Builders continue to have inadequate understanding of construction financials
Announcement posted by The Association of Professional Builders 28 Mar 2024
More than 92 per cent of builders are looking at inaccurate financial reports and in doing so exposing a significant gap in the understanding of crucial concepts, new research has revealed.
The data, which was sourced from a survey of 1,817 builders from Australia, the United States, Canada and New Zealand, informs the State of the Residential Construction Industry (SORCI) report for 2024.
According to the annual report, commissioned by the Association of Professional Builders (APB), even though 68.3 percent of builders say they correctly understand the difference between markup and margin, there remains a lack of regular monitoring of gross margins on projects.
What this means is that the industry's grasp on construction financials remains inadequate, which doesn't bode well given the fragility of the industry, with building companies continuing to fall like dominos, notes APB Co-Founder and Business Strategy Specialist Russ Stephens.
"Only about half of the builders surveyed confirmed that they produced monthly reports, and worryingly, just over seven percent accurately understand the work in progress (WIP) calculation," Mr Stephens added.
"Most of the inaccurate financial reports are due to this critical gap in understanding the WIP and this miscalculation could lead to significant financial discrepancies, impacting both tax obligations and overall business health."
The report showed that Australian and New Zealand builders continue to lag behind the United States and Canada in terms of how many companies follow the recommended, and certainly, the most profitable business model, which is Design and Build, compared to quoting clients' plans.
"Across ANZ around 44 per cent of builders still quote plans rather than control the design process, with the number even higher for remodelers," Mr Stephens explained.
"The data supported that Design and Build is more profitable, with 65.5 percent more builders applying markups over 25 percent compared with builders quoting clients' plans."
Perhaps the most positive insight to come out of the survey was that despite continued uncertainty with rising interest rates, labour shortages and war, more than 75 percent of building company owners said they were expecting to grow their businesses in 2024.
Even more significantly, half of all builders who participated in the survey expect to achieve 10 percent or more in net profits from the projects they deliver over the next 12 months, which is quite incredible given the ongoing profit challenges experienced by their larger rivals in the industry.
Further insights showed that 2023 in Australia was a year of cautious optimism in the residential construction industry.
The stabilisation of material prices provided some relief, but the sector continued to struggle with financing challenges, especially for lower-end projects. Labour shortages remained a persistent issue, hampering recruitment efforts and pushing wages upward.
Despite these challenges, niche builders experienced relative success, adapting to the market by focusing on renovation projects and custom builds.
When it came to mental health, in 2023 the building fraternity admitted to focusing more of their energies on work-life balance.
"The challenges of previous years, including the pandemic and economic uncertainties, had underscored the importance of addressing mental health in the workplace," said Mr Stephens.
The mental health of 79.2 percent of respondents either improved or stayed the same this year, highlighting a positive shift in mindset among builders with an optimistic future on the horizon.
To find out more about the state of the residential construction industry, you can download the SORCI report at https://www.associationofprofessionalbuilders.com/sorci
KEY STATISTICS
- 92.4% of builders are looking at inaccurate financial reports.
- More Australian builders are using fixed-price contracts than they were in 2022 with 85.7 percent of respondents affirming that is their preference.
- 68.3% of builders correctly understand the difference between markup and margin.
- 13.5% of Australian builders accurately understand the WIP calculation.
- 12.3% of respondents are now working more than 60 hours weekly.
- 76.9% of building company owners expect to grow their businesses in 2024.
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