Canada Homes Corporation

Report prepared for:
CHC Board of Director

Prepared by:
Erdell & Co., Management Consultant

July 2, 2006
Executive Summary

Canadian Home Corporation (CHC), a residential developer in Eastern Canada, was incorporated in 1978 and is well-known in the residential construction industry for quality and innovative design.

Currently CHC is experiencing challenges in generating profitable income and meeting shareholder’s objective of annual dividends. It remains unprofitable due to rising material and labor costs, and the cyclical nature of the real estate industry. In addition, quality issues have created negative publicity that threatens the reputation of CHC.

The purpose of this report is to analyze strategic and operational issues with CHC and to provide recommendations to improve the performance of the company. CHC’s external opportunities and threats that affect the company’s decision on its strategic alternatives include: increasing popularity of prefabricated housing, high demand of renovation, labor shortage, and a shortage of land available for development.

In light of its internal analysis and external environment, CHC must:

1. Pursue renovation services 2. Manufacture prefabricated homes 3. Reject GH’s joint venture proposal 4. Reject rental property development proposal 5. Divest Maritimes Division
To mitigate the various operational issues: 1. Declare bankruptcy for its European subsidiary 2. Implement a rating system to ensure consistent quality among performance of subcontractor’s performance 3. Establish a Board of Director (BOD) succession plan to ensure consistency in operations

By implementing the new strategic direction and the recommendations outlined in this report for the company’s operational issues, CHC will have an unobstructed road to business growth and garner positive returns for the shareholders of the company.

Table of Contents

Introduction 5

Owner’s Preference 6

CHC’s Implied Mission Statement 6

Situational Analysis 7

Internal 7

External 7

Financial 8

Strategic Alternatives 10

Alternative 1: Entering Renovation market – Inspiration Renovations 11

Alternative 2: Divest Martimes Division 12

Alternative 3: Enter the Prefabricated homes market: 13

Alternative 4: Joint Venture in the U.S. with Gand Holdings Inc. 15

Alternative 5: Develop Welly Acres in to Rental Townhome in Mississauga 17

Strategic Recommendations 19

Implementation Plan - Strategic 20

Restated Mission Statement 20

Prefabricated Homes 20

Renovation strategy 21

Divesting of Maritimes Division 21

Implementation Plan - Operational Issues 21

European Subsidiary 21

Marketing Plan 22

Quality 22

Employee Communication 23

Human Resources 23

Staff Turnover 23

Succession Planning 23

Lawsuits 23

Toxic Soil Remediation 24

Accounting 24

Conclusion 25

Appendix A - Strengths Weaknesses Opportunities Threats 26

Appendix B – Analysis of Renovation alternative 30

Appendix C – Analysis of Divesting Maritimes Division 30

Appendix D – Population and Migration Data in the Maritime region 30

Appendix E - Profitability of Entering Prefabricated Homes Market 31

Appendix F - Joint Venture with GH 32

Appendix G - Vacancy Rate and Immigration Trends in Rental Industry 33

Appendix H - Profitability of Financing Townhome Project at 7% (Option A) and 8% (Option B) 35

Appendix I: Manufactured vs. Modular 36

Appendix J: Revenue Projections - New Strategy 37

Appendix K: Implementation Plan 38

Appendix L – Subcontractor Performance Rating 39

Bibliography 40

Introduction

Canada Homes Corporation (CHC) has been a success story, providing multi-unit developments across Canada. Founded by Leonard Farbloom in 1978, the company has grown from a home-based business to a $100 Million plus company.

With the changing landscape of the real estate market, specifically diminishing land resources, high cost of labour and material and an ever dynamic customer-base, CHC is faced with numerous challenges. This is evidenced in the financial losses incurred in last few years by the company.

This report will analyze CHC's current situation and strategic alternatives. At the conclusion will be a recommendation for change, both at the strategic level and also at the operational level. Coupled with the recommendations will be a viable implementation plan outlining the timeframe and steps necessary to ensure long term success for CHC.

