Since the summer of 2008, I have cut staff steadily. First to go was a field laborer, then a handyman carpenter, then a secretary, then one of two project managers. My next dilemma was how to complete the remaining three homes that were under construction while maintaining continuity for the clients who had been working with the same project manager since their jobs began. I could not maintain his payroll expense, but I needed to complete the jobs and avoid doing the project management personally so I can keep my eye on the big picture.
After long and thorough analyses, I finally came up with a workable solution. It revolves around a milestone-based fee for services on a per-project basis combined with the project manager doing some direct labor.
Since David had been with me for more than 10 years, I decided to first give him six weeks’ notice while he earned his full salary. I did this to avoid feeling like I owed him a large severance check. I explained that economics forced me to make these moves and he fully understood.
I still had two presold custom homes to complete. David officially came off payroll after six weeks’ notice. I sold him the company truck he was driving for half of its blue book value and I financed it over 18 months. Now my salary expenses were reduced and I saved thousands in insurance and maintenance. David agreed to milestone payments as each house progresses through C of O and final punch. He will also do the trim labor on the second home which allowed me to use the client’s trim budget to supplement my cost for paying him to manage.
The client maintains continuity with David finishing the home he started. David has a clear vision of both his responsibilities and his income for the next four months, and he is incentivized to finish the homes quickly, rather than the natural tendency to stretch out the remaining work with the hopes another job will keep him on payroll longer. The quicker he finishes both homes the faster he will earn the milestone payments.
The third of the three homes to be completed was a 3,100-sq.-ft. spec home. In the fall of 2008, David had managed the completion of the exterior of the home and all the site work. Then I stopped the progress of the home to try to presell it, which did not work. We had some showings and some nibbles but no offers, despite dramatic price decreases. To further reduce project manager costs, I made a deal with Ralph, a lead carpenter who has two helpers that work for him. He agreed to do all of the project management of the home through C of O and punch for a set fee, and do all the labor for insulation, sheetrock, installation of cabinets, tile, trim and final painting.
I no longer needed to budget a salary for a project manager. I have done all the purchasing and scheduling, and I leaned heavily on each trade while explaining that this spec home was being finished to cut my carrying costs and liquidate this asset. I explained that it would bring me only losses, no profit, since the land and home value had dropped so much since I bought the lot in 2004. I was able to reduce my budget by more than $50,000 without sacrificing quality or selections.
Of course I hope I sell some new custom projects soon and can offer David more work. In the interim, I have cut expenses while figuring out a win-win way to keep David reasonably happy, given the circumstances. Most importantly, I continued to protect my own bottom line and cash flow during these tough times. Now I am positioned to survive until the market returns. Have you done what’s needed to survive economically?