Command Performance

Four years ago, Atlantic Builders, a diversified firm in Fredericksburg, Va., near Washington, was the poster child for excessive warranty work. “It was a classic case of building a house and then rebuilding it,” says principal Tom Schoedel regarding the two points against revenue he was spending on callbacks per year. “We've always been profitable, but we felt we could do a lot better.”

By implementing and continually refining a comprehensive commitment to quality management, Atlantic Builders has since reduced warranty costs to one-quarter of 1 percent of its annual revenue, a savings of about $2,200 per house. The company also has shaved more than a month off its per-house cycle time, raised its customer satisfaction and referral rates, reduced final inspection defects by 75 percent, and experienced no jobsite injuries.

Those results enhanced the company's profitability during high times in the D.C. metro area and are now helping the firm hedge against competitive conditions that have dropped its production from 178 starts in 2005 to a projected 77 this year. But weathering a weak market wasn't the point. “It's more of a philosophy about how we treat our customers and what's important,” says Schoedel. “If you want to be a world-class company and really improve, you need to start with the customer.”

Within the housing industry, “quality” is probably the most overused and least-defined term bandied about the sales center. To be fair, quality is subjective; what's acceptable to a code inspector may be well below (or, shudder to think, higher) than a builder's or subcontractor's standards ... or a homeowner's expectations.

So rather than trying to figure out if a wall stud is “plumb” or use similarly vague language to define quality in the various aspects of the business (including sales and warranty work), quality management experts suggest setting tighter, more defined standards (e.g., “plumb” is no more than 1/8-inch in 8 feet; every buyer under contract gets a weekly phone call) and then measuring against them. “Quality is your performance versus standards,” says Bob Whitten, a former builder and now managing partner at SMA Consulting in Orlando, Fla. “It's not one product being better than another.”

If that sounds like a monumental shift in industry thinking and practice, it doesn't end there. “The best practice is a quality and conditions program,” says Whitten, which extends the definition to include how home buyers view the process—from the model homes to the jobsite to the guy who shows up to fix the leaky skylight—as an additional measure of quality.

To an untrained customer's eye, he says, quality can and is defined by things such as trash in the backfill or materials lying in mud, not the engineering and assembly minutiae that occupy builders, trades, and inspectors “It's looking at your jobsite as if a customer could walk through at any time.”

That's one of several methods Atlantic Builders employs in its First Time Quality and Safety program. “We want it right and looking right when they move in,” says Schoedel. Getting it right means setting, managing, and measuring production standards (enabled in part by 64 separate inspections) and delivering a defect-free house—a baseline of buyer expectations.

To also make it look right, Atlantic uses an in-house, dedicated quality inspector, trained to a home buyer's sensitivities, to mark every dink, scuff, and slight gap in the trim with swatches of painter's tape. “The house looks like it sprouted a case of blue measles,” Schoedel says. “But the devil is in the details.”

Other builders are similarly dedicated. Whitten surmises that the top 25 percent by volume of the largest home builders employ thorough controls for quality and conditions, while the mass middle—including local and regional builders and custom shops—are also starting to take notice and embrace them. “It's being driven by competition,” he says, for both sales and customer satisfaction ratings, the latter being an increasingly weighty factor for home buyers. “The industry is actually well prepared to implement this, but in a business of entrepreneurs, you really have to drink the Kool-Aid to be successful.”

Paul Scholes, vice president of operations for Moser Builders, a 50-unit-per-year operation serving the Philadelphia area, brought the Kool-Aid with him when he joined the company last year; the builder is just now starting to realize the benefits of the quality and risk management programs he initiated in the fall of '06.

A Whitten disciple, Scholes instituted a rigid “daily walk” routine for every home under construction, setting standards for assembly and cleanliness and emphasizing the overriding goal of reducing the number of items and the number of times required to build to those standards. “It's not one thing, but rather improving overall systems and efficiency,” he says. “It's simply a focus on doing the right thing at the right time.”

Another sea change in a buyer-focused reality is the diminished role of warranties within a modern risk and quality management program that addresses defects and their related costs and potential liability or litigation. “Buyers are using customer satisfaction and quality ratings to make buying decisions,” says Frank Alexander, director of National Housing Quality programs for the NAHB Research Center in Upper Marlboro, Md., including builder and trade contractor certification programs. “They don't care about a warranty. They want a house that's reliable,” which satisfaction ratings more definitely discern.