Owner’s Preference

The owners want CHC to stabilize and improve its operating results and return to a regular dividend payout. The Farblooms believe money has been wasted recently but are unsure of the direction the company should take. With the changes in the construction industry, they desire a new and profitable strategic direction and recommendations for any operational issues facing CHC.

CHC’s Implied Mission Statement

Canada Homes Corporation provides innovative, moderately priced, high quality homes to Canadians from coast to coast.

Situational Analysis

The situational analysis identifies the main strengths and issues concerning CHC. For a detailed analysis of CHC’s strengths, weaknesses, opportunities, and threats (SWOT Analysis), please refer to Appendix A.

Internal

CHC is well-recognized for its designs and quality of multi-unit homes across Canada. This strength stems from their award winning designs, prepared internally by a talented architect. This good name is branded under "Inspiration Homes".

The company operates with an excellent understanding of the market through a diligent process of market research and prospecting. From land acquisition to development to home décor, CHC maintains a proactive position to keep abreast the latest market trends and costs. This is maintained by a team of trained staff and an IT system, Kanstruction purchasing system.

The primary focus has been on building low to moderate priced homes in and around large population centers in Alberta, Manitoba, Ontario, Quebec, Nova Scotia and New Brunswick. The company has met this objective thus far, although with some drawbacks. The Maritime Provinces have experienced losses due to general stagnant economic conditions in that region. CHC has also attempted an unsuccessful project in Europe which has led to further losses.
Most of CHC's employees are contract-based due to the nature of the construction industry. The challenge with a workforce of this type is CHC's ability to maintain a consistent level of quality and expertise. With a diverse and experienced management team combine a good process for quality control to meet building codes, CHC manages to keep this weakness at bay. Recently, CHC has been experiencing higher turnover on their sales staff due to a combination of inadequate compensation structure and proper motivation. This has resulted in increased hiring and training costs.

There have been customer complaints for poor quality which have created some negative publicity for CHC. This situation along with two lawsuits has created some concerns with regards to CHC's quality and reputation.

CHC is also entirely dependent on one source for financing. With growing demand for capital as CHC searches for further revenue growth, this inflexibility may hinder CHC's ability to grow.

External

Canada Homes Corporation is in an industry that is driven by local, national and worldwide economic conditions. The residential construction market is cyclical in nature and is impacted by demand, commodity prices and overall selling prices. The nature of the industry can also impact profit potential on each project and limits the availability of skilled contractors. ‘In the long term, attracting new workers into the construction trades is essential; the source population for new entrants is small and will increase only moderately in the future.’[1]

Location is a very important factor for home buyers’ decisions. In Ontario and across Canada available land is becoming a scarce commodity. ‘Residential housing construction will continue to slow down and Ontario home starts will remain above historical averages but will edge lower over the next couple of years as…and land constraints will moderate new home construction.’[2] In the communities in which CHC operates there has been increased competition with other land users and builders for the remaining available land to meet the housing demand.

The construction industry is also one of the highest regulated industries in Canada; municipally, provincially and federally. ‘The housing industry recognizes the legitimate role of regulations to protect public health and safety but it is also aware of the significant deterrent that onerous and/or unnecessary regulations can pose to innovation.’[3]

There are many different commodities used in the construction industry. The largest commodity; wood and wood products, has prices which fluctuate significantly due to demand and supply and which impact the potential profits in the construction industry.

CHC has many opportunities available. The renovation and pre-fabricated home markets are growing industries in Canada and will help to diversify its services and maintain its competitive advantage within the marketplace.

Economic conditions, employment rates and demographic shifts of population affect the affordability for home buyers nationwide. Research shows that average real incomes have been increasing in Ontario for both tenants and owners and that the Canadian government has amended federal legislation to leverage and facilitate home ownership.

