Riding the Wave: Lessons for Homebuilders from 2020-2021

The residential construction industry faced unprecedented challenges in relation to the pandemic, both on the demand side as well as supply chain disruptions. Homebuilders were faced with a multitude of pressures to keep up with overwhelming demand, while not being able to secure materials and subcontractors on-site in time to meet closings. These pressures combined with exploding material costs reminded the residential construction industry that significant changes to the market can happen, seemingly overnight. So, the question remains: how can Builders be ready for the next surge in demand and material costs?

Diversifying Suppliers

Relying on one trade or subcontractor for a portion of the build proved to be a significant risk during the pandemic. Homebuilders should focus on diversifying their trade base, whether this be connecting with local suppliers versus national suppliers, as well as focusing on keeping a consistent number of jobs to their trades. A key rule learned during 2020-2021 is trades who can consistently rely on builders during slower times for jobs were more likely to commit to builders during peak demand times. Builders who were able to order key materials such as windows and appliances earlier in the build proved to have a competitive advantage for closing timely.

Financial Strategies: Planning for Volatility

Builders should consistently review and update a flexible budget that allows for unexpected cost fluctuations as well as implement practices to mitigate cost variations. Common practices include budgeting overage amounts for critical materials, ordering materials earlier in the project to secure pricing, and requiring a Purchase Order system for any materials/labor ordered to the job. Additionally, builders should consider additional financing options when analyzing funding sources for projects, including revolving credit facilities, to ensure projects are not paused due to a lack of available funds.

Connecting to the Industry

Forming strategic partnerships with industry associations such as your local HBA can give builders valuable insights into upcoming market pressures. Other various associations can introduce collective bargaining power to lower costs when purchasing materials for suppliers. Staying connected to other industry leaders in your area can also assist in staying aware on latest changes to local regulations and building code.

Leverage Technology for Efficiency

Access to the most up-to-date and relevant information has proven to be an even larger competitive advantage than in recent years. Teams who invest time and resources into technology can collaborate in real-time with accurate information and reign supreme in times of volatility. Investments in technology and defined processes allow homebuilders to rely on relevant data to make more informed decisions.

R2 Management is The Builder’s CFO, combining decades of experience in the home building industry with connections to a variety of Investors searching for builders to partner with and deals to invest. We have directly managed over 18,000 Closings and $3.7 Billion in revenue for Builders and Developers. Our team of tenured professionals in the residential construction industry allow scaling or established Builders to rely on much-needed expertise without the tremendous overhead burden.