Here is the text version of the Zero Energy Ready Home webinar, "Invest in Quality; Keep Money in Your Pocket!" presented in November 2017. Watch the webinar.

Alex Krowka:
Presentation cover slide:

We're excited that you can join us today for our webinar on how to invest in quality and keep money in your pocket. We have a treat for you today, as our presenter, Glenn Cottrell of IBACOS, will teach you how to manage risk and save money when building homes. Glenn is the managing director of building solutions for IBACOS. In this position, he's directly responsible for all aspects of their work with homebuilders. This includes the development and delivery of construction best practices, knowledge tools, content, and technical consulting services to leading homebuilders nationwide. The Perform Program, as it is named, increases the builder's bottom line by improving the builder's quality and performance. Glenn helped lead the ground-up development and expansion of Build IQ, the building industry's first online education system for production homebuilders, and has spoken at many industry conferences on the subject of adult learning. In 2014, he began a journey into quantifying the true costs builders pay for quality, both investments made to ensure good quality as well as the price paid due to poor quality. His unique insight and perspective has opened opportunities with many of the nation's largest production homebuilders, and we are really excited to have him present for us today.

Today's session is one in a continuing series of training webinars to support our partners in designing, building, and selling DOE Zero Energy Ready Homes, and recordings of our webinars can be found on the Zero Energy Ready Home resources page. My name is Alex Krowka, and I provide coordination support for the program. I'm just going to take a minute here to cover some general notes on webinar housekeeping. All attendees will be in listen-only mode, however, we invite you to ask questions throughout the webinar in the questions section of the GoToWebinar program. We'll monitor these throughout the webinar, and after the presentation, we'll have some time to go over your submitted questions that weren't answered. This session is being recorded and will be placed on the resources page of the Zero Energy Ready Home website. Please allow some time for this, since it does take a few days to a couple weeks to go through the process to be added online. However, we will notify everyone once everything is uploaded. Now I'm going to pass it over to Sam Rashkin, chief architect of the Building Technologies Office of DOE, who will give a quick intro to the program and the purpose of the webinar. Go ahead, Sam.

Sam Rashkin:
Hey, thank-you, Alex, and we're so grateful to have Glenn Cottrell from IBACOS here to talk to you today about quality improvements in construction. As many of you may know who's in the Zero Energy Ready Home program, there's extra recognition provided for those builders that agree to a quality assurance program. And we just touch the tip with the additional recommendations that we make about quality in that extra recognition program. So for us, we know that our builders that we work with in this program will be so much better positioned for success once they get a good control of the quality challenges in home construction. The challenges are huge. One of the reasons we invited Glenn is he's at the forefront of getting the most significant research data and practice experience working with builders on how they can improve quality. And quality means significant dollars saved, dollars that can be invested, reinvested, into a better consumer experience, superior performance, and all the goals that we're after. We have to get control of this part of construction, how we integrate quality into everything we do. And so this is one of the most important webinars that we're providing. As you know with this series, our goal is to bring you the best experts from all different fields that we address in Zero Energy Ready Homes, so you can be most successful. So again, I'm incredibly grateful to Glenn to bring this expertise to you. This is going to be a very important session. Thank-you for attending, and here's Glenn Cottrell.

Glenn Cottrell:
Very good. Thank-you, Sam, and Alex. I appreciate everybody taking the time today to participate in this. What we're going to do over the next 45, 50 minutes or so is to talk through what I hope will be a shift in the way that we often think in our industry about quality. Shifting our mindset from looking at quality as a cost of doing business to that of being an investment in our business.

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When I often get up in front of a room of homebuilders, I ask everyone in the room to raise their hand if they feel that they build a quality home. And to no surprise, all homebuilders' hands go up, to which I follow up that question by asking them, how do they know? So when posed that second question, some of the responses that I get back from the audience is things like, well, I know I build a quality home because of the products that I install in my home. I know I build a quality home because of my customer satisfaction scores. Or because of my lower or reduced warranty costs that I have. All of which are very valid questions. But quality in and of itself is really something that is very intangible. It's something more that we feel and not something that we can necessarily pin down and all agree on its definition. What's also very difficult to pin down is how much we spend on quality. So if you are a homebuilder listening to this webinar, we challenge you with this question, how much do you spend on quality.

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So as I had mentioned in my opening remarks, we can look at quality as a cost of doing business, or we can look at it as an investment, an investment that we expect to receive a return on. So the question to us is, should we be seeing quality as a cost, or an investment? I would actually argue that it's both.

