therefore, only use the term ‘change order’ when something is being changed that both parties already confirmed.  Do not confuse home buyer decisions that are made during the construction process with change orders.  Home buyer selections should never be termed a change order.  If Mr. Home Buyer confirms red brick, that’s a selection.  If Mrs. Home Buyer then changes it to brown brick, then that is a change order.  Decisions made during construction can better be phrased as selections, options, enhancements, or upgrades. 

The best way to handle change orders is to eliminate as many of them as possible.  Bad decisions lead to change orders.  Make sure you are educating your home buyers prior to making decisions so they make the right decision the first time.  Implementing a process that helps home buyer’s make decisions benefits both of you. 

Some change orders are inevitable on any project, so here’s a simple change order process that works every time: 

  1. Builder or home buyer initiates a change order request. 
  2. Builder provides a cost for the change, time consideration, and any pertinent details. 
  3. Home buyer approves or cancels the change order. 

Those three steps may seem overly simple, but in truth, it should be that simple.  You can include more details in those steps to meet your needs, like adding change order fees, interest fees, profit margins, and decision deadlines.  Documenting a change is the critical step.  Implementing and accounting for it become easier once it’s documented.  Most home building software and remodeling software offer an automated change order system, such as SelectionWare, Buildtopia, Sage Master Builder and Timberline. 

There is no excuse for not documenting change orders, whether made in the field or office.  The five minutes saved in the field by not documenting a change order has an avalanche effect.  Implementing the change becomes harder as little is communicated, accounting becomes a nightmare as invoices don’t match existing paperwork, and collecting from the home buyer becomes a “he said-she said” battle.  Five minutes of documentation and an approval system can save hours of headaches and lawsuits. 

I recommend the following to solve the change order epidemic: 

  1. Implement a change order system, whether automated or on paper. 
  2. Be disciplined to document every change order. 
  3. If you are too busy to document a change order, then see step 2. 

Magic change orders fairies do not exist, implement a system that fits your company!

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Posted by aelsbury

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