Thursday, January 10, 2013

Huge Projects - Build Them or Pass

Modular construction manufacturers come in many shapes and sizes. For many, 2013 will be the determining year as to whether they stay open, close forever, sell out or possibly buy a factory. 

2011 saw many modular home factories take on large commercial projects just to keep the doors open and more often than not, it would have been better to not build them in the first place. 2012 saw a few more home factories entering the fray in the battle to wrench business from the traditional commercial and government modular manufacturers.

The big guns in commercial modular already had a great foothold in that market and many of the projects that the modular housing factories picked up were ones that had to be sold close to cost just to get. So what is happening now?

If a modular home factory that traditionally builds single family homes decides that they want to try and get a 140 unit commercial project, they find themselves caught between two very hard rocks. First rock, if a factory has a capacity of 16 – 20 floors a week, the project will take a minimum of 7 weeks and possibly more than 2 months.  During that time, they must have enough cash flow available to complete the production, then wait until it is delivered, set and finished with up to another month for final payment which usually never materializes because the bank and developer requires up to a 10% holdback for 6 to 12 months. Ouch! That’s the profit.

The second rock is the builder base the modular home factory already has in place that feeds the factory between 3 and 6 homes a week. Asking them to wait longer for their homes while the factory builds the huge project could mean the loss of many good and long time builders. Giving up quick cash flow for long term profit is a gamble that not many modular home factories can successfully pull off.

It may seem bidding on a huge project that usually is won by the big commercial modular factories may seem like the best way to keep the factory running but in a lot of instances it would be better to close for a month, back up some production and reopen running at 50-60% of capacity with single family homes. For East Coast factories, Hurricane Sandy can be the saving grace for many of them unless they get tied up with a huge low profit commercial project.

I recently heard about one factory that is debating whether to take on a 100+ module project because they are making a nice profit with their existing builder base and are worried what the project will do to their bottom line and to their builders. Let’s hope they choose wisely.

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