Advice for Right-Sizing Your Business Expenses

When volume drops, businesses need to respond by cutting expenses, and with the housing downturn continuing, employee layoffs are becoming more common since they're one way home builders look to align their business expenses with lower volume.

Ways to Cut Business Expenses

The traditional view is to cut expenses across the board, rather than taking a systematic approach to right-size the business. For example, selling, general, and administrative expenses (SG&A—the departments where a lot of the headcount expense is tracked) is often managed by a ratio of less than 10% of revenue. Home builders expand or contract their head count as business grows or contracts. If revenue is up, then more staff can be added, but when revenue is down, the head count must be reduced. It’s been that way for as long as I’ve been in home building. 

The Real Price of a New Hire

Layoffs are never easy. A job loss affects more than the individual team member; it also affects their family. But if a business doesn’t cut its expenses to align with a drop in revenue, then everyone in that company will eventually be looking for a job. That said, cutting people should be a last resort.

In addition to the fact that there is a national labor shortage, the costs of hiring are all real expenses. There are fees for recruiting and background checks, as well as training costs, not to mention the inefficiencies that occur while a new employee is still learning the job. Cutting people also adds to your remaining team members’ workload, which can result in a loss of efficiency and an increase in errors and burnout of the remaining team members.

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Good people are hard to find. I’m not talking about the quiet quitters; those who do the bare minimum. They are a drag on your business. I’m talking about good people who work hard, are productive, effective, and efficient. They meet their commitments, even if they must work past 5 p.m. to do so. Those people are getting harder and harder to find. If you have them, do all you can to hold onto them because if you let one of them go during a downturn, they may not be willing to come back when business picks up again. 

A Better Approach to Right-Sizing Your Business Expenses

What if you were to take a more holistic approach to right-sizing your business expenses? For example, how often do you award a contract to a trade from your prequalified bid list that wasn’t the lowest bidder? Doesn’t a dollar of direct construction costs affect the bottom line as much as a dollar paid in SG&A? What if you awarded the bid to prequalified, lower-cost suppliers and trades that can do the work but would require some onboarding effort? Would you do it to prevent laying off some of your team members? What if you had to look at material substitutions of equal to or better quality at a lower cost? There are so many ways to improve efficiency and cut costs without cutting employees. 

What if you used employees, who would have otherwise been laid off, to work with trades on the jobsite to tighten material quantities, improve material utilization, reduce cycle times through better coordination, and so on ... These employees could also serve on process improvement teams to identify ways to do more with less.

Home building is cyclical. If you could use resources in the downturn that would prevent you from hiring more resources when the business returns, would you? Yes, your SG&A would be above 10% in a downturn, but it would be much less when the market returns and revenues increase, and your staffing needs would remain the same as a result of the improved efficiencies.

Home building costs have risen by double digits each year for the past several years. Shouldn’t our focus be on lowering those costs before we start cutting valuable team members from our ranks? 

Set a goal to put people first and work collaboratively to identify other areas in your business where you can cut expenses. Empower your teams to make decisions, but hold them accountable for results. If they want to pay more to use one qualified installer over another, then let them know they will have to cut costs in another area to make up for the additional money spent using their preferred trade. In my career, I have seen one home builder after another spend millions more than needed so they could use their preferred trade. I often wonder if they would do that if it was their money. It’s far easier to pay more when it’s other people’s money. What if the builder had to cut a team member to make up the difference? I wonder if they would still make the same choice or if they’d give a new prequalified trade a chance. 

Improve Efficiencies First

Examine your expenses over the housing cycle. That will require banking money in the good times to get you through the bad. Downturns are a great time to improve efficiency and effectiveness. When the market is good, everyone is too busy to dive into process improvements. Don’t believe me? Ask one of your trades to participate on a process improvement team when they have more work than they can complete. However, ask that same trade to participate on a process improvement team when the market is down, and they are more likely to help—especially if it will improve their efficiencies as well; efficiencies that would lower their costs, help them win more bids, and benefit their business overall. 

Home building costs have risen by double digits each year for the past several years. Shouldn’t our focus be on lowering those costs before we start cutting valuable team members from our ranks? I know trades that have increased their costs by 70% to 80% during the last two years alone. If you have walked a jobsite in the last two years, you’ve seen how the efficiencies have eroded. Jobsites are less efficient now than they were in 2018. The focus of the last two years has been on completing homes at any cost; that and the rise in interest rates has created the affordability crisis that we now find ourselves in. SG&A cuts won’t be enough to get home building costs in line. Let’s use all of the resources available to us and tackle the elephant in the room: Affordability.