Sunday, April 15, 2018

The Real Cost of Building a Custom Modular Home

Meeting the builder’s and their customer’s expectations for personalization and customization requires flexibility. And such flexibility can provide a distinct competitive advantage — as long as costs aren’t spiraling out of control. In a study of nearly 250 manufacturers over a 10-year period (2005–2015), it was discovered that 78% of firms had improved their ability to fill their total actual market demand but had lost control over costs.

Apparently, chasing the often elusive custom home customer can come at a cost that many factories are overlooking. That cost is increased production time on the line, more homes being sent out incomplete and severe increases in service work before and after delivery.

The labor and overhead costs to do ‘one-off’ custom work is increasing every day while nobody seems willing to put the brakes on it.

Many modular home factories have turned to commercial work like hotels, dormitories and apartment buildings to keep their lines filled. With all the best intentions management tries to calculate what profit will be made on each project. A team is put together to come up with a cost to present to the commercial customer and everyone buys into it.

Related Article: Can Modular Fill Specialized Housing Needs?

The dark side of commercial work is cost is a very elusive thing. Overruns in materials, overruns in labor and in the case of commercial projects holdbacks of up to 15% until the project is completed which could be 90-180 days after delivery were not fully figured into the bids and quotes.

A negative of commercial work is the abandonment of the single family modular home builder by many factories. Big companies like Cavco, Champion, Clayton and Commodore work in both the modular and manufactured home arenas. If and when they take on large projects they do it away from their strength product, the HUD home.

When a factory that doesn’t have a HUD line to fall back on takes on a major 100 module project and they can only turn out 10 modules a week, what happens to the builders that have customers wanting to know why their new home they saved up for has been delayed 10 weeks or more. They paid their deposit, the bank has given them a mortgage, the builder has pulled all the permits, they have given notice to the people buying their old home or notice to their landlords and now because the builder’s factory is under a performance clause in their contract to build a hotel, they could lose thousands of dollars.

There’s an old joke in the modular home building world: “We lose money on every house, but we’ll make it up in volume.” This bit of sardonic humor hits close to home for many small builders and even factories struggling to balance growth with profits.

But there doesn’t have to be a dark side. If a modular home factory wants to do custom homes, they must charge enough to make a profit and allow for enough time to complete the work. Is it the factory’s fault the customer balks at the price? NO! It’s the customer’s problem because they underestimated the expense and really can’t afford it. How many builders have lost a home to a competitor because they thought your cost was too high only to build a house without those ‘custom’ features with your competitor? If it has never happened to you consider that you might be drastically underpricing your homes.

If a factory wants to offer custom work for their builders pick a limited series of popular custom options and work through the numbers so the price is both cost effective and easy to produce. Or think about shipping the home prepped for the custom features the customer wants and let the builder price it at the job.

Being innovative is the real answer to building a custom home for individual customers.

Clayton Homes is acquiring large regional builders across central US. I’ve been told they are designing the homes with limited custom features for their new communities. The number of house plans are limited as are the front facades and interior options. Limiting the number of SKU’s is how they are making each house profitable.

Related Article: Clayton Acquires Largest Private Homebuilder in Texas

To recap, if your factory wants to do custom work, sit down and honestly work through the numbers, both financially and time. Both of these are quantitative. Then don’t back down from those numbers. Let’s be honest here, the builder and their customer really don’t care if you lose money on custom features.

If you want to enter the commercial side of modular, enter it completely. You can’t play in the muddy field of commercial work on a part time basis. If you want to serve both the builder and the commercial markets, considering building another factory. You don’t see Ford building mustangs and F150’s on the same assembly line.

And lastly, if you want more builders in your network instead of commercial developers, start a real program to recruit new to modular builders and entrepreneurs, train them thoroughly and mentor them through their first 3 homes.

Modular construction in both commercial and single family homes has nowhere to go but up. Developers know it, investors know it, Architects know it. The media is shouting its benefits from the rooftops. The only people that don’t understand that modular construction is the future seems to be us.

No comments: