On-Site vs. Off-Site: a Total Cost Analysis for Home Builders

Most builders and component suppliers do a marginal job of calculating true, fully loaded, the total cost when comparing various methods. It’s time to remedy that

Total Cost: The Only Thing That Matters

Before we move on to the factors that comprise the model, we confront a major, stubborn obstacle: the continued practice of buying on bid price alone, for which there is no viable argument.

Most builders and “component suppliers” do, at best, a marginal job of calculating true, fully loaded, total cost when comparing construction methods. If you fail to go beyond bid price to consider total cost, it’s impossible to make a fair, accurate determination of the right choice. With bid price alone, you know just one thing: Your numbers are wrong. Total cost is the only thing that matters.

Now that we’re all in sync on pursuit of total cost, let’s consider the factors to use when comparing traditional on-site construction to off-site methods. Here’s the current list, and—with input from readers and colleagues—I expect it to change. The starting point is the true total cost of your current construction methods compared with the new delivered, erected cost of whatever off-site techniques you’re considering. This demands a no-BS review of each category.

Consider These 12 Factors When Comparing Site-Built vs. Off-Site Construction

1. Cycle-time savings

This measure requires brutal honesty about your actual current cycle time, not what the paper schedule says. Kidding yourself here ruins the data and invalidates the cost comparison. Suppliers tend to overestimate the saved days from using their off-site systems; builders tend to under-report the actual number of schedule days. Face the brutal facts and calculate the value. Few know-how. The TrueNorth Saved-Day Calculator will help (see the end of this article to get a copy). The saved-day dollars alone are often enough to justify changeover to off-site production methods.

2. Direct material savings

If you use turnkey trade partners, this number may be buried in their bids, but it’s essential to uncover it. Wall panels, for example, should absolutely save on your lumber takeoff, yet it’s common to see panel manufacturers waste as much material through overbuilding as the worst stick-framers do. Excess kings, jacks, and cripples should be the exception, not the rule, as are oversize headers or those simply not needed. Shouldn’t the panel plants be the leaders here in value engineering? Challenge them! Their first-pass bid may drop substantially if you force the issue, and suddenly panelization just might work.

3. Direct labor savings

Roof trusses, wall panels, and other prebuilt components unquestionably save labor for framers even though bid adjustments in stick-built markets are hard to come by—initially. But go to a market dominated by engineered trusses and ask a framer to stick-build your roofs and you get an immediate and substantial price increase. It can take time and education, so be patient. You may not see those savings at first, but after some months, framers learn how much time they save, and the great majority will adjust—or maybe you don’t get the next increase your competitors do.

4. Direct labor and material savings, other than framer

When changing from stick-built roofs to factory-built trusses, builders typically factor out the labor for the roof structure itself. What they often miss are potential cost reductions for other aspects of the structure, namely the materials and labor no longer required for point-load transfers and thicker foundation footers to carry a stick-built roof frame. Similarly, web trusses save your mechanicals considerable labor. Neglect those costs, and your comparisons are no good.

5. On-site waste reduction savings

In addition to the common site dumpster, builders collect and remove waste in many ways. In our practice, we’ve learned to never accept the first-blush numbers, as there are usually additional costs left uncounted. Surveys show typical waste collection and removal costs average $1,500 per unit, however, and off-site construction can absolutely reduce that. Savings figures vary from 15 percent to 65 percent depending on how far you go, so delve deep into your numbers. As a bonus, your job sites are cleaner, something trades, inspectors, neighbors, and customers love.

6. Builder admin and overhead savings

Hardly anyone measures this, but it can be far more dollars than you realize. Calculate the cost reduction in purchasing and billing through reduction of number of suppliers and trades to keep current in your system and the number of orders, invoices, and checks you must process.

7. Planned-trip reduction

For each supplier and trade in your current process, calculate the number of required trips to do the job. That alone will be revealing. Now calculate the total cost of those trips. The TrueNorth Trip-Cost Calculator Excel template will make this easy. (See below for a free copy.) Now calculate the reduction in planned trips through use of off-site manufacturing techniques and compare the two. It’s an eye-opener.

8. Wasted-trip reduction

This is very different from planned-trip reduction, and we have cold, hard data showing the cost of wasted trips averages a conservative $10K per unit, with $12K to $15K a more realistic number. Yet almost no builders track and calculate the number and value of wasted—or otherwise what should be unnecessary—trips to building sites for suppliers and trades. Either they don’t understand the impact or they don’t know how to measure it, or both. (Again, our Trip-Cost Calculator will help you calculate it.) Once you nail that cost, determine how many wasted trips off-site methods can eliminate. I guarantee it’s significantly greater than you imagined.

9. VPO reduction

Whether you call it VPO, FPO, EPO, or just variance, it’s a nationwide epidemic and primary robber of margin in the housing industry. Everything in labor, material, and the accompanying overhead generated after a housing start is variance. Period. Even if to you they’re merely customer selections, they’re variances that cost you, as well as your suppliers and trades. I’ve yet to find a single builder that measures variance fully and correctly, but do your best and calculate how much will be eliminated through off-site building techniques, such as hot short orders for lumber, extra trips for the framer, and reduced on-site damage, among others.

10. Process rework reduction

This is another difficult one to calculate because no one measures it, yet there’s no denying margins suffer as a result. Any rework done prior to closing is a loss for all. Stare this factor down hard, use your field staff to derive estimates of the mostly buried cost, and calculate a dollar value for how much can be saved.

11. Warranty reduction

We still find builders that fail to accurately and completely track post-close warranty by both frequency and cost of each item. Anything less and you miss the full impact. Presuming you have that data, make a realistic estimate of how much you’ll save by applying various manufacturing technologies. Most should help reduce warranty calls and costs and remember: The biggest cost factor here is the impact of warranty calls on customer satisfaction. It’s almost impossible to measure accurately, but must be taken into account.

12. Equipment requirements

Today, cranes, pumps, and other material-handling equipment is everywhere, so it’s key to calculate the difference in equipment costs between traditional methods and off-site approaches. The extra costs will vary from inconsequential to deal-breakers.