Furthermore, the aging baby-boomer population is increasing the demand for renovations of existing homes to address the accessibility requirements (e.g., wheelchair access and modification of bathrooms). Migration destinations have been and for the foreseeable future are likely to continue to be, to the major metropolitan centers, particularly in Alberta, British Columbia and Ontario.[4]

Financial

As most of the companies in this industry are family-owned and privately held by Canadians, the best financial comparison available is the company’s own year over year results.

The housing industry is cyclical in its operations and requires large cash outlays to acquire available land for development with wait times for the planning and marketing of the site. This causes challenges for CHC from a cash flow perspective. As indicated in Appendix A, the interest coverage ratio and the cash coverage ratio are negative for 2006 (-.9369 & -.3870, respectively). These ratios indicate whether the company is generating enough cash through its operations to repay debt as it comes due. CHC is not generating enough income to satisfy its short term & long term debt obligations. This is also a concern for their bank, Canadian Bank of Trade, as they do not want CHC to over extend itself and assume the risk on upcoming development projects.

The company has experienced a lack of consistent profitability and recent losses. This is reflective in a -.06% in operative profit margin and negative results on return on assets and return on equity (-.08% & -2.24%) respectively for 2006. Since 2005, revenues have decreased 8.9% while expenses have only decreased 5.8% contributing to the company’s declining profit. With these results, the company has not declared dividends in two years, which has caused concerns for the shareholders.

Strategic Alternatives

In light of the current situation analysis, the following strategic alternatives have been identified and analyzed:

1. Enter Renovation Market - Inspiration Renovations 2. Divest Maritimes Division 3. Enter Prefabricated Homes Market 4. Joint Venture in US with Gand Holdings Inc. (GH) 5. Develop Welly Acres into Rental Townhomes in Mississauga

Alternative 1: Entering Renovation market – Inspiration Renovations

Currently, CHC operates with only one core business. As land becomes less available, the renovation market allows CHC to diversify its services and to expand its revenues and profits.
Pros:
• CHC’s reputable name in the construction industry • Will support the diminishing supply of available land that is a threat to the home construction industry • Provides a value-added service to its existing customers • Projected revenue growth of $18 Million to $35 Million in years one to four o Profit expected to reach $2.5 Million in year four (see Appendix B) o Provides income growth • Increased need for renovations due to change in homeowner demographics • Leverages CHC’s expertise in managing subcontracts • High home equity value allows existing homeowners to mortgage their home for future renovations[5] • Shortage of prime listings in metropolitan areas alter consumer’s decision to renovate rather than purchase a new home[6] • Healthy projected renovation market ($30.1 Billion for 2006) – an accelerated increase, according to StatsCan report[7]

Cons: • Interest rates and demand pressures adding to cost of housing – land supply/cost of land also a concern[8] • Increase in cost of different commodities and components that cannot always be passed onto the customer (i.e. wood, steel, etc.) • Difficult to manage subcontractor quality • Rising interest rate, which results in increased financing cost, might deter homeowner’s decision to renovate • Shortage of skilled labor in the GTA area

Summary: It is recommended that CHC pursue the Home Renovations strategy. This strategy will allow CHC to diversify its services and mitigate the risk relating to the decrease in available land for construction. This strategic decision also meets the board’s objective in income growth. The renovation strategy will enable CHC to strengthen its reputation by providing its current customer with a value-added service.

Alternative 2: Divest Martimes Division

Both of the Maritime development projects in the Maritimes have suffered losses. With the one remaining piece of land that is available for development, CHC must decide whether to develop or divest the property.
Pros:
• Maritimes Division has suffered continuous losses • Negative population growth in the maritime region (Appendix C), o Trend of Maritimes residents moving to large metropolitan cities o Low demand for housing • Local market value declining • Sale of division will provide cash to pursue other strategies
Cons:
• Loss from divesture is expected to be $584,000 (see Appendix D)

Summary: Due to low housing demand, CHC should divest the Maritimes Division. To reduce the severance expense, the company can give incentive package that will encourage employees to move to GTA. This would also relieve the labor shortage issue.

