Cost increases hit builders’ margins

DESPITE a heated construction market, cost increases in labour and materials are eroding profits for some builders, particularly in the residential sector.

A joint Master Builders Association (MBA) and Bentleys MRI survey of business conditions in Western Australia has found while overall profitability was satisfactory, rapid unbudgeted increases in building costs were affecting the bottom line.

The survey warned that cost pressures, labour and material shortages could lead to an erosion of actual margins on jobs currently in progress.

MBA director of economics and housing Gavan Forster said there was concern about the capacity of the industry to meet underlying demand in the residential sector.

“The current level of underlying demand is around 19,000 dwellings per annum, but the current maximum annual production level is only 18,000 dwellings,” he said.

“Under these circumstances it is not surprising that construction times have blown out.

“Expectations are in excess of 20,000 dwelling starts in 2004-05.

“Recent increases in steel prices and roof tiling costs are likely to adversely affect future profit levels.”

One quarter of residential builders said their profits had declined compared with the same quarter last year, while two thirds of residential builders said their profits had remained steady.

In the commercial sector, profit margins were more positive, with one quarter of respondents reporting an increase in profits, and 60 per cent reporting unchanged profit levels on the same period last year.

Mr Forster said the building and construction labour market remained overheated.

“Job advertisements and calls for sub-contractors have remained virtually unchanged over the last three months – 55 per cent higher than for the same period in 2003,” he said. “Demand for bricklayers appears to have eased slig-htly, albeit remaining at extremely high levels, but ceiling fixers and ceramic tilers are in extraordinary demand.”