Why Are Builders Going Bankrupt?

We've all noticed the alarming rate of bankrupties within the building industry. According to the media, and the builders, it is due to the rising costs of products.

Although materials prices have risen, they haven't risen so dramatically that is comes as a shock. Suppliers will often advise builders of price rises months in advance. And a good builder will have trade agreements in place and exercise that 'buying power' they brag about.

So what are the real reasons? After working in the building industry for over 13 years, I have seen the same issues arise time and again that cost builders thousands.

Costing programs are rarely used.

Most builders will use a rough sqm rate. Some will even produce a very rough estimate program that their salesperson will use to price homes. These are very inaccurate to start with and don't factor in all the variables, or the salesperson costing the home is inexperienced to realise the variables and additional costs.

Invoices are not checked against estimates.

Stemming from (1), invoices are rarely checked against actual estimates. What builder's think they are being charged by suppliers and trades is usually much different from what they are actually being charged.

There are no trade agreements or supplier agreements in place.

Having a trade agreement and supplier agreement is imperative to ensure estimates are accurate. A good trade agreement includes a scope of works and agreed rates. Without this in place, the builder is practically writing a blank cheque to trades. However, these rarely exist in any building company and builders soon find themselves with huge trade-related invoices for 'additional works'.

Many owners/managers don't have relevant qualifications or experience.

Many owners and managers of building companies do not have the required qualifications to be in a management position. Many have not worked in building. As a result, they don't understand the complex process of obtaining reports and engineering and applying those reports to the designs in the correct order. The result is confusion, cost-blowouts and mistakes that are passed down to the employees. Many professionals refuse to work for builders because of this.

Many site supervisors and operations managers etc are hired because they have carpentry experience. However, carpentry does not teach the entire process and many supervisors are lost in the design and approvals process.

In saying this, after obtaining several diplomas and certificates from various educational institutes, I have found that most educational providers do not teach the correct process in detail and the implications of skipping vital steps. Experience is the key, coupled with formal training.

Many building companies do not have a process.

Anyone who has worked in building will talk about the confusion that occurs within the office. This is because most companies do not have a process or workflow in place. A good company will have a CRM which tracks stages and tasks so anyone can view where a job is. However, this type or organisation is rarely implemented.

Everything is rushed.

We've all heard that a project involves 90% planning and 10% execution. I always say that in the building industry, it is "0% planning and 100% mistakes". Designs are pushed through incomplete, contracts are entered into incomplete , site works are started before approvals and everything is done without liaising with the relevant departments. As a result, the costly mistakes usually start before Approvals are received.

Not enough detail on plans.

Builders try to skimp wherever they can, and paying as little as possible for plans is at the top of their list. As a result, plans are usually very basic with minimal detail. Or the drafter that was engaged doesn't know the full details of the build, and doesn't note important details on the plans. And because all the correct site tests and reports are not obtained before rushing to get drawings completed correctly, important details are missed which can affect Approvals, or even certifications at the end of the job.

Cheap imported, and defective, materials used

Defective materials have been a focus in the media in recent years. Many of these products are 'certified' as meeting Australian Standards, although independent testing shows they are usually not even close to meeting the standards

Cladding containing asbestos or being flammable is a big problem in the building industry.

Items such as cheap imported tiles often crack or break and allow water to penetrated into the walls and sub-floor, causing thousands of dollars in damage.

Plumbing fixtures often deteriorate quickly resulting in water damage to bathrooms and kitchens.

Imported products are not subject to consumer laws or guarantees so their is no recourse for builders or owners. The result is short term savings, but long term problems.

How to avoid these problems?

The red flags are obvious to anyone working in the building industry, and owner can minimise their risk easily and avoid dealing with 'cowboys':

• confirm what processes the builder has in place and what systems they use;

• confirm that the builder is using a recognised estimate program (although they won't disclose their trade and supplier rates);

• confirm that all items used are from local suppliers;

• confirm with a building certifier that all site reports have been completed and are reflected on the plans and engineering before entering into a contract;

• don't rush the builder. Builder's want to start and finish your home as quickly as possible. Putting pressure on them during the design stage forces them to skip important steps in the process;

• focus on the builder's professionalism and build quality, rather than chasing a cheap price!