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It's hard to believe that it was just over a year ago when none of us could step on an airplane without being told by the flight attendant that if we have Galaxy Note 7 that we needed to either throw that away or step off the airplane. So much has changed since then. But I also have no idea how much Samsung invested in R&D, but what has been published is that their Galaxy Note 7 ended up costing their company $2.3 billion and has downgraded Q3 earnings last year. A 30 percent decline in their operating income overall as a business, and a 96 percent decline in operating income in their mobile device division. I don't know of anybody today on this call who could survive a 96 percent decline in operating income.

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Bringing this a little bit closer to home to our industry, back in mid-July Weyerhaeuser announced that they were setting aside between $50 and $60 million in reserves to address the replacement of 2,200 homes that had their Flak Jacket product installed. I am not here today to disparage Weyerhaeuser or Samsung. I'm merely using these two companies and their products as examples of the cost that those companies are paying due to failure of their products in the field. So, $50-60 million in reserves over those 2,200 homes is $24,000 roughly per home being set aside by Weyerhaeuser, and this is before the litigation.

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So let's look at quality. Let's define this a little bit more so that we can begin to peel back the onion on what we are actually spending and where we're spending it. So if we turn to the American Society for Quality, their definition of the cost of quality, I will just read this here: A methodology that allows an organization to determine the extent to which its resources are used for activities that, 1) prevent poor quality. So what are you doing to offset the advent of poor quality, or construction quality in our industry? Costs that go into appraising the quality, to measure the quality through its process of production. And then finally, costs associated with the result of internal or external failures. In the two examples that I've just provided, Galaxy Note 7 and the Flak Jacket product, those are failure costs. Fundamentally, the cost of quality, as we look at it from the American Society of Quality, is an understanding of how we spend our dollars relative to the quality of our products. This is applicable if we're a homebuilding company. It's applicable if we are a manufacturer. It's applicable in all industries. For us, we're focused today, looking at construction quality.

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Trying to get an understanding of our failure costs, it may be something that as a homebuilder it's difficult for you to put your finger on it. I would suggest that you start by looking at what you are setting aside in your warranty reserves, or in your warranty accruals. We look at the New Homes and Building Material Warranty Report in Warranty Week magazine, looking at an article that I found in May of 2014, 1.1 percent of a product's homebuilder's sales revenue is set aside and spent in warranties. So on a $400,000 house, that's $4,400 are being spent on warranty. Theresa Weston from Dupont, the research fellow with Dupont, as well as a Six Sigma black belt, did an analysis looking at 13 publicly traded homebuilders. She chose publicly traded homebuilders simply because their financial information was readily available. She looked at five years of annual reports. And over those five years, the average warranty reserves or accruals that were being set aside by those 13 public builders was nearly $5,000. So when I first heard this information back in 2014, I was in a room full of homebuilders and building product manufacturers. And the homebuilders in the room, some of them were quietly nodding their heads, thoughtfully nodding their heads. Others were sort of not looking at the screen with their eyes down, a little bit sheepishly concerned that perhaps if you read their body language, maybe my numbers are higher than that. And then the building product manufacturers were kind of aghast with this number. And I could only think that if I was an equipment manufacturer sitting there and saying, OK, you're setting aside $5,000, or your history would suggest that you're spending $5,000 after you have sold the home, and yet you're trying to negotiate with me over a $25 rebate on a condensing unit, for example. So what struck me at that point, when Terri first presented this, was, we're missing the forest from the trees here. And there's a lot of money, there's a lot of waste built into the system. It's difficult to quantify; it's difficult to go after. But I was bit by the bug to try to go and figure out just where this money was and how we should go after it.

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So let's dig into -- and I've just included here a couple of slides from Theresa's presentation -- let's look at warranty accruals. The amount of accruals that a homebuilding company, certainly a publicly traded homebuilding company, has to set aside is, 1) it's driven by their historical experience. So how much have they spent in previous years addressing warranty claims? Second, how many units have they built? What is their rate of anticipated warranty claims, and what are the costs of those claims? Those factors come together to determine the amount of money that a homebuilding company, a publicly traded homebuilding company, must by law set aside as their reserves. Now one thing that I want to point out is, what a builder spends in warranty is not analogous to the same as what they're spending in general liability insurance. So your general liability insurance coverage is there to protect you against any damages to the home. So say for example that your plumber has done some poor workmanship, there's a leak in the home, and the drywall in the ceiling and the hardwood floor is damaged. That has to be replaced. You have a legitimate general liability claim and your insurance will come in and should cover that. The cost, however, to go in and repair and replace the plumbing system is not going to be covered by your general liability. That's the warranty cost. So that's about as far as I'm going to take that today, but I wanted to highlight the fact that when we're talking about warranty accruals or what builders set aside for warranty spend, that's different than what you are paying for general liability insurance, above and beyond.

