Cost of Building a New Home: Part 1

The Darker side of ‘Volume Discounts’.

When assessing the cost of building a new home, people believe that larger builders offer cheaper prices than the smaller builder. This is not surprising because larger builders can often negotiate volume discounts from building suppliers because they buy in volume.

It is therefore assumed that this ‘buying power’ translates into a less expensive cost of building a new home than would be the case if you were to build through a smaller builder.

As is often the case; this assumption misleads because it covers only a part, and a tiny part at that, of the factors that influence the cost of building a new home.

All business account for their profits in similar ways, In the case of Builders, goes like this:

Total Sales – 10 sales = $3,000,000

Less:

  • Cost of Sales = $2,560,000
  • Gross Profit = $440,000
  • Less Expenses: (Overhead)$292,000

Net Profit = $148,000

Cost_of_Building_a_ New_ Home_Volume_or_Custom

That is a very simplified example, (*and only applies if the builder is very, very lucky), but the idea is to show that there is a very real difference between the Cost to Build (otherwise known as the cost of sales), and overhead expenses. Both have a direct bearing on the overall cost to build the new home, but negotiated discounts will only affect a fraction of the Costs of Sales (the direct input costs to build a new home). Here’s why.

The Effect of Volume on the Cost of Building a New Home

  1. In order to be in a position to negotiate huge discounts on the supply of materials to build the home, the builders has to spend a great deal of money on marketing activities: Display Homes, Advertising, Sales staff etc. So his marketing cost per sale is significantly higher that the smaller builder, who probably does not even calculate the Return on Investment (ROI) for his relatively insignificant marketing costs. Large builders marketing costs per unit sale usually is far in excess of the value of the savings negotiated because of their ‘volume discounts’.
  2. The term “Volume Discounts’ is a marketing tool employed by the big building product suppliers in an attempt to grab market share by implying membership of an exclusive club. The question has to be asked. When exactly does a builder become eligible for a volume discount?  20, 50, 100, 200, 1000 houses PA? Nobody really knows. How much is the discount? 10%, 20%, 30%, normal trade supplier prices? This is where it becomes interesting.

At AKS Homes, we have often been offered those kinds of discounts, only to find that we can get an even better deal from a totally unrelated supplier. It does seem that to us, that prices can always be negotiated, regardless of your total volume purchasing power.

If a supplier needs to improve sales, they will provide enticing prices to attract business. Builders have adapted to razor-thin margins over the past 4-5 years.

Good suppliers are learning the same lesson as they resist the inroads Chinese and Indian product is making into their traditional markets, and are similarly adapting their pricing business models. Margins across the board have been shaved to the bone, and there should be no capacity for any supplier to provide a 30% discount, unless it is a going out of business sale. This is depriving the larger builders of their one-trick-pony marketing plans.

The only question is whether smaller builders have geared their infrastructure to take advantage of this reality.

Here at AKS Homes, we believe we have. Find out the Cost of Building Your New Home. Give us a test and get a quote to build a house now..