Saturday, March 16, 2019

Adding Commercial Projects Could Put Your Factory at a Disadvantage

As more and more modular home factories that once only produced single family homes and some small townhouse projects are adding hotel and other commercial projects to their production lines it brings an entirely new set of problems.

The modular home factory used to be able to look at a module going down the production line knowing they were making a legitimate profit on every one. Pricing was done with a price book that contained every option all priced with a fair markup or by the SWAG method. Inflation was stable. Service after the sale was under control because the quality was built into every module by people that had worked on the line for decades.

The factories knew they didn’t have worry about freight, engineering costs or code approval fees or the required third party warranty since they simply invoiced the builder as a direct pass-through.

But something happened about 10 years ago that has uprooted all that and changed modular housing as we know it.

Prior to this upheaval there were two distinct types of modular production; residential and commercial. There are still a fair number of modular factories that have stayed with what they had been producing and still have very healthy bottom lines, few service calls and profits still at historical levels.

However some residential modular factories have added commercial projects to their line bringing in projects of 40, 60 and even 100 modules onto their once exclusive residential production line.

Those factories that embraced commercial projects were once able to absorb a few percentage points of lost profit on a house are now facing investors and developers negotiating the factory profit down to pennies instead of dollars?

Before, during and after a sale is made on a huge commercial project, the factory’s ability to operate efficiently determines whether margins are made or lost.

This pricing pressure forces factories to manage all costs including after-completion service and performance penalties to help avoid reactive cost cutting. This happens only when there is a well-defined cost structure that is tied to the business plan. An accurate cost structure will make it possible to set proper prices, forecast performance, and isolate areas that impact cash flow.

Modular factories that do not understand their cost structure are at a competitive disadvantage. Gone are the good old days of saying “we don’t put anything on the line we don’t make at least 24% gross.” That’s because in a lot of factories the same management team that was used to building high profit single family homes now has to look at the cost of labor, fixed and variable costs, direct and indirect expenses, overhead, and costs by market segment, customer, geography, and product of the commercial project. Those are things they never had to be concerned with when a home brought in 24% gross but now that the hotel, apartment project or other major commercial project is seeing a max of 10% gross profit, those ugly things are going to be rearing their ugly head every minute of every day.

A commodity-based business must be a low-cost producer. Hotel chains aren’t going to pay more than their lowest bidder simply because you build a great modular house. New resources should be devoted to determining an accurate cost structure of every part of every step of the sale from bidding to production to freight, set and after delivery service calls.

We see new prefab and modular factories coming on line across the country that are funded by high tech investors and developers. These people don’t know what it’s like to have built modular houses for decades. They do know how to use the latest high tech financial tools to accurately forecast accountability of all stages of the project, measure and report the results quickly, and how data from all areas of the business are transformed into information. This information pertains to the financial health of the business, where controls are need to be established, how investments are evaluated and audits are performed.

Katerra, factory OS, Blueprint Robotics and several other newly launched prefab and modular factories had these measures in place before they even started to design their factories.

The lesson is that changing from what you have been doing as a modular factory for the past 30 years may involve more than just adding a couple of new people in the accounting department. It may require a factory to add an entirely new department just to ride roughshod over every single cost center to ensure when a commercial project is complete that the factory made as close as possible to the gross margin it needs to survive to do another commercial project as well as the residential modular homes they built for decades.

If your factory doesn’t already have at least some of these new processes in place and everyone is on board with it you and your factory may be forced to go back to what you had done before or worse, forced to close your doors sometime in the near future.


Anonymous said...

Great article and couldn't be more timely. Keep up the good work Coach

Anonymous said...

Stick to one or the other. Asking residential builders to accept longer lead times because you can fill the line is shortsighted. Instead focus on training and helping sales staff of builders to sell and promote more use of modular construction.

Anonymous said...

Nice article but I believe you missed a few key points that single family manufacturers lack when doing commercial work (if you want to call a hotel commercial, it is still residential design after all). The first is a project management department with actual project managers, not salesmen, that oversee the project, communicate with the team and coordinate any/all changes or revisions. Complicated projects, not necessarily hotels, rarely go without a few changes or revisions to the design. Without proper coordination the details are sometimes misunderstood or poorly communicated with the plant, which leads to errors and later, back-charges from the GC or owner. The second is QC/QA, with most issues stemming from a lack of understanding the importance in dimension tolerance and alignment in both structure/framing and MEP systems. In single family these issues are easily remedied by the set crews or left out for site installation by the dealers; they are compounded when stacking four floors that can have 200' corridors. This can lead to 8" height differences in a flat roof section or 10" projections in exterior and corridor walls. The key point governing these issues is treating commercial work as product and not a single coordinated project from start to finish. And when errors are made, some large enough to justify a complete tear-down of a building, the entire modular industry gets a black-eye; the blame is placed on everyone in the industry, which hurts everyone. Understanding the project requirements and your profit margin prior to contracting will lead to less headaches and complications, but that's an entirely different article.