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So this is information taken out, a graph taken out of Theresa's report, and what I want to highlight here -- you can look at the bar graph of the distribution of these 13 public builders. Really want to highlight here, however, the $4,900 is the mean by which those publicly traded builders over those five years are setting aside for their warranty accruals.

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We can see here -- let's look at those five years plotted out. The red dash line in the middle is the $4,919. Concern that I see in this report, however, is we look at the trend from '13 to '16, that trend is going up. And that's not something that any of us should necessarily feel good about.

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Another way to look at this: This information has come from a colleague of mine at Lockton Insurance. And what he has done is taking some of the same financial data available in annual reports and broken it down across 12 public builders. I do not know, admittedly, whether these are the same builders that were included in Terri's study, but I imagine that there is some overlap here. That's OK. Even if it isn't the same builders. The point here is that of the 12 builders showcased here, over the last five years, nine of the 12, numbers are going up. That the amount of money the builders have set aside five years ago to where they are adjusting those numbers now, five years later, those numbers are going up. Again, we are spending more in addressing poor quality now than we have in the past. This is looking at warranty. So this is going back to my plumbing analogy. This is repair and replace of faulty workmanship, failure of the installation of the plumbing system. This does not address litigation. Now, I cannot separate, with the information that's available in the report, separate what is construction litigation versus other litigation, such as, you know, worker's comp claims, things like that. What I can tell you, however, in speaking with the top 25 homebuilders' general counsel, he shared with me that 95 percent of their companies' litigation claims deal with construction quality. So the numbers I'm about to share with you now look at both warranty and litigation accruals combined together. Take it for what it's worth. But a significant portion of the litigation I think we can attribute that back to construction quality.

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So looking back at those same 13 publicly traded homebuilders, when we combine warranty spend accruals as well as litigation, $22,278. This is nearly $23,000 per door, per home, that those public builders have built. Over the last five years, on average, $23,000 per home is being set aside, based on historical experience -- that that is money that those builders are going to have to spend back to someone, somehow, after those homes have been sold, and closed, delivered to the buyers.

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That's a staggering amount of money in my opinion. Go back to that $400,000 house. This is over 5 percent of your margin, is being set aside. Are you going to eliminate all of that? No. Are you going to eliminate half of it? Probably not. But we as an industry are focused so heavily on first costs and trying to keep that $25, $50, $100 that we can find in first costs, and we are missing literally thousands of dollars that we are spending after the homes have been closed. So this is what I have been interested in. This is one of the aspects that I have been looking at.

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And I have been trying to, as Alex mentioned at the start, really trying to understand in this cost of quality study, what are builders spending and why. What they're trying to get in return. How much they should be spending. And where they should be spending their quality dollars in order to maximize their return on investment. So let's go back to the American Society for Quality's definition of the cost of quality methodology for a moment, and let's peel this back a little bit more.

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So let's start again with our failure costs. Failure cost in our industry is everything from cost overruns and construction delays, customer dissatisfaction and the impact that has on their less likelihood to refer you, fines, OSHA, litigation as we've mentioned. Just the fact that we have to go back and redo work. That's work that no one's getting paid for but you are absolutely as the homebuilding company paying for it in that first-time bid. Turnover. And this is a little bit of stretch, but studies would show from the Society of Human Resources that employees that are working for a company, that that company doesn't demonstrate that they take pride in the quality of the product and the quality of their customer experience, are less likely to stay as an employee of that business. The cost of turnover to your business is significant. Warranty, we've talked about. And waste, particularly construction waste. These are all failure spends in our industry. Every homebuilding company has it; the question is, how much are you spending? And what can you do to reduce the expenditures to your bottom line?