Alternative 3: Enter the Prefabricated homes market:

Due to the increasing popularity of prefabricated homes throughout the home construction industry, the following analysis has been prepared to determine whether this market would provide a profitable strategic alternative to building homes on site.
Pros:
• Prefabricated homes are a growing market in North America since builders are always seeking ways to lower their cost structure • Canadian prefab homes are well-known for their quality, energy efficiency, and attractive designs • Annual net income of 2-3% for CHC starting from year 2, which is higher than their traditional net income of -1.3% (refer to Appendix E) • Prefabrication reduces amount of work done on site o Will help avoid building delays due to poor weather • Offers customer design flexibility and quick move in time • Many skilled subcontractors available in the mid-size city of Billville due to recent closing of heavy manufacturing plant • CHC has reputation for quality and innovative design • Homes can be built at R2000, which is the highest standard of energy efficiency • 15% of manufactured homes are constructed for the US market
Cons:
• CHC has no experience in manufacturing prefabricated homes • Proposal requires high initial investment cost of $3.3 Million • No income generated until year two • High Canadian dollar can deter potential international buyers o 18% of the total Canadian manufactured prefabricated homes are exported • Poor US dollar does not ensure higher profits when entering the US market • Banks treat financing of prefab home as personal property; therefore, buyers will incur higher financing cost
Summary: It is recommended that CHC enter the prefabricated homes market since it will provide CHC with greater operational efficiencies, large cost savings, higher quality of manufactured homes, and therefore resulting in a profitable growing business.

Alternative 4: Joint Venture in the U.S. with Gand Holdings Inc.

CHC has been presented with the opportunity to enter into a joint venture in the US with Gand Holdings Inc. (GH), a privately owned company that purchases and sells land. The following points are a list of the findings on the joint venture proposal:
Pros:
• Allows CHC to enter the US housing market • CHC has extensive experience in housing development • Building location, Buffalo, NY, is close to CHC’s Toronto office • $507,000 from management fees will be earned • 34% of shares will be owned by CHC • GH will contribute land worth an estimated US$4.83 Million as well as US$1 Million in cash – CHC to contribute US$3 Million cash
Cons:
• High risk of housing market decline o House prices in NY is 30% overvalued and has a risk rating of 506; therefore there is a 50% chance of a price drop • Will be required to repay loan once units built, even if units not sold • CHC not capable of competing with large US builders with large buying power • Joint venture will result in a net loss in operations of $-215,000 for 2 years (Refer to Appendix F) • Actual costs will be higher than budgeted due to increasing material and labor cost • CHC has no network of contacts in NY for the housing industry • Will be selling in a market CHC is unfamiliar with
Summary: As a result of our analysis, it is recommended to not enter into a joint venture agreement with GH. Due to the high initial investment cost, negative profits, and the high risk involved, this proposal would not be advantageous for CHC to pursue.

Alternative 5: Develop Welly Acres in to Rental Townhome in Mississauga

Previously, two consultants have investigated turning the company’s Welly Acres property in Mississauga, Ontario, into a townhome rental development. Although the consultants have indicated their investigations to be favorable, further analysis has been prepared.

Pros:

• Property is currently zoned for rental townhome construction and roads and sewers are already in place • CHC has experience in development of townhomes in Mississauga • ‘Inspiration Homes’ has a good reputation and is recognized in most of the company’s key markets • Multiple-unit residential construction is a major part of the housing industry o Out of 162,728 housing starts, a little over 50% were multiple housing units (row housing, apartment buildings or condominiums) • CHC’s current housing complies with all building codes • Aging baby boomers will lead to a greater demand for housing targeted to seniors, such as condo/townhouse units • According to a Globe and Mail article (March 2005), greatest increase in home buying intentions was in Ontario • Increased number of immigrants settling into the Greater Toronto Area (GTA)– 75% of immigrants choose to rent to satisfy their housing needs (Refer to Appendix G - 1) • CHC is regulated by Tarion Warranty Corporation to promote high standards of construction among the builders of new homes in Ontario • CHC is a member in good standing of the home builder associations

