Have you seen the recent collapse of a lot of large building companies?
Are you like most people and left wondering… What is going on?
Or have you personally been affected by these recent closures?
With so much uncertainty right now, it can be an anxious time to be thinking about building and renovating!
The reality is that the smaller boutique builder is the safer choice right now. All the recent building company collapses have shattered the myth that the big companies are stronger, and more likely to be in a position to ride out the challenges being faced in the industry. They, in fact, have been the first to fall over and the recent failure of some of the most well known companies suggests it may continue, at least in the short term. So what went wrong?
It’s All About Risk Management
Towards the end of 2020, the government introduced stimulus packages to support the economy and this sent the number of contracts being signed through the roof! However, not all of the building companies jumped on these grants trying to sign as many contracts as they could.
While some of the larger building companies closed two, three and even four times the number of contracts they would normally sign in a 12-month period, the small building companies remained cautious and limited their additional contracts.
According to the SORCI report 2022, around 50% of smaller boutique building companies took on more work than usual during 2020/21, increasing their workload by about 20%. This is in comparison to the larger building companies that signed 100% – 300% more contracts than they normally would. These larger builders were probably thinking they had just hit the holy grail but the reality was that these additional contracts (which were all fixed price contracts), exposed them to a greater risk.
By mid 2021, it became very clear to the industry that, due to unprecedented material price increases, any contracts that had been signed more than 90 days prior, were no longer profitable for the builder. It was at this point where these building companies should have repriced any contracts that had not commenced construction in order to establish a revised contract value to suit the price increases.
But these bigger companies didn’t do that. We’re not sure why they didn’t just renegotiate with their clients and just explain the problem? We do know what they should have done though!
Communicate!
Hearing that the fixed price contract you just signed with your builder is now no longer viable is not something anyone would be happy to hear…
Directors of building companies have a legal obligation to act in the best interest of the business, so commencing construction on a loss-making contract, let alone 100s of them, is not something that should be taken lightly.
This puts all these builders in a difficult position.
On the one hand, they either have a difficult conversation with their client, and tell them that they need to increase the contract value by 15-20% or refund their deposit…
Or, do they just ignore the problem and hope that their big company will help them ride through it?
We all know that cash flow is king and commencing projects that will result in net losses will seriously strangle any size company. The symptoms of a builder in this position are lack of communication with the client, progress on site is very slow or stops altogether, and the client can’t get in contact with their builder.
As we look at how it is all unfolding, the evidence is suggesting that the larger building companies that are experiencing difficulties, chose not to communicate with their clients, and ignored the reality of the situation. It has come to light that some builders allegedly hit up their clients with additional invoices during construction, putting the client under terrible stress. These variations to the contract were not agreed upon by their clients and are not legally enforceable on a fixed price contract.
The dilemma is, should the client pay an illegitimate variation just because the builder failed to communicate the situation before the job started?
Or should they hold back the money and potentially have the builder go broke or face mediation and legal intervention?
Not a good situation for anyone involved. Which is why you’re better off building with…
The Professional Small Builder
Dealing with the inevitable price rises can sting any sized company… But a small builder will be able to mitigate these rises more efficiently. Often the smaller builder will order their materials as soon as a contract is signed. This ensures that the materials are ordered early and the price is locked in.
Smaller building companies typically have a much stronger relationship with their subcontractors, which means they enjoy far greater loyalty in terms of reliability and productivity. They communicate better, they pay quicker (sometimes even before an invoice is due) and they ensure that there is no downtime for the subcontractor by working hard to have all the materials and information the subcontractor requires prior to starting.
While the challenges affecting the industry have hit building companies of all sizes equally, all the data is telling us that it’s the smaller boutique operators that have outperformed the project builders.
You want to feel secure and confident in your decision when choosing a builder. You want to not only ‘click’ with your builder, but also feel that you’re in the safe hands of an experienced professional. We have plenty of information available that can help you find the right builder, budget for your project and ask the right questions.
But before you search for your perfect builder, download our FREE ZJ Building Design Guide and let us help set your expectations before you’ve even begun planning your dream home.