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Prevention spending. So what are we doing up-front as a homebuilding company to prevent the appearance of poor quality, or let's look at it a different way: What are we doing to ensure that the quality expectations that we have set are actually delivered when that home is sold and closed? In our industry how we compensate people, what are their incentive programs. Just what is our contracting documents? Are we leaving in our contracts, in our documents "this product or equivalent"? Are we allowing our trade contractors to make those product decisions? Just the level of engagement that we have with our employees and our trade contractors. The expectations clearly demonstrating what our intent is as a homebuilding company. Recognizing those people for outstanding work, or recognizing those when they fall short of those expectations. What are the specifications that you have? What are you doing to go about training and educating your workforce? Value engineering. All of these are aspects, I would argue, of preventative medicine, if you will. These are the investments that we're making as a company to ensure that we're getting the quality that we expect down the road.

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And then the third category that ASQ defines is the appraisal spending for assessments. So in our industry, auditing of our product or our workflow. Commissioning. We have somebody coming out, we have our HERS rater come out and do a commissioning on the duct system. That is an appraisal spend. This is a validation that we are getting the quality that we paid for. Inspections, whether those be municipal inspections or third-party inspections or our own construction oversight personnel. Supervision. Surveying. Testing. All of these would fall into that appraisal spend category.

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So what I would challenge each of you that are listening to this webinar today to do is go and do an analysis. If you don't know what you're spending and where, don't worry; you're not alone. No one that I have spoken with, as I've delivered this presentation over the last couple years -- no one's been able to come to me and say, we've done this analysis, this is what we're spending, and how it falls. But I would strongly encourage you to ask that question of your team. What are we spending in each of these categories? What are we expecting to get in return? Whether that expectation is something positive to help improve our bottom line, or if that expectation is more failure cost and actually taking away from our bottom line.

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When I have gone out and asked homebuilders what they believe their profile looks like, 42 percent -- homebuilders are saying 42 percent of their $100, if they had $100 to spend in quality, they're spending $42 of it in prevention. They're spending $32 in appraisal. And they're spending 27 percent in failure. This is what I get in response to the question, where are you spending your money? Unfortunately, that's not reality. That's not what's really happening.

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This study, granted, is 20 years old, but it's still relevant to our construction industry, and it gives you some proportion. This is looking at all facets of constructions, so it's not just homebuilding and it's not just the U.S. This study from 1996 shows that 55 percent of construction quality spending is on failure, and then the remaining 45 percent is what I would consider good quality spending up-front to prevent poor quality and ensure that the quality that we're delivering is what we expect. We look at our industry, specifically the U.S. homebuilding industry, and the builders that I've had the opportunity to look at some of their numbers, also getting some information and insight from the National Housing Quality Program, which requires applicants to provide insight into their financials. Unfortunately this bad picture that we're seeing in this study that's 20 years old is only worse for the residential construction industry. Information that I'm seeing, homebuilders, U.S. homebuilders are somewhere spending between 10 and 15 percent in prevention and upwards of 75 percent in failure.

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Wherever you are at in this spectrum, what I'm trying to articulate today is that we look at this, and we do a shift.

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We shift our mindset from spending money in bad quality failures and shifting that to what I would consider good quality spends. Make those investments, and granted, as we're making an investment, whether it's in our personal life or in our professional life, when we're making an investment, we should expect a return on that investment. So where I'm going to go now is once we shift our mindsets to moving that money from bad quality spends to good quality spends, what does that mean, or what could that mean, to the bottom line of your business?

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Let's go back to this 1996 study, and again, I'm using it simply to point out the idea of this shift. This is the profile that this study suggested, that 55 percent of an overall quality spend is bad quality spending. Let's shift some of that bad quality spending. As you can see, let's take, instead of 23 percent of our dollars going into preventative medicine, let's spend 40 percent of our quality dollars there. Keep the same amount in our appraisal costs. What we're seeing, then, a return of a net reduction of our failure costs. And what's left over? Our overall spend has gone down when we invest up-front in ensuring good quality. Our failure costs go down. But it's not a one-for-one. If I asked you to spend a dollar in order to save a dollar, you're probably not going to go through that cost of change. If I can tell you to spend a dollar and get -- in the research that I've done looking at national housing quality award recipients, I ask you to spend a dollar in order to save $5.90 as a return on that investment, I imagine I have some of your attention. So whatever you can then save in failure costs, in reduced failure costs, that's money in your pocket.

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OK, so now let's start to de-layer this a little bit further and give you some ideas from our research as to where you might want to look first.

