Risk Management Programs Lead To Happy Customers

A comprehensive quality and risk management program creates satisfied customers and protects your profits.

Four years ago, Atlantic Builders, a diversified firm in Fredericksburg, Va., near Washington, was the poster child for excessive warranty work. “It was a classic case of building a house and then rebuilding it,” says principal Tom Schoedel regarding the two points against revenue he was spending on callbacks per year. “We've always been profitable, but we felt we could do a lot better.”

By implementing and continually refining a comprehensive commitment to quality management, Atlantic Builders has since reduced warranty costs to one-quarter of 1 percent of its annual revenue, a savings of about $2,200 per house. The company also has shaved more than a month off its per-house cycle time, raised its customer satisfaction and referral rates, reduced final inspection defects by 75 percent, and experienced no jobsite injuries.

Those results enhanced the company's profitability during high times in the D.C. metro area and are now helping the firm hedge against competitive conditions that have dropped its production from 178 starts in 2005 to a projected 77 this year. But weathering a weak market wasn't the point. “It's more of a philosophy about how we treat our customers and what's important,” says Schoedel. “If you want to be a world-class company and really improve, you need to start with the customer.”

QUALITY REDEFINED Within the housing industry, “quality” is probably the most overused and least-defined term bandied about the sales center. To be fair, quality is subjective; what's acceptable to a code inspector may be well below (or, shudder to think, higher) than a builder's or subcontractor's standards ... or a homeowner's expectations.

So rather than trying to figure out if a wall stud is “plumb” or use similarly vague language to define quality in the various aspects of the business (including sales and warranty work), quality management experts suggest setting tighter, more defined standards (e.g., “plumb” is no more than 1/8-inch in 8 feet; every buyer under contract gets a weekly phone call) and then measuring against them. “Quality is your performance versus standards,” says Bob Whitten, a former builder and now managing partner at SMA Consulting in Orlando, Fla. “It's not one product being better than another.”

If that sounds like a monumental shift in industry thinking and practice, it doesn't end there. “The best practice is a quality and conditions program,” says Whitten, which extends the definition to include how home buyers view the process—from the model homes to the jobsite to the guy who shows up to fix the leaky skylight—as an additional measure of quality.

To an untrained customer's eye, he says, quality can and is defined by things such as trash in the backfill or materials lying in mud, not the engineering and assembly minutiae that occupy builders, trades, and inspectors “It's looking at your jobsite as if a customer could walk through at any time.”

That's one of several methods Atlantic Builders employs in its First Time Quality and Safety program. “We want it right and looking right when they move in,” says Schoedel. Getting it right means setting, managing, and measuring production standards (enabled in part by 64 separate inspections) and delivering a defect-free house—a baseline of buyer expectations.

To also make it look right, Atlantic uses an in-house, dedicated quality inspector, trained to a home buyer's sensitivities, to mark every dink, scuff, and slight gap in the trim with swatches of painter's tape. “The house looks like it sprouted a case of blue measles,” Schoedel says. “But the devil is in the details.”

Other builders are similarly dedicated. Whitten surmises that the top 25 percent by volume of the largest home builders employ thorough controls for quality and conditions, while the mass middle—including local and regional builders and custom shops—are also starting to take notice and embrace them. “It's being driven by competition,” he says, for both sales and customer satisfaction ratings, the latter being an increasingly weighty factor for home buyers. “The industry is actually well prepared to implement this, but in a business of entrepreneurs, you really have to drink the Kool-Aid to be successful.”