Fall 2006 issue of Horizons

to office administration such as officer and other salaries, related payroll taxes and fringe benefits, rent, office supplies, training, insurance, travel and entertainment, and profession- al fees. These fixed costs remain the same regardless of the number of houses closed. These types of expenses should be monitored and reduced if possible. Also, the hiring of any new employees should be evaluated closely. Employees should be cross-trained to better absorb the loss or reduction of any employees. Develop budgets for certain other fixed expenses and capital items and monitor closely. Budgets for other fixed costs such as advertising (and pro- motion) and donations should be established. For example, if a builder's total budget for advertising is 1 percent of sales, all expenses of this type, such as print and media ads, should be monitored during the year not to exceed this bud- geted limit. In addition, a budget for fixed asset additions should be established with a priority order of need determined. A cost benefit analysis should be contemplated when considering new asset purchases. Also, rather than buying new model home furnishings, existing items from old or existing models should be used as needed. Manage and control the number of specs and display mod- els being carried. As a market slows, it is important to adequately plan and manage the number of spec houses and models included in construction inventory. The anticipated closing volume should provide a strong relationship of specs and models needed to sustain such activity. Too much of this kind of inventory will have a substantial negative effect on a home builder's financial or model home costs. Relationships between staffing and sales volume should be closely monitored. The number of key employees by job function should be monitored based on the amount of sales volume being real- ized. These employee categories include superintendents, estimators, general laborers, and general and administrative employees.

For example, a company may be able to have two superin- tendents for 80 houses being closed. Should the volume decrease to 40-50 units, it is not likely the amount of activity is sufficient to support both employees. Manage and reduce direct construction costs. During “slower” cycles, it is an especially good time to review direct construction costs. The impact of even a small reduc- tion in each home's cost can have a huge increase directly to the bottom line. In particular, the process of “value” engineer- ing can help determine what feature in the base model can be replaced by less costly items that will not detract from the appeal of the product. Input from the company's subcontrac- tors and suppliers on ways to reduce costs or design alterna- tives should be obtained. Items that can be “multiplied” in savings over each house will have a positive effect on the bottom line.

BUILDER BITS

• In a relatively short period of time, it has gone from a sell- er's to a buyer's market in the acquisition of developed lots.

• The 17 consecutive spikes in the interest rate have certainly become noticeable in the financial costs part of the income statement as this line item is now exceeding 3 percent of sales. Let's hope the Fed is getting near the end of this correction . . . • Per our RubinBrown Home Builders statistical database, spec sales are now 28 percent of the market - this number may top out over 30 percent by the end of 2006.

• The Section 199 Domestic Production Deduction has turned out to be a great benefit to home builders.

Questions? Contact Steven Hays Sr., CPA Partner-in-Charge, Home Builder Services Group 314-290-3336 steve.hays@rubinbrown.com or Felicia Malter, CPA Partner, Assurance Services Group 314-290-3249 felicia.malter@rubinbrown.com

40 • summer 2006 issue