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

Part 1 of a two-part series

The articles, columns, seminars, and social media posts describing how off-site construction methods will revolutionize home building continue unabated. With labor shortages once again polling near the top of home builder concerns, it’s no surprise builders are interested, as manufacturing technologies applied to construction promise significant reductions in labor to build homes, among other things.

My Professional Builder column last September titled “The Next Great Thing in Home Building? ... Or Not,” described how, 30 years ago, manufacturing methods were poised to produce a sea-change in our building processes. Today, five cycles of the “off-site revolution” later, we are, in truth, only marginally closer. As a percentage of total production, the application of manufacturing techniques to the home building process—beyond factory-built roof trusses—remains a tiny share of the total output.

Despite that, I’m still a believer. The transition to more off-site production is inevitable. Our TrueNorth team has spent much of the past 12 years helping builders identify, measure, and eliminate waste in product, process, and plans. The dollars identified are massive—totaling seven, sometimes eight figures.

There’s no question a significant portion of that waste can be saved through off-site construction. These applications progress in fits and starts around the country, while we stare in amazement at the persistent inefficiencies of traditional methods, such as the stick-built roofs that still rule in so many markets. Recent field walks of large Texas homes revealed a framer’s nightmare, looking every bit like a jungle gym in the aftermath of an F5 tornado.

To date, however, no one has fully solved the volume equation. Some incredible off-site facilities have been built with the latest high-tech processes, yet when volume fell, they collapsed. A few suppliers claim they’ve solved it, but only the next downturn will tell. Regardless, I believe the industry will eventually solve the problem, similar to how auto manufacturers can now run multiple models down the same production line, even with different frames. Thirty years ago, that notion was absurd to plant management and engineers alike. Continued acquisition of U.S. home builders by Japanese corporations substantially ahead of us on home manufacturing technology will only hasten that day.

Measuring On-Site vs. Off-Site Costs of Construction

One of the biggest impediments to the adoption of manufacturing techniques is that neither builders nor producers are skilled at measuring the total cost of traditional site-built homes versus those using off-site manufacturing. An all too common example is a builder considering switching to factory-built roof trusses from stick-built.

I recently spoke with a builder that had priced trusses, then backed off due to cost. Had the builder calculated the benefit of schedule days saved? No, and they weren’t sure how to. How about the reduction in the thickness of foundation footers? Or the extra wood used to carry point loads onto the beefed-up beams and posts taking it all the way down to the basement? Not to mention the reduction in waste-hauling costs and the impact on framers and mechanical runs.

None of those factors were calculated, so it was no surprise the truss option was rejected. When I asked to see the truss supplier’s worksheets comparing the costs, the builder replied, “We’ve never seen one.”

Ponder that. How can you sell a supposedly advanced construction process without solid numbers to back up your claims?

Flying home from that trip, the wheels began to turn: What if a purchasing manager had an “On-Site vs. Off-Site Cost Calculator”—an Excel template to compare traditional on-site construction with off-site production for anything from components to a fully modular home? That would be a huge benefit, and if the stick-built roof still won the day, it would be based on numbers, not notions.

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 jobsites 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

When I was a young buck, crews thought nothing of man-handling huge trusses for the roof on a 3,500-square-foot home and concrete pumps were as scarce as low-fat options at White Castle. 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.

That’s a lot to absorb, and next month there’s more. I queried 20 or so knowledgeable colleagues with this model asking them for what I’d missed. The response was amazing; everyone is interested in this subject. The next column will cover more of the nuances, subtleties, and deeper thoughts, so stay tuned.

Meanwhile, we’re still at work on the Excel template, and there’s much to do before we publish it.

Now it’s your turn. Send me your thoughts, observations, experience, or even protestations (see my contact info below). A solid approach to calculating the true total costs of on-site vs. off-site construction techniques is both difficult and desperately needed. Together, we’ll figure this out.

For links to TrueNorth’s Excel templates, email your request to [email protected].

Access a PDF of this article in Professional Builder's May 2019 digital edition