Key points
- Construction businesses are facing a perfect storm of supply chain delays, material cost spikes, labour shortages, and fixed-price contract pressures.
- Monthly or quarterly financial reporting is essential to understand real-time business performance and make informed decisions.
- Focusing on cash flow, profitability, and cost control can help businesses stay solvent and adapt to volatile market conditions.
The construction industry is doing it tough. Property developers, builders, tradies, and civil and construction contractors face a perfect storm, above and beyond the usual fluctuations and challenges that beset the sector.
Perfect storm – 5 pressures on the construction industry
- Supply chain issues and construction material shortages
- Rapid price increases for construction materials
- Labour shortages and increased labour costs
- Workflow disruption
- Fixed price contracts.
Supply chain issues are causing delays in construction materials. Often, the entire order is not filled, leaving construction sites without enough materials. Shortages and other inflationary pressures mean the cost of materials is also sky-rocketing.
There is also a shortage of skilled and unskilled labour for building and construction projects. People shortages and wage demands to meet rising cost of living pressures means the cost of labour is going up too.
All of this means builders, tradies and construction project managers are juggling interruptions and delays to completing construction projects.
To top it off, many builders and contractors are working under fixed price contracts. Rising costs and delays are making projects unprofitable.
This perfect storm has seen several construction firms and home builders becoming insolvent or going into administration.
Three ways to help the construction sector to weather the storm
How can construction related enterprises weather this storm to ensure more firms don’t get into difficulty or go under? There are three priority areas our business advisors work on with construction sector clients that are essential in these difficult times.
1) More frequent reporting and analysis of financial and other business data
Gone are the days when a construction business can look at the accounts once a year at tax-time. We recommend monthly or quarterly reporting, so businesses have a proper, real-time, understanding of their financial situation.
Having the numbers is one thing. What is important is analysing and interpreting that data to know what is working and what is not. Good data helps to focus on what to do now to make the most difference.
2) Zero in on cashflow, profitability and costs
Cashflow is king for any business, but particularly for tradies, contractors and smaller construction businesses.
If cashflow is poor, it may be time to look at serious changes to the business. If cashflow is positive, there are ways to manage and reinvest those funds to grow the business and maximise profits and longer-term wealth. Make the cashflow work harder for the business.
Reducing costs through different ordering structures, payment terms or suppliers is one way to boost profitability, especially if fixed price contracts are preventing passing those costs on to boost revenue.
The alternative to fixed price contracts for business and tradies in the construction sector is cost plus contracts. While the market is shifting to greater use of such contracts, the reality is many customers resist these contracts. They still ask how much the job is going to cost, partly because that is a question their bank or financer is also asking.
3) Focus on work in progress or completion times
One way to improve cash flow is to issue invoices and get them paid quickly. Staying on top of invoicing and negotiating invoicing terms in contracts is key to a better bottom line. One reporting item should be work in progress which means looking at job throughput or completion times. More effective use of short supplies of materials and labour can help to finish some jobs quicker.
A good construction business advisor can save time and money
People running property development and construction firms as well as tradies and contractors are time poor.
A good business advisor can help set up a reporting system that efficiently puts the right, easy to read, data at the fingertips of owners and managers. More importantly, a business advisor can help draw out any issues the data is showing and suggest the best solutions to these problems.
Pitcher Partners’ business advisors and accountants understand the construction sector and work across other industries. This helps get the right focus and solutions in place to ride out this storm and create calmer and more profitable waters in the future.
Got a question about construction accounting or business strategy?
We love questions. If you are looking for an experienced construction accountant Newcastle based, give us a call. For more about Pitcher Partners Newcastle and Hunter’s construction accounting services please contact us.
Jason Bartlett is a Partner at Pitcher Partners Newcastle and Hunter. He specialises in working with building and construction businesses and has 30 years’ experience as a strategic business adviser. Jason believes in diving deep into a business through regular management reporting, health checks and communication. His clients value his data-driven and personable approach.
