Self-Taught MBA: Accounting for Callbacks
Tracking all you spend on callbacks may help you identify and fix weak points in your construction processes.
At one point in my career, confronted with a series of expenses related to warranty claims, I decided to identify the weak points in my construction process by tracking my annual callback costs as if they were one very long and profitless job. In other words, in my accounting system I setup a “job” called “Warranty2015.” The year would change, but the tracking codes were the basic line items for the construction of a typical home, such as framing, windows, plumbing, and painting. Once I finished a project, say a room addition or home construction, I would “close” this project in accounting right away, instead of keeping it open for trailing expenses, as I used to do. Moving forward, instead of applying callback costs to the original project, I would track them in my “Warranty2015” job.
By tallying all callbacks in one place, I could see how much I was spending per trade and create a hierarchy of expenses that would help me pinpoint problems, whether triggered by particular subs, specific products, or construction processes that caused me to lose money. Armed with this information, I could act proactively, correct the issues, and reduce the warranty nosebleed.
Tracking Accurately
To pinpoint callback problems accurately, I could not simply account for trades within their standard categories. For example, if a pipe sprung a leak and the resulting damage caused me to repair drywall, paint, and carpeting, I could not track those trades in their respective line items, which would be drywall, paint, and flooring, since doing so would distort any accounting of what the original construction defect cost me. Instead, I tracked all direct and indirect expenses for any callback under the one line item corresponding to the trade that caused all the damage. In this example, all the damage, including drywall, paint, and carpet, was the result of “plumbing,” so all expenses related to this callback would go under plumbing (…or as I figured out later, under “sealing and insulation.” I’ll get back to this in bit).
After tracking my callback costs this way for several years, I learned that windows both cheaply made and incorrectly installed cost me more in warranty claims than any other item. While a plumbing leak would create the highest expense on a per-callback basis, it turns out plumbing leaks were infrequent, while repairs to window failures, such as improper closing, drafts, condensation, and leaks had become an unfortunately predictable expense.
With this information, I researched windows and found a vinyl window line with thicker frames that were not so sensitive to minor wracking, and also with larger weep holes that assured me water would not accumulate in the rails and leak back into the house, even if the window sat slightly out of plumb. I also sent my employees to ongoing window flashing and installation workshops, brought them articles to read from Fine Homebuilding and GreenBuildingAdvisor, and generally inculcated a culture of excellence in window installation within the company. It paid off—by year three, windows were no longer a major cause of callbacks, and I focused on the next highest cost center, which turned out to be not plumbing, as I thought, but sealing and insulation.
Epilogue
After windows, I turned my attention to plumbing, the atom bomb of warranty costs. But analyzing a three-year history, I found that most leaks—in fact, all leaks—were the result of frozen pipes. So I switched to PEX pipe from copper. PEX expands, it’s plastic, and does not crack open like copper pipe, and hence the majority of pipe breaks stopped cold (sorry, I could not resists the pun). Yet the problem, in this case, was not really my plumber or copper piping, but the insulation subcontractor who didn’t do a good enough job at sealing air leaks and insulating critical areas such as attic eaves and band joists. In Nebraska, cold winter winds easily seep through voids in the building envelope and freeze pipes solid, causing them to split open. Improved sealing and insulation would eventually keep the pipes from freezing in the first place. In the final analysis I figured out that the proper line item under which to track callbacks for frozen pipes was not plumbing at all, but—you guessed it—insulation, and instead of a switching plumbers, I took sealing in-house and hired better insulators.
All this accounting analysis changed my approach to building in the ways I described and many others. This is just one example of how cost accounting can provide benefits beyond financial reports and tax preparation.
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View Comments
Good piece, Fernando. Learning from our mistakes - Who knew?
I read this blog post twice and made a note in my working copy of Running a Successful Construction Company to request
that you allow me to include it as a "guest column" in the next edition. What a terrific idea!
I wish your decision to "inculcate a culture of window excellence"in your company was emulated by every builder in the country. Installing exterior doors and windows properly, and with properly integrated water management systems, seems to be a challenge that many builders either ignore -- judging from the quantity of building failures we see -- or struggle to meet.
It is a tough challenge, actually much tougher than the glamor work of interior finish, or so it seems to me.
A few years ago when I was building a house, I noticed that the beautiful clear pine interior window trim actually involved only the pretty straightforward installation of seven sticks of wood. The water management system required weaving together a veritable origami of floppy, sticky, difficult to handle materials).
Maybe you can give us a whole blog post on the
program you put in place for your company. We need it!
David, you may plagiarize anything I write, in exchange for allowing me to plagiarize just one line of yours: "The water management system required, weaving together a veritable origami of floppy, sticky, difficult to handle materials." Now that describes it perfectly.