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How QA Earns More Than It Costs

The numbers are in. Quality Assurance really does reduce liability costs for high-performance builders.

How QA Earns More Than It Costs

It's no surprise that builders with formal Quality Assurance programs report fewer warranty claims. For instance, Professional Builder magazine interviewed builders, National Housing Quality Awards judges and QA consultants around the U.S. for an August 2017 article and found that while most builders lack such programs, those who put who them in place get a quick return on their investment. One builder interviewed for the article reported a 70 percent reduction after just a couple of years.

But while quality gains are the obvious purposes of such programs, they can offer the added benefit of lowering insurance rates.

That's according to Nathan Kahre, High Performance and Healthy Home Manager at Thrive, a 250 home-per-year Denver builder. At a seminar he taught during EEBA's annual Summit in October, he said that within two years of launching its QA program, the company was rewarded with a hefty reduction in liability premiums—more than enough to pay for the program.

"After creating the QA department, we brought it to our insurance agent," he says. "They shopped it to several providers and came back with a great deal."

Thrive was given two choices: $5 million in liability coverage for slightly less than they were paying for their current $4 million policy, or the same $4 million in coverage for 44 percent less. They took the former. In addition, Thrive had been paying a yearly premium for the seven-year tail needed to cover Colorado's eight-year implied warranty. Because of the QA program, the insurer gave them the option of buying the entire tail upfront for 8 percent less.

In all, the company saved around $150,000 in insurance premiums. Kahre also credits the QA program for reducing variance costs by $1,000 per home—another $150,000 in annual savings—and for slashing cycle time by 27 days.

Other builders have gotten similar results. Glenn Cottrell, Managing Director of IBACOS, a Pittsburgh-based consulting firm that helps production builders create and implement QA programs, co-taught the seminar with Kahre. He told the audience that one of his clients had reduced its warranty accruals by 12 percent over a five-year period, a total of about $5 million in savings. Another had seen a 25 percent increase in its customers' willingness to refer. Those numbers are typical.

While these savings are certainly impressive, insurance wasn't the main motivation for Thrive's program. Construction defect litigation had been increasing statewide, and they knew that having a documented process for eliminating defects and improving quality would reduce the chance of being targeted by opportunistic lawyers. "By lowering warranty claims, we stay off of their radar," he said.

The fact that the company collects and saves data on each individual home also makes it harder for lawyers to aggregate units, a process in which defects in a sample of homes are assumed to be present in all units. In effect, the data collected by the QA department has made the company a harder and less appealing target.

Kahre and Cottrell both stressed that while a formal QA program can benefit any builder, it's critical for those building high-performance homes.

The big issue is water management. Today's highly engineered homes have less of what's called Hygric Buffer Capacity, or the ability of building materials to suck up moisture then release it. In older homes, wood, stone, brick and plaster absorbed lots of water, and the airflow through their leaky wall cavities helped that moisture dry out before it caused problems. Older homes may have been energy pigs, but as building scientist Joe Lstiburek puts it, "they were durable pigs."

By contrast, newer homes use lightweight materials that absorb less moisture, and they place those materials in a highly insulated, airtight shell. Even a small leak can cause big problems over time.

It should be a no-brainer that builders of these homes need a process for ensuring the works gets done right. The good news is that with a formal QA program, a knowledgeable high-performance builder can craft new homes that are just as durable as those older ones.

So how do you go about getting these benefits? According to Kahre, it took about a year from the time the company decided to launch its QA program until it was fully implemented, then another year before they had collected enough data to make useful analysis possible. The analysis part is important because an effective QA program is proactive: it includes an inspection to catch and correct errors, but the real goal is to eliminate those errors going forward.

The details of an effective program are too much to go into here. However, the August 2017 Professional Builder article cited above—Best Practices for Quality Assurance—is a good introduction to the subject.

 

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