IN THE WAKE of Fletcher Building’s profit downgrade announcement, there has been a lot of talk about the building industry’s ability to cope with the demands of the current construction peak. It can be said that some companies are over-trading and run the risk of becoming victims of their own success.
Our experience working with a Waikato leading residential home builder is that it is possible to remain on track and benefit from the booming industry. This is achieved by focusing on people, relationships and minimising downside risk wherever possible.
People at the centre
The owners of our client’s business are its key to success. They value establishing long-term relationships with suppliers, employees and customers. Their culture is inclusive and team-oriented, with the customer at the centre of everything they do.
This customer-centric model includes providing exceptional value, creating a risk-free build experience and making the process as simple as possible.
Focus on risk minimisation
There are risks of over-extending and entering into a greater number or larger scale of projects than a business can sustain. Problems can arise from misunderstanding cash flow cycles or not being able to upscale activities quickly enough because of the supply constraints in the industry. The risks are significant, whether they apply to your own business or to your customers and suppliers.
Ways to minimise risk
Key ways to address these concerns and minimise risk include:
- understanding construction contract legislation and knowing when and how to enforce your rights
- stopping work when you are not getting paid
- getting variations approved in writing
- having an independent business advisor prepare cash-flow projections
- engaging a quantity surveyor and accountant to price jobs
- obtaining retentions advice and exploring alternative options, for example, milestone payments
- taking personal guarantees from customers where possible
- registering on the Personal Property Securities Register (PPSR)
- obtaining insolvent transaction advice
- obtaining terms of trade advice
- allowing for plenty of margin when providing quotes, bearing in mind that construction inflation is currently running at 9–10%
- allowing more time to complete projects and avoiding signing up to harsh liquidated damages clauses
- walking away from accepting projects that don’t stack up in respect of both margin and time.
Our client recognises the importance of managing risk and follows these steps wherever possible. Every job goes through an estimator, terms of trade are well documented, every variation is approved in writing and every job has a budget and projected margin.
Get experts to oversee finances
Behind the scenes we, as their accountant and business advisor, work with them reviewing:
- gross revenue on a segmented basis
- contract throughput
- customer deposit traffic
- slab-down rates
- work in progress
- gross profit margin
- budget-to-actual variance analysis by project
- land acquisition and settlement cycles
- cash-flow projections and debtor cycles
- tax opportunities
- optimal business ownership structure.
We recommend all businesses in the building trade find experienced advisors who can provide a similar oversight.
What does this mean for me?
Success in the building industry isn’t guaranteed, despite the current excessive demand within the construction sector. More than ever, it requires a disciplined approach across all aspects of a business.
If you are in the building sector and experiencing the current pressures of a booming industry, ask yourself these questions:
- Am I attracting and retaining the best people?
- Does my customers’ experience make them want to refer me to others?
- Have I structured my business in a way that best mitigates downside risk?
- Are my internal controls and processes adequate, and are they constantly adapting to change?
- Can I be sure that my quotes, my costs and my billing line up?
- Do I truly understand the key drivers of profitability in my business?
- Am I performing budget-to-actual variance analysis, and do I understand the reasons for project margin variances?
- Is my business able to identify and realise growth opportunities – now or in the future?
- Do I have my finger on the pulse – am I in control of my business?
If you cannot answer yes to these questions, it may be time to take a step back, review your business and seek professional advice.
This is intended as general advice only. For specific advice, contact your advisor or local Staples Rodway office.
Articles are correct at the time of publication but may have since become outdated.