So the pundits are spruiking that the construction industry in Australia is in the midst of a profitless boom which puts it in a pretty perilous pickle. Current estimates are that around 50% (yes a whopping 50%) that’s half of Australia's construction companies are trading insolvent (this means a company is unable to pay its debts as and when they fall due and continues to incur further debt, a bit of robbing Peter to pay Paul you might say!)
There has been a perfect storm of issues to reach these dizzying heights but we can tell you a lack of demand is not one of them. There are currently approximately 75% more houses being constructed than there was pre covid, with this mostly due to the $25,000 Homebuilders Grant that the government offered during the covid period (thanks ScoMo). This demand coupled with Covid has led to many a shortage of labour and supplies in the industry, which are pretty central to the core of a construction business, blowing out the average time to build a house by approximately 5 weeks per house. Dumbing this one down, the longer a house takes to build the loss profit there is on it. Ouch!
Now the pain doesn’t stop there, we now need to add ridiculously high inflation to the cost of supplies and voila the perfect storm (but not one you want to be in). Steel prices are up 40% from last year, timber 20% and electrical and bathroom supplies almost 15%. Like seriously if you are a builder who works on fixed price contracts and had contracts already signed, it is you who has had to absorb these price increases (bloody unfair we say), meaning your profits have not only been gobbled up but to finish the build you may even be making a loss! (now that sucks!)
You may be thinking well this is all doom and gloom isn’t it, or tell me something I don’t already know … so OK we will. We can help you run a profitable construction business and turn things around and it’s all got to do with operating smarter and taking control of your business. Tell us more we hear you say? Well of course, we thought you would never ask ...
Should you be fixed on fixed price?
With the issues that fixed price contracts are now causing, it begs the question, is this the right approach for the building industry going forward? It’s not fair for businesses to solely wear the price increases and the cost of delays, but it is very difficult to go back to clients to increase pricing if they are relying on bank funding and have maxed out their capacity to pay. So what are the alternatives?
Why not consider entering contracts as cost plus (and yes this is becoming more common and yes we work with builders who do this and they are growing profitability during this time). This means that they track the costs of the build and then add a fixed margin to the cost to ensure that they make profit on their projects. This method will allow you to pass on all price increases and ensure that it is not you that loses out. In fact, as the prices rise, they are making more revenue as their margin commensurately increases. Now this method isn’t all sunshine and rainbows and here’s why … it requires a lot more administration to track all the costs and complete the invoicing. If you do not have the correct internal systems in place (wink wink nudge nudge we can help with this bit), this will be difficult to administer and you may miss invoicing some of the costs which will impact your profit on the project. It also makes it harder for clients to get bank funding without a hard and fast contract price in place. Whilst they will have an estimate, there will always be scope for that to increase.
The second option would be to continue with fixed price contracts, but ensure there are clauses to allow you to increase the price if there are substantial increases in the cost of materials (if you can). Great communication is essential in negotiating price increases with clients. You need to have frequent conversations with clients updating them on the status and any potential increases that may be heading their way, as you can do a huge amount of damage to client relationships if you spring huge cost increases on clients at the end of a project. For your clients, building a house is a huge financial commitment and also an emotive time, so if you are going to pass on costs, communicating with them is key to maintaining the relationship and avoiding any possible fall out.
It’s all about who you know
We are all busy people and we fall into the habit of doing the same thing over and over, because it’s easier, not because it is what is best for us. With the changing state of the industry, its more important than ever to ensure you are reviewing all of your contracts, subcontractors and suppliers to ensure they are still the best fit for you. Could you be negotiating better prices with other suppliers or subbies? Does someone else have better turn around times now?
Now don’t do the classic of slashing costs compromising your quality of work, but it is important that you are finding the best deals for your business to ensure you do not lose out on profit. Could you be buying in bulk to ensure you have supply and get a better price? If you have storage space this may be an option for you. Can you move all your business through the one supplier and increase volume to get a better deal, rather than using adhoc suppliers. These are all things that you need to spend time reviewing, and on a regular basis, to ensure you are being efficient with your spending.
Are your people right for you?
Do you have the right level staff completing the right level of work? Are your seniors doing work that an apprentice could be doing, like popping down to Bunnings 5 times a day? Are your seniors productive with their time? Are they spending too much time on administration that a lower paid administration employee could be completing, leaving them more time to perform the work they are actually qualified to do?
Reviewing your staffing structure to ensure you have the right staff levels performing the right tasks and having every one as productive and as efficient as possible is a great way to save your business money. Like with other expenses, this needs to be reviewed regularly as what was right 12 months ago may not be right for you now. The industry is changing rapidly, and your business needs to change with it.
Are you capturing all the work you do?
A huge trap with fixed price contracts is what we call in accounting, scope creep. It means you start doing jobs and tasks that you didn’t include in your initial quote. You need to be extremely careful with fixed price contracts that you account for all variations that the client requests, and this includes small ones, as small things add up quickly to be big things! If clients are asking you to add things on, you need to account for these costs and clearly communicate how much extra it will cost. And don’t forget, extra labour time is an extra cost too!
As a business owner it is important that all of your staff are aware of what is included in the fixed price as well, as they may perform work over and above what has been quoted for, and if you are not aware of it, you can not charge for it. Everyone needs to be on the same page as to what a client is paying for and how to communicate with them around variation and additional charges.
KNOW YOUR NUMBERS!!!!
Now as super dooper cool accountants (that are not nerdy at all) we can’t stress this enough, in fact we want to yell it from the tops of the buildings you have built, you need to be on top of your numbers, like really know them!!!! Do you know what your businesses fixed costs are? do you know what a project has actually cost you? do you know if it was profitable? It makes it extremely difficult to quote a job accurately if you have no idea about what your expenses are and how long a job actually takes, what labour is involved, what the cost of every material is going to be. When quoting it is easy to forget every little screw, nail, glue etc etc that goes into building a house. If you are not capturing every cost, you are losing out on profit.
The easiest way to capture these expenses and gain this insight is by using accounting software, such as Xero, and adding job costing to it. Now we are talking the online, real-time stuff. You can start with the basics of Xero Projects for a low fee and once you grow comfortable with that move onto a full job costing system such as BuildXact. With the systems in place, you can then review project reports regularly to understand if they are on budget or whether they may be going over budget. Knowing this information whilst the project is still going allows you to make decisions in real time around potentially saving costs or negotiating with clients around increasing the fees.
Now this is the bit where we step in as we have set this up for many a builder client, you could say we are experts, but hey just don’t take our word for it, check out Craig Linke from Craig Linke Bespoke Building to let you know how we have helped him. https://www.allinadvisory.com.au/testimonials
Knowledge is power right? and the more you know about the performance of your business, the more decisions you can make to help your business boom, so get ready to build em up buttercup! If you want to know more then click on the link and book a time to meet with us https://www.allinadvisory.com.au/book-an-appointment. Well that's as good as it nets, calc-u-later!
Disclaimer: This blog is for general informational purposes only. For advice on your specific situation, please contact a tax professional, ie us 😊