The recent collapse of Meridian Homes brings to mind the importance of best business practice.
Many companies come to grief because they have not anticipated the rise and decline in the housing market and how this affects cashflow.
Deposits start to slow down (which is a risk if you use deposits to fund your working capital for the current job).
Your overheads will not change and this will start to reduce your net margin.
You need to plan to reduce your overheads. Keep working on the time to complete so you can get progress payments in earlier and build up your working capital so you can survive in downtimes.
Delays
Delays in construction of fixed price houses can see an increase of material, labour and/or subcontractors costs that cannot be recovered as no price escalation has been built in.
Often at this point the deposit money runs out and the builder gets into cashflow problems as suppliers put the squeeze on for payment.
Having the prices from your suppliers and subcontractors fixed for these contracts can help alleviate this situation.
Builders need to grow their business at a steady and sustainable rate.
Extra business
There is no point taking on extra business if you cannot deliver as this will only put your business at risk and damage your reputation.
Builders need to match their resources to the work and ensure deposits are allocated to the specific job and not as a general slush fund.
On average, 5% of construction companies go into liquidation each year, but less than 1% of those are Registered Master Builder Federation members.
The Federation’s membership criteria are based on the quality of the member’s building work and on the successful overall running of the member’s business.
Unfortunately, there will always be situations where things like this can happen.
But if you contact the RMBF or your local association they can recommend solutions or put you on to people who can help you out.
A smart business person is one who knows when to ask for help!
BUSINESS TIPS TO REMEMBER
• Avoid fixed price contracts if possible.
• Allow a contingency over and above normal to cover unforeseen budget overruns.
• Deal with reputable sub-trades and have them fix their prices and contracts prior to your commitment to the client.
• Keep your payment terms current. The lure of 90-day credit is a trap. You need to keep a watchful eye on cashflow and deal with problems as they occur, not when it is too late.
• Manage growth carefully. Don’t expand too quickly or spread over too wide an area. The transition from a “hands-on” builder to managing multiple sites in many locations requires a totally different skill set, strong systems and large amounts of working capital.
• It is better to do less work at higher margins than lots of work at low margins. The quality of your work increases, your income increases and the work level is more manageable, call backs diminish, stress reduces and lifestyle and family time increases!
• Back cost all your jobs so you know what jobs make money and what jobs don’t.
