Is the Cost of Quality Really $22K+ Per House?

“The amount set aside from current sales to fund the cost of future warranty claims (accruals) is a company’s prediction of product reliability.”
– Warranty Week

While teeing up smart quality management presentations at our 2017 Innovation Summit, Glenn Cottrell of IBACOS shared an interesting piece of research data from a study conducted by DuPont.

According to DuPont’s Theresa Weston and her review of multiple years of published annual report data, 13 of the 30 publicly traded builders in the U.S. set aside an average of $22,278 in accruals for warranty and litigation per house. On a $400,000 house, that’s more than a 5% “margin for error.” If you were to build 400 homes in a year, that’s $8.9 million reserved to fix and fight mistakes.

Reactions to the data were mixed. Some said, “that can’t be so”, while others suggested it’s sad, but likely true. One thing was for sure, it piqued people’s interest, and there were multiple requests for more information as to where those numbers came from and what they actually meant.

During a recent call with our Cost of Quality Program Council, we had the opportunity to dig more deeply into the numbers with Theresa. Here are the fine points that hopefully help answer some questions and provide some much-needed context.

It’s not the top 13 builders, but rather 13 of the 30 publicly traded builders. To be fair, the phrase “13 top public builders” in our Summit presentation may have given the wrong impression. In fact, not all builders from the study are in the top 20 in terms of housing volume. Theresa isn’t naming any names, but if you want to dig into their annual reports yourself, the data is publicly available.

$22,278 is the accrual, not necessarily the spend.
While the number is real for those builders, the number itself isn’t the point. The intent is to show the order of magnitude of what publicly traded builders are setting aside for warranty and litigation – predicting that they will have construction quality failures and other issues that could result in such actions.

While it isn’t necessarily what they are spending in the long run, it is a lot of money to tie up. Again, for 400 houses, it’s $8.9 million dollars sitting in some bank instead of being invested in the company. For a thousand homes, it’s $22.2 million; for 10,000, it’s $222 million.

What could you do with that kind of cash? Or even half that? Providing better training, rewarding your trades for high quality, on-time work, putting better products in your homes and more money in your pocket are just a few we can think of.

The warranty picture has gotten a little better.
Theresa gathered and analyzed data from a three-year period in the mid 2000’s initially and updated her findings with annual reports in the last year or so. She looked at the dollars accrued and normalized the figures to the number of starts. In the mid-2000’s, $7,200 per house was set aside specifically for warranty related work, a figure that actually went down to $6,000 in the latest update.

A number of factors at play could help explain that difference, or it may just be due to the volume and speed that homes were being delivered back then. Regardless, it’s good to see some of the numbers are going in the right direction.

Alliance members – What do you think?
Log in to our members-only portal and join the discussion under our Cost of Quality Community Forum.