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So we had gone out and surveyed 21 homebuilding companies. You can see the diversity of those homebuilding companies. They represented nearly 10 percent of the closings in 2014. Four of these 21 were small, regional builders. Four of these were large national builders. And a smattering of homebuilding companies in the middle. And you can see geographically where these homebuilding companies were operating, from the map here on the right.

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Some of the data that we were asking of these 21 homebuilders who wanted to know how much of their overall spending was spent on construction versus land and marketing and sales, things like that. What they were paying their field superintendents. What number of homes that each superintendent was carrying at any point in time, how many homes, what was their volume that they were overseeing at any point in time. What their staff turnover was. Their cycle time, both what they targeted and their actual, as well as the number of wasted days, dry runs, when the job site sat idle because it wasn't ready for the next trading contractor. These were some of the questions that we surveyed these builders on.

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In addition, what percent of their cost overrun in their construction budget. Number of dumpsters and construction waste. Their on-call fees for their trash. Number of warranty claims and how much money was spent on warranty.

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Just to give you a snapshot of what we had heard from those 21 builders. On the low end, the number of homes carried by a superintendent is five. On the high end, 45 homes. On average, it was 15 homes per superintendent. That's an active home under construction. Turnover: Low turnover, less than 5 percent annually of their construction staff; more than 20 percent on the high end; 10.5 percent as their average. Cycle time: Low end, 55 days (this is from stake-in-the-ground to closing); 135 days on the high end; and 89 was the average. That was the target cycle time. What were you actually doing? That builder that had a 55-day target cycle time was actually delivering homes in 55 days. On the high end, the 135-day schedule was really being delivered in 152 days. So our actual cycle time was 101 days. Number of days wasted on site: Less than 1, greater than 5, 2.9 days wasted typically in the construction cycle on average. Number of warranty items: Less than 2, greater than 10 on the high end, 5.1 warranty items. So what does this all paint a picture of?

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We started to look at different metrics, then, of the homebuilding operation, in trying to uncover what the return on investment might be. What would the financial return on investment by focusing on each of these business metrics and looking for the financial return that could be achieved in each of these areas. So as you can see here, we looked at cost variance, construction oversight, cycle time, employee engagement, waste, training, value engineering, warranty. I'm going to focus on these four today. So let's look -- we'll begin with cycle time.

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What is the return on investment -- a numeric financial return on investment -- if we are able to produce our cycle time, construction cycle time?

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So again, going back to that survey: On the low end, we had a 55-day cycle time, on the high end, 135. Nearly 90 days was the average, and 75 was the most common response that we received. And then the actual cycle time. So we're going to use the 101 average cycle time and working days.

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I thought when I started this back in 2014 that I would find all of this information already researched, already published. I turned to the National Association of Homebuilders. They had issued, at that point, they had issued their 17th edition of "The Cost of Doing Business." They had issued it every three years for the last 30-some years. I thought surely there would be insights into this report, as to what builders spend in quality, or the facets that make up construction quality. Quality shows up twice in that 110-page report. It shows up in the beginning as really a footnote that says that there are a number of metrics that do factor into the financial performance of the homebuilding company, but construction quality is not being considered in this study. The second time it shows up is it shows up as an appendix item. So NAHB wasn't a resource for us to do any meaningful information. So what I did was I just picked up the phone. I reached out to people that I knew in this industry, who knew people who knew people and got me in touch with other individuals that I would consider experts. So Eric Timmis from TrueNorth Development in their research indicates (audio lost) ... business by more effectively using your overhead. You can just build more homes. Talking to George Casey at Stockbridge Associates: If we can reduce our cycle times by 5 percent, we could be more effective in using our working capital. And that would basically just -- not having to borrow any more money for our construction loans, that can translate into $250 per day in savings. Or, if you are in a market where you can sell homes faster than you can build them, so you're not in a market constrained, your constraint is your ability to produce. In that situation, that 5 percent reduction in cycle time could translate into a $950-per-day savings on a per-home basis, because what you're doing is you're taking your margin, you're building more homes with the same amount of overhead. And yet, you are able to take the margin -- the added margin that you would get from those additional homes sold, and you apply that added margin back on to all the other homes that you were building with that same existing overhead. We'll go through the analysis in a moment. Talking to the purchasing lead of a top-20 production homebuilder: Easily $700 of savings from the efficiencies working with trade contractors.

