Back in December 2020, I re-published an article that I had prepared in March 2020, “Plan for the Worst and be Ahead of the Game”. In this article I forecast that the ‘perfect storm’ was looming and that:
Large volumes of homes were being pushed out to site expecting to get them all started at once. They couldn’t be finished all at once so what really happens is they would take longer to build causing cashflow problems and customer complaints
A shortage of trades due to the large volume of homes would mean jobs are done in a hurry and defects are likely to appear in years to come or cause frustration at handover with poorer quality homes and more items to fix once customers are living in their homes. This is still to play out
In SE Qld, we had the legacy from the hailstorm that had hit the area and now we have the aftermath of the floods with more rain forecast through the winter months which will lead to further delays leading to stretched out cashflows and completions
Supplies from overseas were getting less and less as European countries that supply goods and materials such as natural stone, tiles appliances and the like were in shutdown as they battle second and third waves of COVID. This is playing out even more so with the lockdowns in China. The global supply chains are slowed even further leading to cascading price increases and shortages.
My advice to builders then was to do two things –
· Undertake a Supply Chain Audit; and
· Prepare a Risk Assessment for the business.
I still advocate for doing these two as they will identify the major risks to the business and hopefully identify opportunities to work around or change the approach altogether. You never know. Going through this risk assessment and supply chain audit may show up some things you weren’t aware of and provide opportunities to procure your goods better in the future and become more efficient. It just may create a cultural shift from a ‘transaction processing mentality’ to one that focuses on strategic supply improvement and increased operational reliability
What else can builders do to navigate these tough times? Unfortunately, there is no single solution to the problems faced by builders at the moment. Each business is unique and the starting point for solutions will be different each time. These are unprecedented times and keeping your business going will be tough but the alternative will be tougher. Below are 13 additional strategies that could be used to mitigate the problems:
Reduce the level of work being undertaken
Your obligation is to your business and if you have to take some hard decisions then you will need to do this. Reach out for help if you haven’t had to do this before as it can be daunting and stressful.
If you have to cut back on work to reduce the exposure of your business, then that’s a strategy worth considering. You can ‘go broke’ faster by taking on more unprofitable projects. If you have to cut overheads and staff then you need to make the hard decisions now as it will be you that will be left to explain to the creditors why the business failed.
This is a time when your mental health can be under pressure. Don’t think you are the only one in your situation, there are many others and talking about it can help shed some light on a solution.
Talk to your suppliers every day
Check with your supplier to find out if they are holding your goods in stock ready for delivery. If not, can the supplier guarantee the supply at the time when you will be needing the goods? If they can’t guarantee supply when you think you will need it, are there other alternatives available from that supplier? If your supplier does not hold the goods or can’t guarantee the supply, then you need to contact other suppliers of those goods and see if the same situation applies. If you can continue to source the goods, what measures do you need to put in place to guarantee the supply of the goods when you need them. If there will be no supply, what are you going to do to overcome that scenario. (Risk assessment and risk management). Think about how many goods and fixtures come from overseas countries that are in lockdown eg. Appliances tiles, natural stone, reconstituted stone, plumbing fixtures, baths, melamine board, laminate board and the list goes on.
Have at least two substitutes available for every material, fixture and fitting in your homes
Review every material and fixture that will be used in the construction of each of your homes and determine where that material or fixture is manufactured, how it is transported, what other distributors are involved in the supply chain and where all these are located. Then identify what potential issues will occur if you can’t obtain these supplies when you need them. Identify two other materials that can be substituted and ensure these are available when needed if not changeover now.
Talk to your clients at least once a week
Contact your client/s and discuss with them the scenarios that you have confirmed and the possible solutions to the situation. I have heard that some suppliers are starting to ask for payment up front or a large deposit for goods that won’t be required for several months. This will obviously put a strain on cashflow. An option may be to delete the ‘supply’ of the goods from the contract and ask the client to pay for them upfront. This would have to be an option for the client to be able to pay for them. Also check with HIA or your association on the contractual validity of doing this.
