The Business Case for ‘Smaller Is Better’

first_imgBeing surrounding in the pages of GBA by a lot of folks whose credentials make mine pale in comparison, I have to be sure never to wander too far from home. And the perspective I am privileged to represent here is one of “Business Advisor,” which means you won’t see me straying too far afield into Building Science, Sustainable Design, or God knows else I would like to pontificate on but that may be outside my purview.Thus, when I consider “big vs. small: which is greener?” I want to respect the different directions this question can be approached from and focus my firepower on the business case for or against the subject at hand. And for me, it’s a no-brainer. When it comes to green, smaller is better. (Oops! I mean greener! Oh, well.) Here’s why.All things being equal, a smaller home will take less time to build than a larger home. A home built in less time means that the client moves in sooner, gets back to normal more quickly, is productive at work faster, and benefits from the energy efficiency and healthy features in the home more immediately. As well, the neighbors have the construction crews out of their lives that much faster, the local government is earning tax revenue, and the client’s kids are back in school earning straight As! And smaller homes require fewer resources to build and operate over the course of their lifetimes. Smaller jobs are completed fasterAll well and good, but where’s the business case for smaller is greener, you ask? Let’s be selfish here for a moment and consider why it is better for business to build smaller. Because a home built in less time means that I earn my compensation for building it more quickly. And if I can earn 12 months of salary in 11 months, even better. Building mansions and McMansions (green or otherwise) can have its own rewards — and in many cases, those rewards can be financial — but let’s put assumptions aside and look more closely.Does a $3M home built over 30 months make more sense than a $650K home built over five months? The former generates revenue of about $ 23K/weekly, and the latter, $32K/weekly. What about gross profit? When you look to see if a potential project is right for you, do you look at the gross profit it will generate for you on a weekly basis? I know having $3M on the books for the next 30 months has it own rewards, which cannot be overlooked (improved cash flow, an ability to pay down debt, freed up resources for long-term strategic planning, to name a few), but please do not let that override other important metrics. Calculate your anticipated gross profitFor a variety of reasons, I turned down the opportunity to bid on a custom ICF home earlier this year. It was a 90-minute drive from my office, the client insisted on a free bid, did not want to pay me for services, and only wanted to pay cost plus 10% on a $1.5M home! At the end of the phone call, I was very straightforward and explained that I could not go to my partners and justify the deal. A gross profit of $150K on a home that would take at least 12 months to build wouldn’t make sense when we could kick out five remodels for the same price and gross more than three times that in the same period of time. Not to mention we would have more net profit on the smaller projects because we would not have to drive so far and we would have a lot less liability exposure than if we were building a big ICF home.Turnover is the key, and if you don’t do the math, you may be tying up resources on projects that generate lower sales or gross profit dollars than could be generated elsewhere. Your Building Advisor is telling you: Big is not always better, and there is a lot of green to be made in building smaller!last_img

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