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So again, let's assume a 101-day build cycle. And we're not going to go for 5 percent. We're just going to assume 2 percent reduction. So we're going to take two days out of this 101-day build cycle. And we're going to do this because we're going to eliminate our dry runs, the job sites are going to be ready, we're going to have appropriate crew sizes, things like that.

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How we do the math. Let's take the number of days in our actual build cycle, so 101 days, times our fully loaded carrying cost per day. Here Timmis suggests that in the work that they've done with over 300 homebuilders, in doing this analysis, there's $500-plus per-day savings in carrying costs. Let's take this times the possible reduction. We've said 2 percent, or two days. That's savings per home. In addition, let's look at our working capital. Let's take the number of additional homes delivered using the same amount of working capital, multiply that by the added margin per home. These are the additional homes that were sold using the same overhead working capital. Divide that by the number of homes that you have already delivered, add those two together. These two days that we've saved on our 101-day cycle time translates into nearly $1,700 per home savings.

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Let's take a look at cost variance.

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On the low end, builders were missing their cost budgets by $50. On the high end, they were missing their construction budgets by over $7,000. On average, it's $1,844. Just translating this into a percentage: So on average the 21 builders that we surveyed, we were missing our construction budgets by just over 1 percent.

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Talking to Noelle Tarabulski from Builder Consulting Group: We just implement variance purchase orders. Just the notion of implementing variance purchase orders. If you're not familiar with what a VPO is, you're simply saying to your field management team that if you're short six 2-by-4s, you need to go and fill out a purchase order in order to go and purchase six more 2-by-4s. Just the notion of letting the field team know that you are watching this in the office, that they have to do the paperwork, the trade contractors have to be involved, your just paying attention will save you that 1 percent in your construction costs. Over time, implementation of variance purchase orders can potentially reduce your waste, your excess construction waste, by 3 to 4 percent. Documentation. So one-third of construction cost overruns. Cost overruns on a construction job site, according to ARC Document Solutions, can be attributed to poor documentation and / or document control.

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If we were to assume our hard cost overruns per unit of $1,800, and we're not trying to accomplish the 3 to 4 percent opportunity through VPOs that Noelle believes is possible; we're not even trying to get the 1 percent VPO impact. We're going to take one-half of 1 percent by implementing VPOs. And then we're also going to try to get 20 percent of a reduction through improved documentation and document management. So ensuring that on the plans we are clear on what we expect of all of the trades, and on our specifications we are articulating the specific product or product performance characteristics that we expect. We're not abdicating those decisions to our increasingly unskilled workforce.

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Let's take the average selling price of our home, times the amount spent on hard construction costs, times our possible reduction in savings. Let's add to this the amount spent on our cost overruns per unit, times the percent possible reduction. Another $1,300 per savings. When we add that to our two days of cycle time, we're now up to nearly $3,000 per home added to our bottom line.

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Let's look at job site waste.

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We asked how many dumpsters used during construction of a single home: On the low end, 1 construction dumpster, on the high end, 5, on average 2.3. What's the average haul fee per dumpster? $100 on the low end, $735, $380 is the average.

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NAHB is a little pricier. NAHB says on average, number of dumpsters on a residential construction site is 3-plus. And the average waste removal costs are $1,200. We didn't get that number, $1,200, in our survey, so we're going to use the $385. Talking to Scott Sedam from TrueNorth Development: Job site waste -- every dumpster, you can peel back and find $300-$500 of usable materials per dumpster. You pull out 100 feet or 50 feet of flex duct, you only use 8 feet to finish off that duct run, the other 42 feet go in the dumpster.

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Let's take 33 percent reduction in waste by doing better up-front design. Let's not design bedrooms that are 10 feet 3 inches by 10 feet 6 inches. Let's design rooms that are 2 feet on center, that are more efficient in the use of drywall. And we don't end up wasting as much material, as well as doing better, accurate takeoffs and partnering with our trade contractors looking for this opportunity to reduce construction waste.

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Take the number of dumpsters per home, times our haul fee, as well as the amount of money found in every dumpster, times the possible reduction. In this case, we said 33 percent reduction. Nearly $600 savings per home. Let's add this to our cost variance and our cycle time. We're up over $3,500 per home.

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And then finally, for today's discussion, let's talk about the customer delight. Customer satisfaction, the engagement with our customers, their whole homebuying experience.

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How many legitimate service or warranty items reported. This is the question we asked 21 homebuilders: Less than 2 on the low end, more than 10 -- 5 was the average number of warranty items.

