The COVID 19 pandemic has certainly provided the building industry with a once-in-a-lifetime set of circumstances that no one could have predicted. Supply shortages, continual price increases, labour shortages and constant changes in working arrangements on-site have made the pricing of building contracts almost impossible to complete.
Market intelligence is absolutely vital so that decisions can be made every week or even day about pricing, contracts and contract periods.
One area than can have some science and mathematics applied to it is a forecast of what future pricing is likely to be for standard house prices and options available. The way to forecast likely future price rises is by using a Cost Movement Allowance (CMA) tool. The CMA tool is used to forecast what the effects are likely to be on the house prices over short and medium periods. Having up-to-date market intelligence is vital and the relationships you have with your suppliers and sub-contractor teams will determine how close you can be in these forecasts.
One way of calculating these price increases is with a Cost Movement Allowance (CMA) Calculator.
A Cost Movement Allowance (CMA) Calculator is designed to calculate the amount of cost movement or change to the typical house construction costs over a period of 12 months. It would typically be reviewed every quarter.
A CMA Calculator is usually broken into four main sections – Material Supply Only, Labour and Materials Only, Labour Primarily Only and Preliminaries Only. The calculator combines the cost movement into monthly, 3 monthly, 6 monthly, 9 monthly and 12 monthly cumulative cost movement allowances. The reason for the four allowances shown is for you to be able to decide how long your construction takes and to apply the relevant CMA % to the cost price of your project. By understanding how these price movements or cost movements affect your pricing, you can use this in negotiations with suppliers and sub-contractors to mitigate the effect of cost movement, reduce the proposed price increase or spread the price increase out over a longer period to reduce the effect.
For most builders, during the time it takes to sell, contract and construct a new home or dwelling, various components of the costs will increase at various times during that period. Some price changes are at an agreed rate and time period which is decided during a negotiated contract. Other price changes can occur at times without any warning such as a carpenter advising his prices are going to increase on 1 Jan next year or a tiler advising his prices are going to increase on 1 March next year.
Most quotes supplied by suppliers are only valid for 30 days and will need to be confirmed at the time of ordering. In most cases the prices will have changed by the time the materials are ordered. When prices increase during the construction period, the increase in the costs is an erosion of the profit margin made by any builder. The ‘smart’ builders will build in an allowance for this cost movement. But how do you calculate what allowance to make?
A CMA Calculator takes the guess work out of the process and enables you as the builder to keep on top of the price movement and take steps to negotiate lower increases if you know what the effects are on your selling prices.
The 3C Mentor Builders Business Resources site has a CMA Calculator available for purchase and comes with instructions on how to use the calculator.
The whole purpose of The 3C Mentor and Alpha Edge is to help create really great businesses in the residential building industry and delivered by our unique ‘Four Pillars to Your Success’ – Business Coaching, Business Consulting, Business Resources and Construction Software.
For an overview of these four pillars go to Alpha Edge here. To find out more about our Business Coaching go to The 3C Mentor here, for further information about the services Alpha Edge can provide go directly to Alpha Edge here and to access the many documents and resources you need as a residential builder, go to our Builder’s Business Resource Centre here. For more information on the construction software and how to ‘Be a Better Builder’, click here
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