Let's face it. Warranty calls can be a costly and time-consuming nuisance. First, the builder has to have a staffer in place to absorb and field the call. Then the builder has to determine what is wrong with the product, often via a site visit. After that, the builder has to look up the warranty information to determine who covers the broken part and create an order for the part acquisition and repair labor. After all that, even if it's a legitimate manufacturer claim (and not the responsibility of the builder), the homeowner will associate the builder's name with that broken item long after the issue is resolved.

The bottom line? The builder's brand, reputation and referrals are at risk, often due to a relatively inexpensive item. Knowing these risks, many builders will eat the costs and repair or replace the item — even if it's covered.

The Impact on Builders

All these small product claims — and, more importantly, the cost of processing them — really do add up. For publicly held, national builders, the costs are in the hundreds of millions of dollars each year — so high in fact that they must be reported in SEC filings. A widely circulated 2007 report assembled by Warranty Week newsletter states that of the 30 publicly-held homebuilders who report their warranty expenses in public filings, 23 saw their warranty claim rates rise in one year's time. Furthermore, these 30 companies alone reported an astounding $946 million in warranty claims in 2006.

Another recent industry report demonstrated how important it is for builders to respond quickly to these claims. According to JD Power and Associates, a global marketing and information firm, a home builders' warranty program is the most important factor in customer satisfaction.

JD Power further reports that new-home owners reported an average of 14 problems after moving into their home. That's a 7 percent increase over figures compiled in 2005. The same study points out that more than 90 percent of new-home buyers reported at least one problem with their new home, whether it was reported to an outsource warranty management service or to an employee of the builder. In the end, it all adds up to real dollars. For example, L.A.-based KB Homes settled $61 million in warranty claims in 2006.

The Per-Home Cost of Warranty Management

What does managing warranty requests really cost the builder? National Association of Home Builders (NAHB) research shows that each warranty call costs the builder more than $300. Many builders, however, believe that $300 is just the beginning of true warranty management costs.

Liberty Homes Inc., a Sandy, Utah-based builder will put about 250 new homes on the board in and around Arizona and Utah in 2007. But with 50 models across three price ranges and 50 standard option packages, Liberty Homes has a huge task in assembling warranties and use-care documents.

The company doesn't want to leave the homeowner with the all-too-common "junk-drawer-based warranty management solution," which Liberty says would end up costing more than it would to properly organize the documents in the first place. Still, the data collection and reconciliation demands for assembling such detailed information, which must be precise — down to the individual product make and model (including SKUs) — for each and every home, is formidable.

"We looked for an outsource warranty management provider, because we recognized that the cost avoidance for outsourcing this process substantially outweighs the cost of any service," says Liberty Homes' Jerry Pay. "And that's to say nothing of the significant value we get from customer referrals, which we would lose if the process were managed badly."

Terry Thomas, director of quality, home services and scheduling for K Hovnanian's Summit Homes division, agrees. The Summit Homes division, with corporate offices based in Red Bank, N.J., builds between 500 to 800 homes each year in the Ohio area. Each home can be customized beyond the standard options package, right down to fixture upgrades, like the installation of a one-off faucet.

"I surely agree with the NAHB figure," says Thomas. "It costs us more than $300 per call to service a post-closing request. And that $300 figure doesn't include the potential cost to our reputation from a bad referral if the warranty and use-care manuals aren't in proper order for a claim. Actual savings, if we were able to outsource this warranty tracking and callback service? At the very least, it's $300 a home for the time it takes for us just to assemble the material in one place, to say nothing of the costs we avoid in processes requests and queries about the home."

At a minimum of $300 per home in costs (with the actual number probably twice or three times that) a 100 home-per-year builder will pay more than $30,000 per year for assembling warranties in one organized location with additional costs for processing calls. As costly as it is to get this right, this is an area where builders can't let down their guards.

Warranty Service Solutions

There are a number of approaches to managing warranties, including home-grown solutions, third-party client-side installation of warranty management software and turn-key outsource warranty management companies.

Many builders just tough it out and deal with calls on an ad hoc basis, with one or two people assigned to managing the incoming calls. Subs and repairmen are issued work orders as needed and parts are ordered one at a time. This approach may seem cost efficient because the costs of servicing warranties are buried in other line items and personnel costs within the builder's budget. But as the NAHB cost estimate suggests, these expenses are categorically attributable and could be reduced to near zero with the proper application of specialty services and technology.

For client-side software installations, an option for large builders is a Web-based field management solutions provider. Corrigo traffics service and warranty information among customers, service and dispatch agents, technicians and vendors and the builder.

For mid-market builders (20 to 500 starts), there are several usable warranty management systems embedded in broad business management software. These services are designed from the builder's perspective, however; not the customer's perspective.

Builders can also explore national digital and print services that offer builders low-cost, turn-key, collections of warranties and designated documents that builders want to provide to the home buyer at closing.

Andrew K. Smith is the president and founder of AxisPointe Inc., www.axispointe.com, which offers post-construction services and information for homeowners.