Bad timing is bad business

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I have been spending a lot of time meeting with owners of construction industry businesses lately and it has been very eye-opening about the challenges this industry faces.

One such challenge is the typical engagement process between the builder and their client and the time involved, which if not managed very carefully can lead to them doing a lot of work for very little or no profit and leaving the clients disappointed in both delivery time and final completed cost.

According to the business owners that I have spoken to, the normal time frame between a project being quoted to when it is all signed up and agreed to is around three months with major projects being much longer when lenders and local body authorities are involved.

The issue with this is that over a three month period the price of materials in late 2021 rose as much as 16 percent, with other costs such as fuel rising by as much as 30 percent in a similar period in early 2022 meaning that what was a project quoted 90 days ago with a 20 percent gross profit margin could wind up being close to profit neutral once completed if these costs cannot be passed on.

This does not show any signs of easing with many economists forecasting a further 15 percent rise over the next year.

Not only are the materials used in building becoming more expensive they are also getting harder to get with major shortages leading to the average time for a standard home completion extending from five months in 2022 to around 12 months according to latest industry data.

Avoid absorbing increases

What was surprising to me is that many trades businesses are not using contracts or terms of trade that allow the costs to be passed on to their clients meaning that they have had to absorb the increases and deal with the disappointment of clients with the late completion of works due to material shortages.

This has led to a massive increase in the amount of debt mediation cases in the construction sector that we are being asked to assist with.

My advice for dealing with the above from a credit management perspective is fairly straightforward. Be very realistic with clients and customers in regards to timeframes for completion – it is always better to deal with a little bit of disappointment at the start of the process than a lot at the end.

Allow for pricing increases in materials pricing in quotes, quote what it will be when it is delivered, not the price it is now if you are not going to have it delivered now. Many suppliers will guarantee pricing for seven days maximum with some having price guarantees for only 24 hours.

If your supplier can’t guarantee that they can get you the materials then do not promise your clients that you can get it for them. If the country’s largest construction companies, who spend hundreds of millions of dollars a year, can’t have guaranteed supply for certain goods then your average SME- sized company has even less chance.

Use best practice up-to-date terms of trade that have provisions for unexpected delivery delays, material cost rises, time frame extensions, consequential losses etc. If your suppliers are having you agree to best practice terms and you are not having your clients do the same then you very well may become the meat (or vegan friendly plant based meat substitute) in a very unsavoury transactional sandwich.

Just a thought.

Related: Be scared – or be prepared

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Nick Kerr
Nick Kerr
Nick Kerr is the director of IPI Group Limited. He can be reached on 021 876 527 and nick@nzipi.com.

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