Best Practices for Home Builders: Managing Purchasing and Estimating Variances

It’s important for every home builder to manage purchasing and estimating variances because they directly erode your bottom line. Variances may happen as a result of vendor changes, late change orders, estimating or planning errors, inaccurate budgets, incomplete start packages, vandalism, etc. When faced with so many possible ways that variances can creep into your business, what can you do? Focus on the variances you can manage.

A variance is defined as an unplanned cost without a counter-balancing revenue that occur across the full range of builder operations.

Best Practices for Eliminating Variances

The best way to eliminate variances is to avoid them in the first place through proper planning and operational consistency. Here are a few best practices to set up your system and put you in a position to avoid variances and track them if they happen.

1) Know who you are as an organization and develop processes that keep you focused on your core mission and organizational strengths. Not everyone is set up to be a high-volume production home builder so you need to build your teams and processes to support your business model.

2) Develop a core set of plans and options that can be used in as many projects as possible. Replication is key—don't build a new prototype every time you build a house. If you will be making changes, it’s important define clear and structured process for making changes to your core plans and options, and only then making them available for sale.

3) Clearly define each project’s scope, schedule, and cost with trade partners up front so everyone is on the same page. You need this to establish a baseline from which you can measure variance and accountability.

4) Eliminating a cost control system that tracks baseline vs. actuals is important. The more detail the better. Track your base house, options, and variance purchase order (VPO) costs separately, allowing you to compare performance across time or jobs to find the true source of a variance.

5) Integrate your job cost system with your accounting system to track budgets vs. actuals in real-time.

6) Create a cost code structure that allows you to track direct construction costs separately from land site improvements, and indirect costs in job cost reports. These reports give you a good picture and make it easier for you to see where you are having issues that are impacting your business.

7) Create a cost code structure that allows you to see VPO and variances quickly in job cost reports. You’ll want to set your structure up so you can drill down instead of just seeing a high-level number.

8) Be consistent—estimate in order of construction to avoid omitting items and get on the same page with your trades. But it’s also important to be realistic about waste and allow that there will always be some materials (e.g. concrete).

Tip! Don’t use a general contingency budget item—put everything in the right cost bucket so you have more precise tracking

9) Establish reasonable budgets and track them on a regular basis based on average actual costs.

10) Detailed POs and VPOs make it easier to report on exact product details, quantities, and uses of products. You can then verify that delivery matches the PO.

Tip! Don’t adjust POs—issue VPOs for variances

11) Site-specific items can vary from lot to lot and can account for a high percentage of your variances. You can mitigate these by using site-specific checklists to provide more accurate estimates.

12) Implement a PO review process that takes place prior to releasing POs to your vendors to ensure that they match the budget. You may not need to do this on every house, but you should look to do this on the first few homes you build in a community. However, the more variables you have in your product and process, the great the need for a PO review process.