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Scott Sedam, president of TrueNorth Development (www.truen.com), spends most of his time working in the trenches with builders, suppliers and trade contractors. His Lean Builder blog appears weekly at HousingZone.com. He welcomes your feedback at scott@truen.com.

The Lean Builder Blog: Turnkey or not?

November 30, 2011

I am frequently asked, what is the right way to buy labor and materials? Should you use turnkey suppliers and trades or should you purchase and negotiate labor and material separately. Let me be 100% clear about this. I have the answer. I am now into my third decade of looking hard at this issue and have watched more than 200 builders up close and personal and unequivocally conclude based on the evidence that the clear answer is to buy labor and materials separately – except when the best way to purchase is turnkey. Got it?

This reminds me of some other age-old truisms, especially common in the sports world. Everyone knows good pitching beats good hitting – except on the days that good hitting beats good hitting. Even Justin Verlander, who won both the Cy Young and the MVP awards this year, lost five games and was rocked on a few occasions, including a couple of playoff games. We also know that in football, good offense beats good defense unless you are last year’s Green Bay Packers or this year’s New England Patriots. Okay, same for the Packers this year, as well.

The only real mistake you can make here is to lock yourself in to one mode. The right approach varies by both trade and market tradition. To say it is situational is a gross oversimplification. The national builders in particular have been on a long-running campaign to buy everything possible separately and always cite a price reduction as the driving force. That is typically based on an initial-bid-price only strategy and gives you only a piece of the total cost picture. You might be winning or losing, but you don’t know without other critical elements factored in such as delivery, quality, warranty, communication, systems integrations, etc.

Breaking down labor and materials helps you to see isolate cost components and that can be powerful. Using turnkey labor and materials provide tremendous incentive for the trade to be as efficient as possible and minimize the waste factor. I like that, too. Can’t I have both?  Well, maybe, but not if you fix on one approach alone. Evaluate each component of the house, what it requires and what your suppliers and trades can do with it locally. The answer will sometimes be “disintermediation” as supply-chain geeks like to call it. Other times a turnkey approach is compelling. The answer may change from year to year. Stay flexible, keep evaluating and make good choices.

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