When we talk to builders about panelized construction, one objection we hear is that the budget for a panelized frame tends to equal or exceeds that for a stick frame. That may be a valid objection if they use panels to build the same number of homes, but we have always contended that builders who leverage offsite’s cycle-time savings to build more homes per year will see higher overall profits.
We’ve been gathering more numbers to support that contention. For instance, the most recent Alliance newsletter included a link to the Beta version of our new Offsite Solutions Business Value Calculator, a tool we’ve developed which takes into account direct and indirect costs. (A number of builders and providers are playing with this, and we’d love to get your input.)
In addition, we’re also getting some real numbers directly from companies that have been panelizing for a while. One of these is Raney Construction, Inc. (RCI) a Groveland, Fla. company that provides builders with turnkey, engineered and panelized shells. The company is similar to Ripon, Calif.-based Entekra in that rather than just making panels, they offer an engineered solution that includes optimizing the builder’s plans for manufacturing. But RCI goes a couple of steps further than Entekra by pouring the foundation and slab, and using their own crews to install the panels.
RCI owner Buddy Raney says that his finished shells, on average, cost $2,500 more than one would pay for a conventional framer and foundation sub. But his approach also shaves 10 days off the time needed to go from footing to finished shell, which means that a framing crew can complete more homes every year. “If I’m building 100 homes per year, then saving 10 days in cycle time means I can build another 11 homes during that time,” Buddy says. He says that builders who do so are realizing higher overall profits.
The Numbers
We ran the numbers for a sample builder who closes 100 homes per year at an average selling price of $250,000. What would paying $2,500 more per home but building 11 more homes per year do to this builder’s profits?
The spreadsheet shows the assumptions we made and results we got, which factor in all the builder’s costs. We estimate an incremental profit of $473 per home and incremental annual profit for the company of $190,000, which is the difference in net income between conventional framing and offsite ($1,440,000 minus $1,250,000).
The builder earns a little less per house ($40,000 versus $42,500), but the fact that fixed overhead doesn’t increase means the incremental profits of the extra homes go directly to the bottom line. That explains the higher overall profit.
These are the minimum savings. If conventional foundation and framing takes 14 crew days, then framing 100 homes requires 1,400 days. If those same crew days are available, but the offsite package only takes 4 days to erect, the crews have a theoretical capacity to build 350 homes per year. We’ve worked those numbers out as well (see the third column on Offsite Potential above).
What prevents the builder from realizing those extra gains are additional bottlenecks. Could the builder sell 350 homes per year? Could the electrician and drywaller handle the extra volume?
With offsite, the factory has gotten rid of one bottleneck. Builders who can find a way past subsequent ones should enjoy even higher volume and better profits.
Other Advantages
Even if the builder only gets 11 extra closings, the benefits don’t end there. For instance, because RCI provides a finished shell that includes the foundation and slab, there are fewer subcontractors to hire and coordinate.
RCI produces 15 homes per day at their 265,000 square foot facility and indicates that some production builders are getting additional value. For instance, the company was KB Home’s Florida manufacturer for about 10 years according to George Glance, who ran KB’s Orlando division and has now joined RCI as President.
Part of the appeal is that RCI locks in pricing for 90 days. Another part is that it offers flexibility in how costs get broken down. “We prefer to separate lumber and labor on the work orders,” says Dale Ahrendt, KB’s VP of Value Engineering. “Buddy provides material quantities to us with the 90-day price lock, and we load them into our Bill of Materials system. That makes it easier for us to track cost changes if lumber prices go up.”
Optimization
RCI’s value proposition also includes improving the builder’s structural plans. “When we come out with new plans we sit down with Buddy to optimize them,” says Ahrendt. “He’s really good at that.”
RCI has embraced Alpine’s VisionRes residential BIM software, which lets it analyze the structure and suggest more efficient and cost-effective ways to build it. “A lot of plans have discrepancies that we need to spot and fix before making the panels,” says Raney. The data is then transmitted directly to the plant’s cutting equipment. The builder does not need BIM software because RCI’s staff can input any plan into its system. Input can take from a couple of hours to a couple of days, depending on plan complexity.
Optimization should also reduce the amount of cutting and blocking needed onsite to accommodate HVAC and plumbing, but the savings of that have yet to be quantified.
“When I talk with builders about technology they usually mention things like lighting control, security systems or Alexa,” says Raney. “But I think that what’s more important is learning to use technology to build the house.”