Builders want to get business-savvy and think more like accountants, but new research from the Association of Professional Builders (APB) reveals that custom home builders could be heading for big trouble in 2021.
The State of Residential Construction Industry (SORCI) report, a new industry report commissioned by APB with more than 1,000 builders taking part, found that 2020 was a bumper year with 46.5% of respondents signing more contracts than in 2019.
However, after signing a record number of fixed-price contracts, the report also found that many are not prepared for the ensuing squeeze on margins caused by material price increases with a staggering 50% of builders admitting to not knowing their running costs.
What 2020 taught the building industry
APB Co-founder and Business Strategy Specialist, Russ Stephens said the past year has taught the industry that its fortunes can flip in an instant.
“With restrictions on travel, entertainment and leisure, homeowners had spare cash to splash out on improvements and larger homes to generate unprecedented demand for builders.”
“However, while demand may be high now, it cannot be sustained,” Russ Stephens said.
“We’re urging professional builders to plan for the long term and avoid the temptation to over-commit themselves to fixed-price contracts that may be unprofitable in just 6 months’ time.”
The report found 49.5% of respondents admitted to never calculating their work in progress figure, creating a risk in builders growing too quickly without understanding their true financial position.
Russ Stephens said this increases the likelihood for builders who don’t know this figure to pay higher tax amounts and experience severe cash flow problems, particularly when sales reduce.
Nearly two-thirds of respondents had no formal sales process in place, and the vast majority (78.8%) had no succession plan to future-proof their business should the unthinkable happen.
With these findings in mind, it’s no surprise builders have identified systemising their business as the first priority for 2021. Currently, 39.1% said they wanted to streamline their building companies and would make systemising a top priority in 2021.
Russ Stephens said builders have been sucked into the frenzy surrounding the construction industry and have signed too many fixed-price contracts without protecting themselves against future price increases and potential supply shortages.
“Professional builders set themselves apart from the rest of the industry, by putting systems and processes in place that allow projects to be planned and scheduled efficiently, which maximises their profits.”
“Without those systems and processes, average builders operate reactively and suffer the consequences of supply chain issues,” Russ Stephens said. The SORCI report has highlighted the current state of the industry as well as taking a look towards the future.
“This really shows the current pain points in the residential construction industry and where companies need to focus their efforts to ensure they meet industry benchmarks and can compete with the best operators in our industry.”
APB’s work in the industry
APB has worked with thousands of builders, coaching residential building companies to systemise their business, including KiaDom Mini Homes, based in Queensland, Australia.
Greg Kite, MD of KiaDom Mini Homes said the best part of the program was being held accountable and taking the step back to work on the business rather than in the business.
“APB has ensured that a lot of the systems and operations that we’ve been wanting to document and put in place for so long – that we’d put aside, that we’ve been too busy to do – have all been put in place, documented, all ready to go,” Mr Kite said.
“So at any point, we can just have a look at what we’ve been doing and follow the system.”
This included hiring two A-team players, recreating their proposals, and implementing successful business systems and processes to ensure accountability and opportunities.