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We’ve all been hearing some pretty crazy stories about the effects La Nina is having on the economy, especially flooding and the consequences of continual rain.
These consequences are severely impacting building companies with La Nina destroying their bottom line. While some situations are unavoidable, there is still a lot that can be done in order to mitigate the effects of La Nina.
The problem up to now, is that a lot of builders have not been thinking ahead of time in terms of what can be done to lessen the effects of La Nina. They hear the warnings on what is likely to happen however they are not using the time available to prepare.
This lack of planning and pivoting can have severe repercussions for not only their bottom line, but also their reputation. This is because these builders are not managing their client’s expectations effectively and realistically.
Manage Your Client's Expectations
La Nina is creating uncontrollable delays which have a direct impact on the timeline to build. So it is crucial to communicate to clients and get them to really understand the impact of what La Nina is going to mean for their build.
It is important for builders to set expectations in advance and then communicate with clients as soon as delays occur. While it is good to verbally relay this information, it must also be put in writing otherwise builders could expose themselves to liquidated damages.
Builders should be claiming every day the project is delayed as an extension of time in a contract variation; thus protecting themselves from future claims.
A lot of builders are not aware of the significant effect delays have on their profitability. Every day a project is delayed increases their fixed expense ratio which is the ratio of fixed expenses to revenue.
As a consequence net profit is reduced, typically by around $650-$750 per day. Most builders are not aware of this hidden cost because they are still using a traditional pricing model that focuses on adding a percentage, or even a dollar figure to the total cost of materials and labour.
Your Pricing Model Is Failing You In Times Like This
The problem with this pricing model is that it does not factor in the fixed expenses for a building company which means the builder is left hoping to make a profit rather than planning to make a profit.
The best way to price a residential construction project is by implementing the Pricing 4 Profit model which adds a net margin to a project rather than a gross margin.
Using the new Pricing 4 Profit model incorporates the time it takes to complete the project as well as labour and materials which means it is the only pricing model which will protect builders margins as we head into La Nina.
La Nina also poses significant risks for builders cashflow. Too many claims on projects have been held up in the past because of very minor items being incomplete, such as a small area of outside tiling or painting not completed due to bad weather.
Builders can avoid having their claims delayed by thinking outside of the box and creating solutions to their problems such as erecting a canopy to keep an area dry and workable.
One of the most important things builders can do as we head into La Nina is to prioritise any job not yet at roof stage! Getting a roof on each project significantly reduces the impact of weather delays so make sure those jobs are on an accelerated timeline.
Improve Cashflow And Check Your Insurance Cover
Which leads us to another tip - increase your cash reserves. Now is not the time to be making profit distributions from a building company because the business may need to call on every cent at its disposal in order to ensure it can meet its obligations as and when they become due and payable, even if cash inflows are being delayed.
Another way to improve cashflow is by adding more claim stages to the contract in order to reduce the companies exposure to debt that cannot be claimed due to delays. More frequent claim stages means more cash flowing into the building company faster. Some financial institutions may object to a builder varying a standard contract when it comes to the number of claims and the percentage being claimed, however, these objections can usually be overcome due to the project being ‘custom’.
One final piece of advice in relation to La Nina is to check your insurance cover.
Especially if the project is located in a flood zone.
What are the clauses in your insurance with regard to flood damage?
At what point does the home cease to become your responsibility in terms of insurance?
Are materials delivered to site in advance covered?
Review your insurance cover and then, if necessary, update your building contracts.
By following these guidelines your building company can remain profitable even in the face of extreme weather conditions, because you will be prepared.
The key as always, is good planning, good communication and pricing your jobs correctly.
The best way to operate a residential building company is by implementing APB’s Systems for Marketing, Sales, Operations & Construction Financials. See how they work in this video.
