Building booms — a bonanza or potential graveyard for builders?

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It is often naively said that builders make a fortune in the boom times.

If that’s the case, why is it that so many builders go broke when building activity is at its highest level for years, especially as it is now in the Canterbury and Auckland regions?

The answer is not simple, but with hindsight it is clear and consistent. Builders find it easy to make sales in boom times. The problems come when they set about trying to complete their projects, only to find themselves fiercely competing for sub-trades and labour that is in short demand, and who will now not honour their original quotes or rates.

The builder is then faced with trying to find alternative suppliers and sub-trades, often of lesser quality, to work within their original budget. Finding alternatives can be difficult — in fact, in Canterbury’s overheated market it is highly unlikely.

In boom times the builder becomes the much squeezed meat in the sandwich between highly expectant home owners and an equally demanding set of sub-trades and suppliers who become mercenary as they pick and choose who they wish to work for. 

A Canterbury contact of mine recently confirmed to me that one accountancy firm they were dealing with had six of their building clients in liquidation. It’s a very sobering and timely warning shot for the rest of the builders in that market.

So what can builders do to avoid a similar fate?

The following steps may help you avoid financial ruin, and enable you to maintain your original margins — and a successful, sustainable business:

The builder who operates in this area plays a foolhardy game, as do the naive suppliers and sub-trades who allow it to happen. Professional builders pay their accounts current so they can keep a watchful eye on actual cashflow and deal with problems as they occur — not when it’s too late.

The results of this are that the home will be difficult to finish around the clients, and any financial retention may be contested as goodwill diminishes, along with the builder’s reputation being tarnished.

The transition from a “hands on” builder to managing staff and multiple sites in many locations requires a totally different skill set, strong systems and large amounts of working capital. 

The number one annoyance for clients is when those small things are not taken care of after the build has been completed.

Being the biggest builder in town will quite possibly make you the busiest, but not necessarily the most successful, wealthiest or happiest. Be driven by results, not your ego.

The unfortunate fact is that there have been many successful builders who have fallen for the trappings of unfettered growth, with disastrous results.

If you are operating in a market with overheated underlying conditions, you would be advised to think and plan carefully in order to avoid the builder’s graveyard that awaits the naive or over-committed and ever-optimistic builder.

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