Be a member of HIA or the other industry associations
Now more than ever, builders will find that being a member of an association is critical and they will feel comfort in knowing there are people there to support and help through this crisis.
HIA has recently issued some advice on how to handle the current situation so this will be helpful. It covers working with your customers, business recovery loans, keeping track of finances, managing your warranty exposure, monitoring your supply chain and looking after your mental health.
Keep up to date with news
Be aware of what is happening in the world, Australia and your State by reading or listening to the news on a regular basis. Screen out the ‘noise’ and focus on the information that applies to your business and seek out clarification or further comment if needed. An industry association such as the HIA also provides expert information relating to building, economic forecasts and activity.
Look for supply chain experts on LinkedIn and be informed
Experts will provide commentary via LinkedIn on many subjects so search for supply chain experts in construction materials and ‘follow’ them for their global insights. Apply these insights to your business with the other information available.
Look at the situation worsening every day with the hold up of shipping outside Shanghai port in China. Nothing can be dropped off and nothing can be exported from China at the moment which is leading to further shortages of materials or components in equipment.
I’ve just become aware that the clay used in Italian tiles usually comes out of Ukraine. With the war going on, this supply line is shut down and so tiles from Italy will become scarce or unavailable very soon. With Russia cutting off gas supply to a number of countries, manufacturing in eastern Europe will grind to a halt.
These scenarios will need to be included in any ‘risk assessment’ and supply chain audit.
Limit the complexity of your projects
Look at smaller renovation projects for a while instead of large homes or volumes of homes. These smaller projects can be more profitable, provide a more even cashflow and restrict the types of materials that are unavailable.
Look for other markets that you can service
Are there other markets that you had not considered. In Qld, the warranty insurance covers ‘non-completion’ of homes where a builder has not completed the project. Consider becoming a pre-qualified builder on a panel that can tender on these homes. There are likely to be many of these projects needing a builder.
Consider looking at sheds, carports, garages, ‘granny flats’ or secondary dwellings and work in areas that are more remote such as islands or rural areas where there is a shortage of builders and labour.
Become an expert in ‘cost escalation’
Start to track the price increases and by being close to your suppliers and subbies, can an insight into future price increases. Calculate how these specific price increases affect the overall cost of a home of renovation and know how to price in these future price increases.
Look at your processes and systems
If you haven’t pre-ordered your goods and supplies, then this situation shows you why it is good practice to estimate your project in full upfront and get those purchase orders out to your suppliers early. This gives them time to plan and order goods and manage their inventory. The supplies and goods they have in stock will be allocated to those who have already ordered them, not for those who wait until the last minute to order and expect it to appear like magic. Waiting until you need the goods onsite is poor planning and poor project management. It’s times like these when the proverbial hits the fan, that poor practices are found wanting badly.
Use this as an opportunity to streamline your business processes and systems. While staff overheads have been reduced, take the opportunity to implement software that will make the remaining staff more productive as activity picks up. Staff is always the largest overhead cost of any business so if you can make staff more productive, profit margins will improve.
Look at alternative supply models
Consider if you can procure materials and components in a better way. For example, Partners in Framing is setting up an alternative steel framing supply model that will enable small to medium builders to nominate when they want their steel frames and trusses and also to be aware of price changes six months ahead – no more nasty unexpected price rises
Know you profit margins at every stage
Many builders unfortunately only know what profit they have made once the job is complete. Builders should be aware of their profit margins at the time of the contract when the job starts on site and every month the job is under construction. Why start a job that is going to be unprofitable just to gain cashflow. Use estimating software that can give you the information you need and not wait for the accountant to tell you that you are going broke.
Some days you may need to apply every one of the above strategies and other days none however, you will need to continue to look for further ways to resolve the problems faced on a daily basis until the business environment eases a little.
There are resources provided by The 3C Mentor that help with your supply chain audit and risk assessment. The Risk Assessment Register is free and allows you capture your areas of risk and develop a plan to mitigate those risks.
The 3C Mentor also has a cost movement calculator available in the resource centre.
Check it out in the Resource Centre.
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