Support For Construction Businesses In Financial Stress

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2020 was a year unlike any other for the Australian construction industry. While the sector was able to continue to operate, the Federal Government launched the HomeBuilder program to protect jobs and help fill the gap in construction activity was expected in the second half of 2020.

According to the Australian Bureau of Statistics (ABS), the number of dwellings approved rose by 12 per cent in July 2020. This was driven by private sector dwellings excluding houses, which increased by 22.7 per cent in July. Meanwhile, private sector houses rose by 8.5 per cent, which was the strongest monthly increase since January 2014.

As a result of the demand surge created by the HomeBuilder grant, delays caused by COVID-19 on imports, shipping delays de to the Suez Canal blockage and weather events such as the 2018-2019 bushfires, in recent months many builders, tradespersons and suppliers have reported significant supply issues with certain materials and goods. Timber and steel are two building materials that have been particularly affected.

Association of Professional Builders (APB) co-founder Russ Stephens, said the situation has been a cause for anxiety for some builders and have place many under enormous amounts of financial stress.

“Even before the introduction of government stimulus as result of COVID-19, building designers, architects and design and build companies were dealing with a surge in demand for their services. The HomeBuilder program just added fuel to the fire.” – Russ

“Now, many builders are finding themselves in severe financial stress and are struggling to gain relief”

According to a survey by the Master Builders Association of NSW, the proportion of businesses experiencing building product supply issues ranges from 70 to 95 per cent. Master Builders notes Government stimulus has also caused a big uptick in civil construction with projects in that sector competing for product with the residential sector.

In some cases, these supply issues have impacted the progress of building works and led to an increase in the costs of materials and trades. Approximately 71 per cent of businesses across Australia are experiencing cost increases of around 10 per cent due to material supply issues, but also as a result of the shortage of trades.

The trades that are most impacted include carpenters, bricklayers, roof installers, concreters, labourers and joiners. 81.9 per cent of businesses are experiencing delays in these trades, but in some states, it is as high as 94 per cent. Since the demand is consistent across the country, tradespeople and products cant be sourced from other domestic jurisdictions.

How can builders better protect themselves?

Mr Stephens has several recommendations on how builders can protect their margins when prices are on the rise. The first is to have a cost escalation clause.

A cost escalation clause is a provision in a contract under which the contract price may be increase to reflect increase costs of labour or materials or increased costs caused by delays in carrying out the work to be performed under the contract.

Another suggestion is to use the pricing for profit formula rather than the traditional method of marking up the cost of sales.

“The traditional method is simply a ‘guess’ at covering fixed expense, whilst the pricing for profit method is a firm calculation of fixed expenses meaning the builder is effectively adding a net profit rather than a gross profit.” Mr Stephens said.

He explained that when building companies price their jobs using a net margin instead of a gross margin, they are guaranteed to make a profit. But when builders apply a gross margin to a project, they are simply hoping to make a profit.
“without retained net profit, you are effectively building a house of cards that will fall over in the next market downturn.”

Mr Stephens also recommends builders utilise a construction slot planner, which enables project start dates to be staggered, allowing the ebbs and flows of the workflow to be spread out throughout the year.”

After measuring its member data throughout 2018, the APB concluded that residential building companies that use construction slot planners have a greater output with fewer resources. This makes them up to 33 per cent more efficient than builders who don’t’ use them.

Finally, Mr Stephens recommends builders have allowances for timber steel, avid relying on one contractor and ensure contracts are carefully reviewed by professional lawyers.

“The more builders do to safeguard their business, the more they will protect themselves during unexpected events.”

APB has the tools builders need to master construction financials

To ensure builders can continue to operate successfully in challenging markets, APB’s courses can assist building companies by creating structured, organised and systemised businesses using the pricing for profit formula, setting up construction slots and calculating work in progress accounting adjustment (WIPAA).
“These courses teach builders how to manage their business and stay in business. For example, calculating the work in progress accounting adjustment is the one tool every successful builder uses as it allows them to accurately produce profit and loss and balance sheet reports for their building companies.”

Mr Stephens said most building companies are in the same position right now and individual businesses should not feel like they are failing.
“While people outside of the industry consider this a boom time for builders, we know the challenges individual builders are facing. We are here to assist builders in need and ensure they can operate successfully for many years to come.”

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