Today’s homebuilders are a mix of visionary and financier. They begin with a vision similar to Walt Disney’s 63 years ago when he built his first theme park in Anaheim, California. To be sure, Walt encountered more than a few skeptics along the way, but in the end his vision far exceeded expectations.
Throughout the past three decades, we at Cornerstone have met and worked with many builders who share this same visionary quality. They have the ability to look at raw land and envision a thriving community abounding with homes, schools, parks and shopping centers.
Though visionaries work diligently to make their dreams come true, they can be constrained by the shackles of financial reporting and meeting the expectations of third parties with a stake in the vision—investors, lenders, public markets, accountants and competitors. We live in an age when information about everything is readily available online any hour of the day; it is no longer an insulated world where information can be controlled.
Builders are asked to quantify their vision with timelines, business assumptions, key performance indicators and well-defined returns on investment. Most builders compile this data into an original proforma. The proforma itself is nothing new to the industry, but today it has blossomed into a living, breathing document used as a measurement tool to determine whether or not the builder’s vision meets expectations and projected returns.
Cornerstone finds that more and more sophisticated builders are using their original proforma to measure their success throughout the life of a project. In response, we have created for our clients a Comparative Margin Report that compares margins at key milestone events, such as release of purchase order, approval of sales contract including options, closing of a home when the new owner receives the keys, and six months after the home has closed.
We believe this last event—six months after the home has closed—is critical because margins reported at close are very often incorrect. It is not that the systems or algorithms go awry; it is a process problem when superintendents sit on change orders and variance purchase orders for months, turning them into accounting only after buyers have moved into their new homes. In a few cases, we have reported to management a swing of 6 to 8% in their final margin calculation due to late invoices and purchase orders.
Cornerstone’s new Comparative Margin Report provides management with a more accurate accounting of profits, KPIs and returns on investment. This report will become increasingly indispensable as the labor market continues to tighten and inflation becomes an industry issue.