Despite the financial curveballs 2020 has thrown, demand for housing is strong. According to the National Association of Home Builders, new home sales were up over 3% in the first half of 2020 compared with the same time period in 2019. Additional inventory is needed to meet this growing market demand, but available housing remains low.
Many home builders are scrambling to keep pace, especially those coming off of construction shutdowns in their states, and taking advantage of the warmer temperatures and longer daylight hours the summer months provide. The increase in construction projects around the country has led to a greater need for raw materials, which has driven up the purchase price for builders and, ultimately, for buyers.
Rising Construction Costs
The cost of building a home likely isn’t going to decrease anytime soon. There are many factors involved including exhausted lot inventory and the scarcity of skilled labor but, quite simply, building materials cost more today than they did even very recently. Builders, therefore, need to find innovative ways to cut cost when building a house. One way to do this is to increase buying power.
Prices for goods used in residential construction rose by 1.9% in June. With global supply chains breaking down, trade tensions heating up and tariffs placed on imported goods from around the world, many sectors of the economy are paying the price. Home builders are forced to either rely on domestic production or pay increasingly costly import taxes on a variety of material goods. Take lumber for example, the price of which has risen roughly 80% since mid-April to $627 per thousand board feet. This increase alone has added $16,148 to the price tag of an average single-family home. Recent product price increases have also been recorded for many other fundamental building blocks of a home including:
- Structural metal products
As a home builder, what are some ways you can lower your material costs without having to sacrifice on quality or your bottom line?
The Benefits of a National Accounts Program: Hedge Against Material Cost Increase
As a builder, you likely have great relationships with your suppliers and are receiving competitive pricing that’s in line with the volume you build each year. Consider the benefits you could realize by multiplying your buying power ten-fold or more. Think of the leverage you could gain with those who supply your plumbing and electrical fixtures, drywall and yes, even lumber.
When you join a large network of builders, you can have access to cost discounts and rebates through a national accounts program that provides pricing advantages you may not be able to obtain on your own. This is the power of strength in numbers, as you gain the ability to benefit from national builder pricing within your small business. Even if you only reduce your cost per square foot by $1, you instantly achieve thousands of dollars in savings per home, not to mention the substantial savings that can be realized when building entire communities.
This can add up quickly when you’re saving on every window, door and faucet placed in your homes. Those dollars go directly to your bottom line.
Additional Ways to Reduce Construction Costs
Along with construction materials, it’s important to note the cost implications of land development and labor. The land acquisition process takes time and money. Developed lots have dried up since the Great Recession and, therefore, builders are left to find raw land that needs to be entitled and developed before homebuilding can begin. Available land in desirable locations is scarce and expensive. The right piece of land might cost more in the short term but the wrong piece of land has long-term cost implications. Not only will it result in poor sales and slow velocity, but it will extend time spent on a construction site and increase the costs associated with it. As Phil Fankhauser, co-founder of Epcon Communities, likes to say, “You can never get a good enough deal on a bad site.”
Labor is another cost concern for many builders. The availability and consistency of tradespeople can be hard to come by, but there are benefits to production building that help regulate the flow of labor and reduce time on site. By building in one location over several years, trades have consistent work and are more likely to prioritize that project over others. Furthermore, building a limited lineup of floorplans allows them to avoid a learning curve on every job, which makes the process much more efficient over time. And planned even-flow building, rather than ebbs and flows in volume, allows you to manage an accurate schedule and move trades efficiently from one house to the next.
Taking labor and land into consideration is not immaterial when planning for the construction costs of a home, so make sure you know your criteria for an ideal location and, once you go vertical, strategize ways to make your job sites as attractive as possible to your trade partners.
Take the Complexity Out of Homebuilding
Homebuilding can be complex, but it doesn’t have to be. If you are a custom or semi-custom builder, how much time are your people spending pricing customizations, managing construction issues arising from one-off designs or reworking features that appeared to work on the drawings but posed problems in the field? What additional costs are your suppliers baking into your bids, knowing that they will spend extra time troubleshooting complex custom blueprints or making special trips to scattered job sites? How much could you lower your costs if you ordered the same materials for every job and gave yourself the opportunity to build your plans more than once? If any of these questions strike a nerve with you, your business could benefit tremendously by committing to a simplified business model.
Together with our Franchise Builders, Epcon Communities builds over 1,000 homes each year in states across the country. Working alongside a top U.S. home builder can help you build and close more homes per year with a scalable, repeatable process.
If working with a large home builder would lower your construction costs, increase your buying power and give you greater ability to meet housing demand, then reach out to Epcon Franchising to see what real estate franchise opportunities exist in your market.
This article is published on Professional Builder.
Materials are just one challenge home builders face. Download the guide “10 Challenges Home Builders Face” to learn more about how to overcome each one.