4 Ways to Build Profits

by Al Trellis and Paul Sharp

Everyone who builds houses expects to make a profit. Yet we talk to thousands of builders across the country, and many of them complain that their profits are dwindling, and they dont know what to do about it. So lets go back to basics. There are four basic ways to increase your profits: Increase your prices, lower your costs, lower your overhead, or increase your sales volume. Thats it. If you cant do one or more of these things, you cant increase your profits.

Increase your prices

Many builders tell me that theyre in a highly competitive market, and that they cant raise their prices. But the price you can charge is a function of the value you provide. Perceived value is a function of design, location, materials, and quality of construction. These must be properly balanced to get the maximum perceived value for the minimum cost.

Lower your costs

The fastest way to lower your production costs is to simplify construction. At the beginning of every new job, we go through the plans carefully to see where the design can be improved and simplified.

The other major area of cost reduction is in component selection. However, be very careful here. Using cheap products can lower the perceived value of the entire home. But you can eliminate outrageously expensive components where it doesnt matter. For example, you can often substitute marble tile for sheet marble or granite. Its much less expensive. You can also lower your labor costs by using more efficient subs. A sub that comes in a few dollars cheaper on an estimate doesnt save you any money if he takes a week longer to complete the job, or delays the work of other subcontractors.

Lower your overhead

Overhead is the money you spend to stay in business. It includes salary for office staff, rent, telephone, office supplies, computers, etc. For most small volume and custom builders, the big jumps in overhead occur when an extra person is hired. The trick is to increase sales volume and profit while keeping overhead constant. This effectively decreases overhead as a percentage of total sales. There is a point of diminishing returns as personnel are stretched to the limits of their capacity. Thats the time to add the extra person in order to jump up to the next level of capability.

One way to lower your overhead is to increase office efficiency. Using a computer to perform word processing, estimating, scheduling, and accounting functions can actually save money by enabling you to get more done in less time, and with less people. But dont get carried overboard. Simpler systems are usually better than complex ones.

Increase your sales volume

After you have pricing, costs, and overhead under control, then think about ways to increase your sales volume. Increasing your sales volume only increases your profits if you can maintain (or increase) your present profit margins. Weve seen builders who lowered prices to increase sales and discovered they were building twice as many houses, yet making less money. That makes no sense to us. Why work twice as hard, when you can work a little smarter, and still come out ahead?

The best way to increase your profits is to look at all four of these ways simultaneously. By increasing your value (and raising your prices), lowering your costs, lowering your overhead, and increasing your sales volume, you may find that you can increase your total profits. Building houses is a lot more fun when you make a profit doing it.

Al Trellis and Paul Sharp are cofounders of Home Builders Network. Al has 25 years experience as a custom builder, speaker, consultant, and columnist. He speaks to over 6,000 builders a year. Paul provides marketing consulting to builders around the country. The article is excerpted from their book, Building with an Attitude.

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