Cons:

• Residential construction industry is cyclically driven by local, national & worldwide economic conditions – population growth, employment levels, interest rates, inflation • High competition in the GTA o Increasing vacancy rates expected for 2006 & 2007 (refer to Appendix G -2) • CHC’s budgeted rate of $1,300 is much higher than the average two bedroom townhome rent of $1.052 in the GTA. • Industry is highly regulated and project must be approved by City of Mississauga; this process can be costly and time consuming • Employment in the housing industry is unstable in relation to retaining a skilled labour force • Shortage of construction workers in the GTA • High cash investment required • Increases in development fees can reduce the housing demand by increasing builder’s costs and therefore house prices • Rising prices of rising key raw materials o Cannot always be passed on to the consumer reducing the potential profit of the project • No economic return until 2010 (Refer to Appendix H)

Summary: Due to the high initial cash investment, increased competition due to increased vacancy rates, no profits are received until 4 years from now (2010), and the high risks involved in terms of fluctuating material costs, employment, and future increases in vacancy rates, it is recommended that CHC decline the rental project.

Strategic Recommendations

It is recommended that CHC pursue the Home Renovations strategy due to the large steady growth in the home renovations industry and to meet the board’s objective of income growth. The strategy will allow CHC to diversify its risk from any potential decline in real estate value. Moreover, the renovation strategy will enable CHC to strengthen its reputation by providing its current customers with a value-added service.

Due to low housing demand and decreasing market value in the Maritimes provinces, CHC should divest the Maritimes Division.

It is recommended that CHC enter the prefabricated homes market since it will provide CHC with greater operational efficiencies, large cost savings, higher quality of manufactured homes, and therefore resulting in a profitable growing business.

As a result of our analysis, it is recommended that CHC do not enter into a joint venture agreement with GH. The high initial investment cost, negative profits, and the general risk involved, particularly the 50% potential decline in the New York housing market, this proposal would not be advantageous for CHC to pursue.

It is recommended that CHC not develop Welly Acres in Mississauga, Ontario into a rental townhome. Due to the high initial cash investment and the lack of profits till 2010, this is not a viable strategic option for CHC to pursue.
Appendix J details our recommendations revenue projections under these recommendations.

Implementation Plan - Strategic

Please refer to Appendix K for an overall view of the implementation plan outlining individuals responsible and timeframe for action.

Restated Mission Statement

Canada Homes Corporation provides top quality and innovative designs of affordable prefabricated and multi-family unit homes and provides renovation services to Canadians while maintaining flexibility of design.

Prefabricated Homes

This initiative will take advantage of CHC's strengths in both its designing prowess and its expertise in selling to the low to moderate housing market. Initially, CHC will concentrate solely on manufactured homes; Appendix I outlines the price points of manufactured homes versus modular homes.

An executive team consisting of Mr. Jarky, Mr. Fam, and Mr. Livod will steer and manage the implementation of this strategy. It is estimated that it will take eight months for the company’s due diligence to begin manufacturing prefabricated homes. To begin production, the team must immediately: • Hire additional staff • Establish firm distribution channels • Purchase production facility in Billville • Purchase equipment

To leverage off their recognized brand name of Inspiration Homes, CHC will be able to penetrate this market with a competitive edge. To ensure that this strategy is successful, CHC must also establish strong relationships with the independent distribution dealers through constant communication, regular reviews and incentive programs. CHC will use employees to do most of the work as it leverage the surplus manufacturing labor in the local market.

CHC will also have the ability to utilize this new facility to prefabricate components for their multi-unit homes development. This synergy could provide CHC with the competitive edge in terms of cost savings would put them in the forefront of the construction industry.

Lastly, the theme of quality, superior design and cost effectiveness must be echoed through the advertising when promoting this new line of product for CHC.

Renovation strategy

In the next three months, CHC will need to hire four project managers. The project managers will be chosen on the basis of their ability to communicate as well as their experience in the housing construction industry. Project managers will need to work closely with customers and subcontractors, with a focus on meeting the client’s objective, such as energy saving or increased accessibility. They should meet regularly with the purchasing department aiming to be kept up to date on trend and cost of different materials.

To improve profitability, CHC must negotiate agreements with major suppliers to buy material at low cost.
The company should hire a lawyer to draft a standardized contract form. This form should include specific details on what is to be expected from the renovation project.
To monitor the operational performance of the renovation strategy, a new profit centre should be created. This profit centre will be part of the construction department. Initially, a warranty expense accrual will be setup based on a reasonable estimate established Mr. Kellar, Mr. Fam and by legal counsel. This accrual percentage will be adjusted annually based on the prior year’s claim rate.

Divesting of Maritimes Division

The company should move immediately to sell off the assets of the Maritimes Division and to transition the sales and project management staff to new assignments in CHC or lay them off. This change should be sponsored by Mr. Kellar. The change agents will be Mr. Fam, who will immediately communicate to the staff the opportunities open to them by staying with CHC or offer them layoffs. Ms. Sandaming will immediately list the assets of the division. It is estimated that they will take three months to liquidate, netting $1.26 million in cash and incurring $585,000 in losses to bring the losses to date for the Maritimes Division to $1.38 million, see Appendix K.

Implementation Plan - Operational Issues

European Subsidiary

The incorporation of the European subsidiary has not been as successful as expected. In order for CHC to retain its current professionalism and its integrity Mr. Jarky and Mr. Kellar must immediately declare bankruptcy on this subsidiary, liquidate all remaining assets and pay the outstanding creditors as much as possible. This decision will help management focus on its current operations in its local market.

Financing
Due to CHC’s strong relationship with their bank, CBT, it is encouraged to renegotiate CHC’s relationship to remain a long-standing customer with CBT. The renegotiation will begin with a proposal prepared by CHC proving to CBT that providing low interest financing to customers of the prefabricated homes will result in increased business for the bank while providing the customers with convenient competitive prices.

However, if CBT is not in favor of the proposal, CHC should explore other options for a banking partner that is willing to support their business ventures.

The strategic alternatives recommended will require an additional $1.5 million[9] in new debt which, under CBT's current debt requirement, CHC is still qualified for.

Marketing Plan

To publicize its offering of prefabricated homes, it should update its website to include the six prefabricated home designs in its product offering list. Moreover, it should continue to participate in local homeshows to increase public exposures to prefabricated homes and the offering of the new renovation services.

Although CHC has a general knowledge of demographic of its buyers, its marketing effort is not directed to any age groups. Its advertisement of lowest priced model is misleading since the decision to purchase a home involves other factors. Over the next three months, Mr. Livod must implement a marketing plan catering to its target market. For a downtown location targeting middle-income couples, it should emphasize the on the lifestyle, gym facilities, and convenient location. This targeted marketing effort would enable the company to enjoy increased profitability.

In addition, CHC can partner with furniture outlet stores to provide its customers with an option to buy furniture at low cost. This option will enhance customer satisfaction since it offers price-sensitive customers an affordability alternative to furnish their new home.

Quality

Due to the inconsistent methods of selecting quality Subtrades, a 100% performance rating must be implemented immediately to guide the Project Managers (PM) and Estimators in selecting quality Subtrades (Refer to Appendix L for example of form). The 100% performance ratings will be based on their prior performance on projects with CHC with ratings from one to five, where one is excellent and a score of five is unsatisfactory. The ratings will be based on a number of factors such as on-site and office performance, planning and scheduling, manpower, and safety.

The process begins when a project is 100% complete. The accountant will then prepare a list of Subtrades for the PM that requires 100% performance ratings. Once the forms are completed, the accountant will input the ratings into a database which can be used for future reference to determine the quality of a Subtrade’s work.

Consequently, the quality of CHC’s Subtrades increases thus enhancing the quality of the project as a whole.

Employee Communication

CHC should enhance their communication lines in the sales and construction department immediately due to the miscommunication of project completion dates. The issue can be resolved by implementing an approval route process where both Mr. Fam and Mr. Wang must agree on the completion dates and the specifications of each project before the customer is informed of the details. By signing off to the terms of the project, both Mr. Fam and Mr. Wang agree that the details are desirable for both to manage. As a result, disputes about the sales department setting too optimal completion dates will be eliminated.

Human Resources

Staff Turnover

Mr. Jarky, Mr. Wang and Mr. Livod should agree on a consistent hiring policy. A consultant can be hired at an estimated cost of $4,000[10] to facilitate the development of the hiring policy or it can be done in house by an established committee. Bonus Structure

To promote a motivating team environment, the revised bonus structure, devised by the current HR manager within three months, will help to encourage teams to do well collectively. The bonus structure will be based on the projected profit, to be prepared by the estimators, and any profit earned above the projected profit will be distributed evenly to all team members to promote fairness and a team support system. In addition, the fairly distributed bonus structure will eliminate any hostility between employees about unfair bonus distribution.

Succession Planning

It is recommended that CHC develop a succession plan, within six months, that will mitigate any unplanned changes in the make up of the Board of Directors (BOD) as well as senior management, including key individuals such as Paul Stencil (architect).

In order for the new strategic direction to be successful, a continuous vision must be carried forward by the management team, in spite of any unplanned changes within CHC. This will allow for the strategy to be fully implemented so that CHC can reap the rewards downstream.

The components of this plan would include identifying career paths for senior management, potential changes in the BOD, a timeline for action should changes occur, and contingency scenarios to fill gaps on an interim basis.

Lawsuits

The possibility of mould in CHC’s houses built since 1996 poses a significant liability risk for CHC. Fortunately in Canada only 50 cases have gone to court[11] vs. thousands in the U.S. in the same period for multi-million dollar settlements. Mr. Fam will immediately begin to implement policy changes to CHC’s building practices to ensure that the company is in compliance with CCA best practices regarding mould and implement CCA standard contract forms delineating the rights and responsibilities of all parties. The Board of Directors need to establish a self-insurance fund to be built up over time to help to mitigate any future lawsuits pertaining to mould found in houses built after 1996.

Toxic Soil Remediation

The Ash Forest property is currently vacant and has traces of toxic chemicals at 168 parts per million. The provincial legislation allows for anything under 200 parts per million but there is a risk that as this land remains vacant that the levels of toxic chemicals could rise to meet or exceed the provincial legislation. Therefore, it is recommended that Mr. Fam and Ms. Sandaming remediate the top ½ meter of soil in the next year at a cost of $75 - $100/ton and replace with healthy soil. Total cost is expected to be approximately $800K. A risk assessment should also be exercised to: 1. Determine the generalized land use 2. Assess the ground water flow 3. The impacts of human and non-human exposure to the contaminated site and 4. The potential exposure during construction.[12]
The risk assessment will help to mitigate any potential health risks in the future and to assist in meeting the regulatory requirements in two to five years.

Accounting

Currently, CHC uses a historical based budgeting method. Since this method ignores the effect of widely fluctuated material and labor costs, it does not provide an accurate presentation of CHC’s financial performance. Mr. Kellar should implement a budgeting method which takes into account of external information such as housing market demand and material cost. Variance analysis of revenue and cost analysis should also be performed on a quarterly basis.

Conclusion

As analyzed throughout this report, CHC is well-positioned to be a continued success. While we recognize CHC's strengths and opportunities, we must proactively address its weaknesses and threats.

Our recommendations are practical and can be systematically implemented to translate into success for CHC for years to come. By implementing our strategic recommendations, CHC will also pave an unobstructed road to business growth and garner positive returns for the shareholders of the company.

Appendix A - Strengths Weaknesses Opportunities Threats

Strengths: - Well established reputation in residential construction with 28 yrs experience o design handled by in-house architect o CHC is member of home builder associations o Highly qualified management team o Paul Stencil create award winning designs Suffolk Special (which accounts for 40% of sales) - Dedicated marketing team researches market trends with respect to various aspects of house design, color and appliance types - Good long term relationship with CBT bank - Offer customers the option of modifiable housing and interior customization (i.e. flooring, cabinetry, finishes, etc.) - Large selection of flooring, cabinetry, finishes allows customers to create a unique place
Weakness
- Unsuccessful development in European subsidiary - Miscommunication between Fam and Wang in regards to project completion dates - Net loss position in the Maritimes development - Disagreement between BOD and mgmt in growth objective - Higher travel cost since the projects are distributed across the country - Incident of poor quality which created negative publicity - Report a profit in only 9 of the 15 years ended Feb03, citing low sales and high financing costs. - No VP of HR - No uniform HR hiring policy causing conflict between 2 VP - High staff turnover causing high training cost - marketing - Website maintained by marketing employees ( lack of expertise to add new features - Marketing expense not allocated to projects - Confusing advertisement quoting cheapest model, could cater marketing effort toward their target customer – middle age married couple - Cost of sales is allocated to unit based of fair value, not actual cost - Historical based forecasting method - Classification of property loan as LT liability, while WIP is current inventory. (overstate Current ratio)
Opportunities
- Renovation market is growing; the market currently makes up 50% of the homebuilding, buying and renovating market ($61B) and CHC could diversify its services - Pre-fabricated home market is a growing industry in Canada and overseas (Sweden) - Pre-fabricated homes can be built to R-2000 – the highest standard of energy efficiency in Canada - Enter into a joint venture with US company GH to build residential projects - Develop Well Acres, near Mississauga into a leasehold town home development to stabilize annual income - Competition is fragmented as there are no large, nation-wide competitors - CHC does not compete with builders of high-end homes - 90-95% of firms have fewer than 20 employees – mostly contractors which reduces costs - Implementation of the provincial warranty program ensures quality of workmanship on construction projects - Economic condition, employment rate, and demographic shifts of population affect buyers’ intention of purchase of new homes nationwide - Demographic shifts increase purchasing power of younger generations - Patent the idea and technology of the aluminum connectors to reduce the amount of wood used in framing to ensure recognition of product development - Canadian government amended federal legislation to facilitate home ownership - Aging baby boom generation will lead to greater demand for housing targeted to this aging market such as condo/townhouse and apartment units
Threats:
- Residential construction is driven by local, national, worldwide economic conditions; therefore, this industry is cyclical in nature impacting cash flow and company morale with layoffs - In Europe, legal liability and warranty issues impact sales – company is unable to sell a partially completed housing project so potential purchasers use these issues and market perceptions to drive very low prices - Economic recessions cause low sales and high financing costs - High competition for available land with other builders and land users - Prices of wood and wood products can fluctuate and cannot always be passed on to the buyer; therefore, impacting profit potential - Shortage of land available for developments – premiums are placed on making the most of the particular lot of land - Municipalities charge develop costs – when these costs are high it can reduce housing demand by increasing builders’ costs and house prices - To attract and retain workers, higher wages are offered which impact cash flows and profit potential per project - Potential lawsuit rising regarding mould contamination which could damage reputation - Competitor copying CHC house design which increases direct competition - Highly regulated industry which increases development costs - Possible damage to reputation regarding issues of quality from customers - Provincial warranty program protects the right of the home owners - Environmental assessment of land must be done before purchase which is costly and can be time consuming - 90-95% of firms employ fewer than 20 employees – mostly contractors which limits the available skilled workers