Booked Out For 18 Months?
Cash Flow Looking Good?
You might be thinking, in all your years in business, things have never looked better than they appear right now. You’ve never been busier. However, below the surface there could be a disease growing inside your building company. And with every week that passes, it could get bigger, feeding off the constant price increases and the delays which are destroying the net profit on your projects and eating away at the equity you have built up over the years in your building company.
You may be too busy to notice what’s going on because you’re spending all your time chasing deliveries, rescheduling subcontractors and dealing with clients demanding to know when their home will be finished, or even started. On the surface everything looks rosy because you have excess cash in the bank. But without retained net profit, every job becomes a liability.
According to a study by the Association of Professional Builders, between 40 to 60% of residential home builders are not making a net profit on their projects due to rising costs and delays. And while material prices may have peaked, the worst is still yet to come as the inevitable interest rate rises come into play, driving up the cost of labor as employees and subcontractors struggle to pay their mortgages as well as cover the cost of the weekly shopping bill.
So, what can you do about it? After all, macroeconomic events are out of anyone’s control so all people can really do is carry on, keep their heads down and wait until what will be, will be—right? Our prediction is that those builders who do nothing, like the vast majority of residential home builders have been doing since April 2021, will find themselves in hole that is too deep to climb out of when the dust settles.
COVID-19 presented the owners of residential building companies with a golden opportunity to take a giant step forward. Demand has far outpaced supply placing building companies in a position of strength never experienced before. However, rather than using that opportunity to increase their margins and put on more resources to streamline their operations through systemization, most builders have carried on doing the same things while expecting a different end result.
Officially, the inflation rate stands at 5.4% in the United States. However, every residential building company owner knows that the inflation rate does not correlate with what is happening in the construction industry. According to the Bureau of Labor Statistics Producer Price Index, the average price of goods used as inputs to residential construction has risen 13.2% year to date as of October.
It’s important to know what’s really going on behind closed doors of independent residential building companies, because when you know how to benchmark yourself against competitors, you can implement the systems and processes that will put your company ahead. A “work in progress” (WIP) adjustment is the only accurate way to reflect the amount of profit you’re earning and then increase the accuracy of the statement by adjusting income up or down based on whether you are ahead or behind with the billing.
When the music stops, a lot of building companies will not have the cash available to cover the hidden liability in their accounts. Builders need to take action right now before it’s too late.
Does that sound far-fetched? Surely it couldn’t happen again?
As Mark Twain said, “History may not repeat itself, but it certainly rhymes.”
And the quote from George Santayana reminds us, “Those who do not learn from history are doomed to repeat it.”
ABP’s annual State of Residential Construction Industry survey provides high-level information and data for the residential construction industry across five countries including the United States and Canada, from industry insights and benchmarks to forecasts for 2022. When you take part in the comprehensive survey, a PDF copy of the finalized report will be delivered straight to your email as soon as it’s published.
USE THIS LINK TO TAKE PART IN THE APB STATE OF RESIDENTIAL CONSTRUCTION INDUSTRY SURVEY
This article is supplied, courtesy of the Association of Professional Builders (APB), a business coaching service for custom home builders in the United States, Australia, New Zealand, and Canada. APB provides tested and proven systems for builders to scale and succeed, based on data, experience, and results. Building Savvy’s new series of articles and education seminars will glean from APB’s vast library of coaching curriculum, and the expertise and experience of the APB team. Topics will range from construction business coaching to sales training, marketing insights and financials coaching. The goal is to share ideas on how to create a systemized residential building company to generate more leads, earn more money for your services and deliver a better client experience.