Risk management is even less well-known and practiced among builders, at least by that name, than quality control. Often, it's a byproduct or adjunct to a quality management system that mitigates potential production defects, on-site accidents and injuries, and other hazards. “Really, it's just good business,” says Russell Nassof, a principal with TRC, an industry consultancy in Phoenix. Nassof focuses on curing callbacks, as much as construction solutions to hedge against defect lawsuits and spiking worker's comp and liability insurance premiums. “It saves money in the long run and makes you a better builder,” he says.

Or perhaps simply insurable ... for what that's worth. While Nassof has worked with insurance carriers for 15 years to create programs for builders that provide coverage for even the most damaging defects (read: water intrusion), other industry experts encourage builders to think outside the policy in this rapidly shrinking market of insurers. “Not only are there fewer carriers and unaffordable rates, but sometimes coverage is very narrow or not even available,” says David Jaffe, NAHB staff vice president for construction liability and legal research. “You either have to make yourself more attractive or minimize your liability. Simply having insurance no longer defines risk management.” (See “Reducing Risk,” below).

Whether it's QM or RM or some other moniker, a critical key to a program's success is a commitment to continual improvement. And the only way to do that is to document your results. “Once you start documenting things, you can audit the program,” says Kevin Estes, owner of Estes Builders, which builds about 30 units a year—split between custom homes and townhouses—in Sequim, Wash. “When you make changes to improve, you need to quantify it.”

Builders savvy to the value of customer satisfaction have employed several ways to garner feedback and measure results. Among them is a willingness to ask not only buyers how they're doing, typically with in-house or independent satisfaction surveys, but also to survey a company's own employees, trade partners, sales agents, suppliers, and others involved in the business. Atlantic Builders, for instance, uses comprehensive feedback to determine which areas in the operation need refinement. Nassof lists documentation of problems and their solutions as one of his six steps to reducing risk.

But as builders improve their quality and risk management acumen, obvious improvements are replaced by subtle refinements that take more work to find and solve. “It's more challenging as you get better,” says Estes, who reduced the average number of final quality inspection defects from 51 to 17 per house and also cut his liability insurance premium by 20 percent. “You start identifying deeper, systemic problems that take longer to resolve,” such as purchasing practices or plan and specification reviews.

Which is to say that, regardless of market conditions or enviable satisfaction ratings, the job is never over if a builder places the customer ahead of everything. “Builders have an obligation to do this,” says Estes. “We're not just manufacturers [of housing], we're service companies to our buyers.”

If a builder is going to commit to quality and risk management, he'd better put someone in charge of the effort. “Designate someone to function in that role, with the responsibility to sign off on critical points,” says Russ Nassof, an industry consultant with TRC. “If you plan for quality, you need a person to implement it.” The NAHB's trade and builder certification programs require quality managers, while builders tend to benefit from off-loading that job to someone else in the organization. “Instead of me wearing three hats, I have others watching quality on a comprehensive basis,” says Washington builder Kevin Estes.

Taking stock of your performance entails a lot more than an exit or ultimate satisfaction survey. Atlantic Builders of Fredericksburg, Md., collects quarterly feedback from buyers, employees, and trade partners, crunches the numbers, and attacks the lowest-scoring areas. The builder also requires its project and sales managers to make weekly phone calls to buyers, and has trained its sales staff to ask prospects about their previous home buying and owning experiences to ferret out flash-point issues to address with that buyer and perhaps incorporate into its overall QM program.

Think outside the norm to help everyone on the team, and the home buyer, get on the same page regarding your expectations for quality and risk management. Atlantic Builders, for instance, generates “hot spots” packages of photos, inspection results, and solutions to help its subs train their crews on proper techniques against the builder's standards for the next job. Moser Builders' “daily walk” of each job captures omissions and defects from a construction manager's point of view and a customer's perspective. Also, be willing to look deeper into your operation to find “defects” that undermine quality and safety.

According to Criterium Engineers, a Maine-based consultancy, 17 percent of the new homes it inspected last year had at least two significant problems, primarily substandard window and door installations, roofing jobs, and framing issues that resulted in water damage about 80 percent of the time. In the realm of risk management, meanwhile, construction defect attorneys list the top five reasons builders are exposed to litigation as poor customer service, inadequate plans and specifications, lack of production supervision, lowest-bid awards, and shifting the responsibility of a defect to others.

The landscape of a builder's liability has changed significantly in the last decade.

Once shielded by short-term warranties and code compliance, builders are now targets for construction defect claims and litigation, with ramifications for their reputations, insurance premiums, sales, and profitability. “There's now a cottage industry of construction defect attorneys,” says the NAHB's David Jaffe, “And there's no going back.” Jaffe and others offer a four-point plan for risk management that takes builders out of the false god of warranties and into a realm of self-protection, as follows: