It is often naively said that builders make a fortune in the boom times. If that’s the case, why is it that so many builders go broke when building activity is at its highest level for years, especially in the Canterbury and Auckland regions?
So be warned, because other regions are now entering this territory, with the highest consent numbers ever predicted on the horizon for the next few years.
The answer is not simple, but with hindsight it is clear and consistent. Builders find it easy to make sales in boom times. The problems come when they set about trying to complete their projects, only to find themselves fiercely competing for sub-trades and labour that are in short demand, and who will now not honour their original quotes or rates.
The builder is then faced with trying to find alternative suppliers and sub-trades — often of lesser quality — to work within their original budget.
Finding alternatives can be difficult — in fact, in Auckland’s overheated and fragmented market it is highly unlikely.
In boom times the builder becomes the much-squeezed meat in the sandwich between highly expectant home owners and an equally demanding set of sub-trades and suppliers who turn mercenary as they pick and choose who they wish to work for.
A Canterbury contact of mine recently confirmed to me that one accountancy firm they were dealing with had six of their building clients in liquidation.
It’s a very sobering and timely warning shot for the rest of the builders around the country.
What can be done to avoid a similar fate?
The following steps may help you to avoid financial ruin and enable you to maintain your original margins and a successful, sustainable business:
1 Do your homework on clients
First, do your homework on clients carefully, especially if they have built with others before or seem to be doing the rounds of the local builders.
Most clients are wonderful to work for. However, others can be a nightmare or serial confrontational junkies. Avoid them at all costs.
Remember, you are not obliged to work for anyone and are completely within your rights to decline a job. It could be the best call you make, so trust your instincts.
2 Set expectations correctly
Set your clients’ expectations correctly from the beginning. In boom times, everything takes longer and tends to be more expensive.
Having a frank discussion about the reality of the market conditions and the impact of those on the build experience could save you from having an avoidable dispute or a disgruntled client.
3 Avoid fixed price contracts
Discuss the reasons for this with your client, and they should be more understanding of the idea. Failing that, in overheated markets it is your right to refuse this condition or, at the very least, cap the amount of your risk.
4 Don’t get locked into unrealistic delivery time frames with liquidated damages clauses
Let someone else get beaten up busting a gut to meet unrealistic time frames, only to get financially penalised for falling short in market conditions that are outside your control.
5 Allow sufficient contingency
Allow a contingency over and above the normal to cover unforeseen budget overruns. Many builders are reporting extraordinary cost slippage, due to increasing costs as high as $8000 to $15,000 per standard house.
6 Deal with reputable sub-trades and have them fix their prices and contracts
Have sub-trades fix their prices and contracts prior to your commitment to the client. This is easier said than done, but your very survival may depend upon it.
7 Keep your payment terms current
Falling for the lure of extended credit or using your suppliers and sub-trades as an unofficial and unwilling overdraft facility are often fatal mistakes.
The builder who operates in this area plays a foolhardy game, as do the naive suppliers and sub-trades who allow it to happen.
Professional builders pay their accounts current so they can keep a watchful eye on actual cash flow, and deal with problems as they occur, not when it’s too late.
8 Don’t let clients take possession of unfinished projects
It’s a mistake to let clients take possession of an unfinished project or hold a retention in their own bank account, even when faced with extenuating living circumstances.
The results of this are often that the home will be difficult to finish around the clients, and any financial retention may be contested as goodwill diminishes, along with the builder’s reputation being tarnished.
9 Manage growth carefully
Many good builders have failed when expanding their business too quickly and/or spreading themselves over too wide a geographical area.
The transition from a “hands-on builder” to managing staff and multiple sites in many locations requires a totally different skill set, strong systems and large amounts of working capital.
Get good accounting advice and produce monthly management accounts that highlight the fundamentals of your business. It can be as simple as knowing your break-even monthly turnover and cash flow projections for the next three-to-six months. Timely information enables timely decisions about resources for your business.
10 Have a long memory
Any sub-trade or supplier who leaves you in the lurch cannot expect favourable treatment when things tighten up. Nothing is surer than that things will change and the tables will turn. Reward those who stick by you with the loyalty they deserve — ongoing work and prompt payment.
11 Have a dedicated maintenance team
Having a dedicated maintenance team who are efficient, reactive and who are separate from the crews who complete the homes will enable you to keep on top of your maintenance obligations.
Failure to do this will severely affect your reputation and ability to get referral business. The number one annoyance for clients is when those small things are not taken care of after the build has been completed.
12 It’s better to do less work at higher margins than lots of work at low margins
Doing less work at higher margins will mean the quality of your work increases, your income increases, your work level is more manageable, call backs diminish, stress will decrease and lifestyle and family time will increase.
Being the biggest builder in town will quite possibly make you the busiest, but not necessarily the most successful, wealthiest or happiest. Be driven by results, not your ego.
The unfortunate fact is that there have been many successful builders who have fallen for the trappings of unfettered growth, with disastrous results.
If you are operating in a market with overheated underlying conditions, you would be advised to think and plan carefully in order to avoid the builder’s graveyard that awaits the naive or over-committed and ever-optimistic builder.
The benefits of doing less work at higher margins
I often remember talking to a builder who complained of being stressed by all the issues he was facing.
His business had grown from 40 to 80 homes per year, but he was now making less money, and had reached breaking point. I asked him about his best years, and he said it had been at the 40 house level mark.
My suggestion to him was why not put your prices up 5% to10% and see what happens? Six months later I had a call to say his profitability had increased significantly, and the number of houses they were now building was closer to 50 per year.
They were turning over a similar amount of money, with fewer hassles and a better finished product.
The houses they weren’t building were for very price-conscious clients who were buying on price alone.
We all know that clients like this are better off building with the opposition and wasting their time and resources, leaving you to concentrate on producing a good product for appreciative clients at sustainable margins.
Here was a builder who solved most of his problems by putting his prices up and focusing on clients who really wanted to build with him for his reputation! It seems counter-intuitive, but the proof is in the pudding.