How to choose a builder that will still be around to finish your home
Right now, the construction industry is under more pressure than at any time in living memory.
Building company collapses are dominating the news, with many major players having already collapsed or clinging on by their fingertips.
So how do you choose a building company that won’t leave you with a half-finished home that sits around for months while the insurance claim is processed?
The key, of course, is to identify the companies that are financially stable and have large cash reserves, which is where things get a little tricky…
Traditional thinking was that large building companies were like big banks and less likely to fail.
However, since the start of 2021 barely a week has gone by without another large player in the industry going under owing millions of dollars to suppliers, subcontractors and of course, clients.
So why are the big building companies that were once considered ‘financially sound’ failing while the smaller building companies continue to thrive?
The answer lies in their sales teams.
Too many sales, not enough houses
The bigger the company, the larger the sales team. And when the COVID Boom hit the construction industry in late 2020 early 2021, those sales people driven by large commission incentives went to work signing record numbers of building contracts.
The problem is, a building company that signs three, four or even five times the number of contracts they would normally build, cannot increase their output by the same amount due to constraints on labour and materials.
Therefore, those projects were queued sequentially which led to long delays before they were even started.
However, the real issue was that those contracts were all fixed-price contracts which meant that once the cost of construction went up by 10%, these companies were all losing money.
Trouble is, the cost of construction did not go up by just 10%, it actually increased by 20% in 2021 and then another 20% in 2022 locking in huge losses for any building company that signed contracts during the COVID boom.
The losses didn't just affect the large building companies, virtually every building company in Australia lost money on at least one project during 2021.
However because they did not overextend themselves during the COVID boom, they were quickly back in profit during 2022 as the contracts they were working from reflected the latest pricing.
As a result, the smaller building companies without large sales teams were able to protect their cash reserves and remain solvent while their larger competitors were forced to use customer deposits in order to pay invoices relating to work already completed on other projects.
How to avoid unstable building companies?
So, how as a consumer can you spot a construction ponzi scheme and avoid contracting with a building company that will not last the distance and may even go under taking your entire deposit with them?
The answer is not as straightforward as it should be, largely due to the lack of financial visibility in the residential construction industry.
But I do have some advice that may help to protect you from these builders.
First of all, it’s important to understand that the old adage of ‘get three quotes and choose the builder with the lowest price’ is a recipe for disaster.
When you follow that advice you are simply attracting the builders desperate for cashflow who will tell you whatever you need to hear in order to get a contract signed, even if that means offering you a contract price below their true cost!
It’s not that these builders are crooks, it's simply that they are desperate for work and not fully aware of their dire financial situation.
The fact is, all builders have access to the same suppliers and the same pool of subcontractors, and with 75% of residential home builders operating on net margins of less than 3%, the only way to significantly undercut a competitor is by going below cost and then hoping to make up the difference on variations.
Generally, the builder with the lowest price is most likely already in a state of decline so they are best avoided even in good times.
Also, don't rely on the fact a building company is licensed.
While this should be an indication that the licensing authorities have reviewed their financial reports and deemed them credit-worthy, the reality - as we have seen numerous times in the press - is that they could still be only a few months away from collapse.
The reasons for this are controversial, and not something I want to go too deeply into in this video, however, as a consumer it's important to know that when it comes to a building company's accounts, things are not always what they seem…
So, if you can't decide on a builder by looking at the quotes and you can't rely on the fact that they are fully licensed, what can you do?
Tips for selecting a reputable building company
The most important thing is to decide on a builder BEFORE you start designing your home. This will ensure you are working with a professional Design & Construct company rather than a builder who is happy to quote numerous plans while delivering very little in the way of service.
Having a builder on your team through the design stage will not only keep your project on budget, it will potentially save you thousands of dollars in structural steel thanks to minor design changes that will not detract from the aesthetics of your new home.
However, before you even decide on a builder, do some research online. Because while you may not have access to their accounts, any reviews online from current clients that allude to delays on site could be a red flag and an indication that the building company is experiencing cash flow issues.
Obviously, in the current climate, there are still supply chain issues that are holding up deliveries, however, it may raise a question that needs to be answered.
At the end of the day, it doesn’t matter how many times you have built before…
Designing a new home can be very overwhelming and when you hear new things for the first time, it's not easy to remember everything.
What I’ve covered here is just a small sample of the information I need to share with you to ensure you are well-informed when you get started on the design process...
This is why I put together a quick guide for you to download.
It’s completely free, and it will help you to avoid any nasty surprises that can sneak up on you when building a custom home.