Reducing Building Costs and Risks

Builders' purchasing departments are changing rapidly, and most contractors and consultants are not keeping pace with the changes. As a result, bidders are left in the dark wondering why they didn't get the work, and builders are not getting the cost concessions and service levels they hope to achieve.

I have three suggestions to help building executives accomplish their goals:

1. Communicate your purchasing strategies and goals to your suppliers and service providers.
2. Coach your suppliers and service providers to help you achieve your goals.
3. Describe the types of relationships you value.

Communicate Your Strategies and Goals
If you haven't put your purchasing strategies on paper, you should. Better than that, you should prioritize them. Your purchasing strategies probably fall into four general categories:

1. Reducing costs: You want to spend less money on goods and services than in the past, but at what expense? If a provider is costing you money because of poor service, how do you know? How do you compare bids from companies with different quality and service levels?

2. Reducing risk: In 2003, the number of lawyers in the United States surpassed the 1 million mark for the first time. Unfortunately, the number of people taking the Law School Admission Test is also at an all-time high. Where do you draw the line between maximizing profits today and ensuring profits in the future? How much insurance do you want your suppliers and service providers to carry?

3. Increasing customer satisfaction: Happy customers refer more sales your way. How, if at all, does customer satisfaction affect the purchasing strategy for all of your products and services? Which products and services are commodities?

4. Increasing options and upgrades: For most builders, the design center started as a way to add value to the sale. Today, the design center serves as a major profit center. Do you select certain suppliers based on their ability to help you increase options and upgrades?

Obviously, you can't buy the cheapest goods and services on the market and hope to have the lowest risk and highest customer satisfaction scores in the industry. Your firm draws the line somewhere in the sand. There is no point in requiring those who bid for your work to guess what is important to you. Tell them.

Coach Your Suppliers and Service Providers to Help You Achieve Your Goals
Help your suppliers and service providers by communicating five key decision criteria to them:

1. Minimum quality and service requirements: For some builders, this simply could be enough to get them through building inspection and close of escrow as inexpensively as possible. For other builders, and even for different communities for the same builder, the minimum could be much higher.

Be honest here. Don't tell people they need to provide a minimum level of service or a minimum quality of product and then select a company that does not meet the minimum required. Don't have minimum requirements that suppliers can skirt without getting caught. If your lawyers dictate minimum requirements in contracts to protect you in the event of lawsuits, but you overlook some of these criteria, you might drive honest suppliers and service providers out of the business. Your great legal strategy might be a lousy business strategy.

If a company fails to meet your minimum requirements, tell it what it needs to fix to be considered. If you don't, you will have fewer suppliers from which to choose.

2. Winning quality and service: Once you have several acceptable bids, on what do you base the decision? If you said "relationship," we will address that later. The most common complaints I hear from those who don't get the sale is that either their competition is "buying market share" or the builder is ignorant about the real quality of the winning bidder's products or services. While you might be glad that one of your providers is "buying market share," you also might not really care that your provider doesn't do something as well as the others. Tell the others what you value so they can adjust their costs to give you the competitive bid you want.

3. Value-added for which you will pay extra: Will you pay more for something that reduces your risk or increases your profit? What do bidders need to do to demonstrate that spending 5% more with them will make you more money over the long term? Will you pay more for superior communication? Put the burden of proof on the bidder. If you suspect that spending more money upfront might be the right decision, help the bidder collect the data or conduct the research yourself to determine if you are correct.

4. Value-added for which you won't pay extra: What you won't pay for is just as important. Salespeople tend to extol all the virtues of their products and services. If they extol something that doesn't interest you, let them know or ask them to prove the value to you. If they have a better product or service but you can't charge more money for it or it won't save you money in the long term, tell them. Do you want them spending money on something that doesn't concern you? If they think they have better quality or service than the competitor but they really don't, tell them that as well. Would you rather they live in a fantasyland or have them face reality?

5. Value-added you are willing to offer: What will you do to help your suppliers and service providers manage their business? It could include the following:

• Minimum guaranteed volume of work
• Insurance guarantees that really do protect them
• Priority recommendations in the design center
• Performance incentives

I expect to see more performance incentives with large builders. With purchasing departments frequently focused on the lowest-cost bids, I expect local division presidents to begin offering incentives to suppliers and service providers that they really need to improve their bottom line. If the preferred supplier can match the lowest-cost bid and make the desired profit margin through incentives (such as through no service calls or callbacks related to their work), then everybody wins.

Describe the Types of Relationships You Value
The most overused term in the business is "relationship," which can mean so many things. Determine what it means to your firm and let your suppliers know. If your definition of relationship changes, let them know that as well.