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Paul Cardis from Avid Ratings shared this with me: For every 1 percent reduction or decrease in overall customer satisfaction translates into 8 percent increase in customer service requests the following year. Let's flip this around. For every 8 percent increase in customer warranty claims, they are 1 percent less satisfied. Should correlate, right? We're not happy with our home, therefore we're going to make more claims, or we're making more claims because we're not happy with our home. The average number of service requests per home: 15 in his experience. And anecdotally, product satisfaction is the strongest predictor of customer referrals. Talking to the president of a National Housing Quality Gold Award recipient, responding to a single service request costs their company $250. Now what I want to point out here is this is not necessarily addressing, fixing, the claim. This is responding to it. This is picking up the phone. This is coordinating with the trade contractors: get out there, you're on staff to get out there. This is making sure that the calendars line up and when Mrs. Smith isn't there, it's rescheduling. It's $250 per claim is your response cost. So clearly, there's money that's being spent on every claim, whether it's a legitimate claim or not.

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Let's look at J.D. Power -- not currently in our industry, but when they were: A 1 percent increase in customer satisfaction yields 0.17 additional referrals or recommendations per buyer. And they indicate that 20 percent of overall customer satisfaction is driven by the builder's warranty or customer service experience, the experience of living in their new home.

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So let's assume we're going to invest in quality, and we're going to result in a 1 percent increase in overall customer satisfaction, which translates into 8 percent fewer service requests and 0.17 additional referrals per buyer. Let's also assume that we can convert 5 percent of those referrals into sales.

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Take the number of warranty items per home, times the dollars it costs to respond to each item, times the possible reduction in savings per home. In addition, let's take your overall customer satisfaction. Let's increase that 1 percent. That translates into x number of additional recommendations / referrals per customer, times your total number of customers, times your conversion rate. That's the number of additional sales that you have with little to no additional sales and marketing costs. Let's take that added sales times the margin that you get per sale, divide that by the total number of homes sold, and you get the dollar savings per home. One percent increase in customer satisfaction, additional $360 per home. Adding customer engagement or customer delight to cycle time, to cost variance, as well as to job site waste, we're at nearly $4,000 added to your bottom line per home.

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These 10 areas that I have up there on the screen are the 10 areas that we have looked into and quantified. I simply picked four today. They translate into opportunities to add $10,000 per home. If you feel that some of the assumptions that I've used today are too aggressive, that's fine. Use the numbers that you're more comfortable with. If the numbers that I've used from the survey information or from interviewing experts doesn't align with your data, again, that's fine. Use the information that you have. What I'm trying to do is quantify the opportunity and share some insights to homebuilders, to where you may choose to focus your time and attention. Because it is limited. Not only do we have limited money, but we have limited mind space in which we can go and invest to see the forest from the trees. So this is intended to provide you some insight into where you may want to start peeling back some of this onion.

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So, as I wrap up, the choice is yours.

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You can either look at quality as a cost of doing business and it's just part of what you have to deal with.

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Or you can really look at it as investment in your business, an investment in the performance of your homes. An investment in the performance of your team. And ultimately, an investment in the performance of your bottom line and your business overall.

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If you're interested in this topic, additional information is available. An article that I wrote was published earlier this year in Professional Builder magazine; feel free to go and look at that. Alternatively, feel free to reach out, give me a call, send me an email, and I'd be happy to follow up with you. So again, thank-you for your time today. I appreciate everybody spending the time with us today. I hope you found this information useful. And now I will turn it back over to you, Alex.

Alex Krowka:
Thank-you, Glenn. That was fantastic, and I think it is really useful not just for our builders, our Zero Energy Ready Home builders, but I think any builder out there, period. So thank-you, again. If anyone has any questions, feel free to type them into the questions bar of the GoTo software. Or raise your hand, and we can unmute you and you can ask your questions via the webinar. So I'm just going to give 30 seconds to a minute or so for anyone to type in. Sam, do you have any closing thoughts? ... I'll take that as a no. So I'll give another 10 seconds here, in case anyone has any lingering questions. Otherwise, I think it sounds like you answered everyone's questions preemptively, Glenn. Alright. Well, thank-you, everyone, for joining. I hope you felt this was as informative as I did. Again, the webinar was recorded, and we will post it on the Zero Energy Ready Home resources page for future reference. Alright. Thank-you, everyone, and thank-you, Glenn. I hope everyone has a good day. Bye.