26/10/2004 - 22:00

Costs cut into builders’ margins

26/10/2004 - 22:00

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The lag time between the signing of construction contracts and the start of work is having a negative effect on many builders, who say cost increases in labour and materials over that period are cutting into their profit margins.

Costs cut into builders’ margins

The lag time between the signing of construction contracts and the start of work is having a negative effect on many builders, who say cost increases in labour and materials over that period are cutting into their profit margins.

Although the construction industry is enjoying a period of strong activity, some builders claim it is increasingly difficult to make a profit due to escalating costs.

Several builders contacted by WA Business News said the level of market activity was making things more difficult for them, despite perceptions that a busy market meant more profit for builders.

A recent Housing Industry Association trades report indicated a significant shift in the price of contractors over the past year, and industry sources say that sub-contractors are the ones benefiting most.

WA Business News reported earlier this month that developer Cedar Woods approached off-the-plans purchasers of Nautilus Apartments in Rockingham to ask for an increase in the purchase price because the project had become unviable at the original price tendered by Pindan Constructions.

Colliers International research manager David Cresp said developers would prefer not to go back to buyers, but that such a move was a last option caused by abnormal market activity in the last year.

“In the past, some projects with pre-sales have not proceeded due to a cost blow out, and it can’t be ruled out for the future, but going back to purchasers is really a last call,” Mr Cresp said.

“There will be some projects that are scheduled to go ahead that will not be feasible.

“It is important that developers keep monitoring costs.

“Historically, the thing that has driven costs back down is recession, which no-one wants.”

He said there was no sign of the market slowing down and that demand would continue.

“There is no short-term fix. Costs won’t go back to where they were a year ago,” Mr Cresp said.

“Costs have caused significant issues in the industry.”

Director of the Master Builders Association, Michael McLean, said builders were struggling to make a profit because the costs tendered narrowed the margins for profit.

“The market can move very quickly, and not all labour and supplies can be locked in,” Mr McLean said.

“Specialist contractors can get whatever price they think is the maximum.

“There is a shrinking number of builders and contractors tendering for work because they are all so busy.”

Mr McLean added that it was not the volume of work completed but the bottom line that impressed banks.

“However, the volume of work has increased, but not the bottom line,” he said. “Although the market will adjust, there won’t be a significant decrease in costs.”

Ralph Beattie Bosworth’s Bill Bosworth told WA Business News the increasing costs of the past two years were relatively predictable.

“If competent cost planning is used, developers would know the trend,” Mr Bosworth said.

“With long lead-in times to jobs, developers must be careful with cost checks on initial estimates.

“If estimators or cost planners are monitoring the market properly, increases will be factored in through contingency and escalation provisions.

“Builders could be reducing their margins to get jobs in the current market, and it is the subcontractors who are making a profit.”

Mr Bosworth said a new cost base for the construction industry had been reached.

Multiplex general manager of construction John Flecker said an upward swinging market provided difficulties across the board.

“In the last 12 months the market has shifted quickly, and it is our job to try and manage that,” he said.

“From 2003 to 2004 there has been a steep price increase in the price of labour, and materials are up after virtually no change in price between 1998 and 2002.

“I wouldn’t necessarily agree that it is harder to make a profit now; people pricing today need to evaluate the risk of projects.”

Mr Flecker said while Cedar Woods’ decision to go back to purchasers may set a precedent, it was not something Multiplex’s development division was contemplating.”

Doric property construction executive Keith Somers said project selection was a big issue for builders, and that forward planning was very important.

“Builders have to make sure they can deliver quality and not compromise,” Mr Somers said.

“Knowing the resources are there at a contractor and sub contractor level is important, as is being open and frank with clients.

“Some builders are being very aggressive in their pricing and not leaving room for price increases and are getting caught.

“There is no real room for error in margins and you have to have strong management with good control of business and costings.

“Any error can be the difference between profit and loss.

“Builders must pick projects they can build and service correctly.

“You can do a lot and do it poorly, or you can do less and do it well.”

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