Posted by: JC Gatlin | May 9, 2010

Five factors to consider before chasing the cheapest dollar

A Construction Professional recently wanted to replace a Building Partner (trade, sub-contractor, vendor) in his community with a less expensive company. The change would result in roughly a $177 savings per home. Now calculate that savings over the number of homes he expects to build in the coming year, and the savings grows exponentially.

Or does it? 

Swapping one Building Parter out for a cheaper company may appear to have immediate financial benefits. But,  if not done smartly, can  have long-term negative effects. In fact the lowest price can ultimately become the most expensive.

Before making the switch, ask a few questions:

1. How will the change impact cycle time?

Can the cheaper company meet the expected duration time of the construction activity? Are they saving money using a smaller crew? What is their efficiency?  How dependable are they? Will they show up on-time and when expected?

2. Will errors and rework increase?

Will there be an increase in building errors during the “learning curve,” while they become familiar with your plans? Do they understand your job completeness requirements? How much extra time will you have to spend inspecting and then re-inspecting their work? Do they keep a clean jobsite? 

3. Is quality sacrificed for the lower price?

Is the cheaper company cutting corners?  Where or what is creating the price difference between the current Building Partner and the cheaper company? Do they suffer from 2nd time quality issues (or even 3rd or 4th time quality?)

4. What kind of impact will the change have on your building system?

Do they follow or are they open to following standardized work? Will they understand lean concepts? Will they use the First Time Quality Program? 

5. Will warranty increase?

This is one of the biggest risks of all. A lot of times, construction costs decrease as warranty costs increase. How does the cheaper company handle warranty commitments on their work? Will they complete their warranty repairs within the required time?

Every nickel and dime counts — especially in today’s economy. So it’s easy to justify a savings of $100 – $200 on  a construction activity, especially when you multiply that by the volume of homes you expect to build. But, if the cheaper price is the only advantage and the other attributes don’t measure up, you’ll spend a lot more in rework, lost cycle time, inspection times, warranty repairs, and the amount of time it takes to get the cheaper company integrated into your building system.

A lean home builder works with its current Building Partners and helps them improve. A lean home builder asks Building Partners to break their pricing down. Explain that they’re coming in higher than their competition and you want to understand why. There is probably tangible reasons (from dry runs, return trips, keeping inventory in stock) that can be addressed on both sides that will allow them to offer a lower price — not to mention further eliminate waste.

At the end of the day, if replacing an expensive Building Partner still appears to be the right choice— just make sure you’re looking at the big picture and asking all the right questions. Once done, it can be very difficult to undue the damage.

© May 2010 Homebuilding Partners, Inc.   twitter-logo

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Responses

  1. Very good points! Any Idea what it costs per day to finance construction? Delays cost real money as well as inconviencing the building partners, construction professional and possibly the customer purchasing the home.

  2. The problem with COST REDUCTION is that the person giving the reduction does not reduce their costs. They just lower their price. This results in resentment, or failure to deliver as they have under priced. Often they come back asking for more money to complete or looking at any excuse to add costs on which leads to delays and “discussions” on what was in the price originally.

    Focusing on cost reduction requires a partnership approach. You may need to help the contractor get their head around the waste elimination principles. As you mention it takes longer but putting the effort in up front saves many times the value later on when things go smoothly.

  3. I think this happens in lots of indureties and you provide good points for everyone to consider. I always like to try ot work with the existing team first. But occassionally that doesn’t work out and you must revisit that relationship. By and large I think you can improve existing relationships though.

  4. […] Five factors to consider before chasing the cheapest dollar dal blog Lean Homebuilding di J.C. Gatlin: Come scegliere un partner nelle costruzioni? (traduzione automatica) […]

  5. Waste reduction results in cost reduction, but it’s a matter of process of how you go about it. Cost reduction starts with the lens of a financial statement or transactional cost data. You then try to work backwards into the process to find opportunities to improve. With waste reduction, you focus on waste in all it’s forms. Some of it will yield cost reduction first-hand, some cost-reduction second-hand, and some none at all. But it starts with the source of most cost overages and long term, when we learn and trust the process, it is a more successful path to cost reduction.

  6. The question isn’t so much, are we eliminating waste or reducing the cost (assuming total cost, not the typical unit cost which is a very narrow view), instead what will become of the elimination of waste? As we all know an outcome of waste elimination is usually unused or free-up capacity. The typical answer to this new found capacity is to ‘reduce the cost’ by moving or eliminating an FTE or Asset, instead, what would be a Growth metric to show the Positive outcome instead of the negative associated with it?

  7. I view cost reduction and waste elimination as two independent variables that may or may not have a relationship to one another. Waste elimination is more encompassing than simple cost reduction, in that cost reductions can often be achieved without the comprehensive removal of waste. An example is the elimination of a FTE. While a FTE reduction may lower operating cost, far too often it does so without addressing the fundamental waste encompassed in a process or flow. As a result, it is not unusual for incremental cost increases to reoccur as the root of the issue has not been adequately addressed or corrected.

  8. Jamie — Your view regarding trying “to work backwards into the process to find opportunities” to cut costs is smack-on. It’s how most companies look at their financials— and actions taken generally produce immediate results. I belive that some of those results have negative impacts that sometime we don’t feel till much later (such as replacing a good, more expensive trade with a cheaper, less qualified trade.)

    It’s harder and slower to work forward. I guess the real question becomes — how do you quantify waste elimination into dollars, to show cost reduction?

    Justin and Jim — What’s FTE?

  9. JC, FTE is Full-time Equivalent or one full-time position.

  10. Waste elimination in the long run should result in cost reduction but often isn’t easily measured unless it is tangible (such as scrap or rework). Without very good metrics, very good recordkeeping and the ability to link the waste elimination to something that is measured well and moves in the desired direction it is often hard to make the connection. Reduction in distance walked should increase the productivity of the employee, but clearly you shouldn’t overproduce just because you can. So the labor content per unit produced remains with typical measures remain unchanged in most systems.

    This leads to “What else am I going to do with this productive time I have from waste elimination without going down the path of let’s lay someone off?” Often that is the fastest way to show the cost reduction as a result of waste elimination and also the fastest way to kill any employee involvement or enthusiasm in lean improvements.

    The lack of planning of what organizations are going to do with the newly minted productive ‘capacity’ of the workforce often proves to be the undoing of lean efforts. Because the common measures often don’t reflect the improvement in cost reduction- at least not quickly enough.

  11. Cost Reduction can work well, but it can also become problematic if not performed with some understanding of the system that its a part of. It can be simple to eliminate staff (perhaps what some might be inclined to refer to as “non-essential” people) and that can reduce the “costs”. But if the underlying work that these people were doing goes unaddressed and is still a part of the scope of the enterprise what are we left with? Critical (“essential”) people, who undoubtedly are paid more money, performing the unessential work that others who made far less were doing before. That may not be the greatest business model for success.

    Also, if Cost Reduction is not well managed Organizations may simply be moving scope of work to other Organizations and claim victory.

    I am inclined to always suggest that when an Organization seeks to Reduce Cost that it does so in a Systematic manner that is focused on the Customer, and always talk the issue thru the lexicon of Value Added Scope. As the VA reduces then the workforce should be addressed as a second step.


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