Financial ManagementOwnerproceed with caution sign

 

Building Inflation a Major Challenge

Building materials are up in price around 34% compared to a year ago and more increases are on the way. We are suffering a perfect storm of high demand, due to the boom in building, and tighter supply lines due to Covid, shipping bottlenecks and now the effects of a war in Europe.

While most, if not all of this is beyond your control, how you react and deal with it is something you can take action of. Two key actions should be at the top of your list:

 

Increase client communications.

Most people are aware of the pressures in the construction industry as there has been a good amount of coverage in the press.  I have linked to such an article here: NEWSROOM ARTICLE

But don’t assume that because you read this stuff that your clients or potential clients do also. Even if they do read such articles they may not realise the implications on their project and how much extra budget they may need.  It is better to assume they HAVE NOT read any articles and educate them on the product delays and inflation and how they need to figure on perhaps a 20% contingency for materials, rather than just 5 or 10%.

Keep up the communications during the build also on how it is tracking to budget, even if the project is a charge-up one. Not many people complain of over-communication during a project, but plenty complain about not enough.

 

 

Inflation clause.

Along with doubling down on communications, you must protect yourself with inflation and delay clauses in your building contracts. The major industry bodies have amended their contract templates to cover this. Make sure you use them, or if you are using another form of building contract you may need to see a lawyer about adding in some special conditions to help protect you.

If the client is insisting on a 100% fixed price deal, you may want to consider walking away.

Some banks are still requiring a fixed price contract. You may be able to provide a hybrid contract that will satisfy your client’s bank and still protect you for materials inflation. If the bank still says no, suggest your client uses a mortgage advisor to find another bank.

 

The current risk profile of the building industry is changing and your business practices need to change along with it.

 

To discuss where you could make some improvements in your business management contact me here or email direct at andy@tradescoach.co.nz or phone 027-6886721 and we can talk.