Become a Franchise
How Builders Can Manage Their Margins Under Supply Chain Stress
The building industry is experiencing its own crisis. The high demand for housing combined with supply chain disruption and a shortage of labor has resulted in price increases. As a result, many builders are losing control of their margins.
It’s a tough situation, but there are a variety of levers that builders can pull to get back in the driver’s seat and stay profitable.
- Build Your Network
If you have a strong network behind you, you can improve your bargaining power. Everyone is trying to protect their own margins, so creating mutually beneficial relationships with suppliers will help you to construct supply deals that offer better service, supply, timing, and prices.
Suppliers simply don’t have enough materials to go around, but they are more likely to choose buyers with momentum and certainty in front of them. For example, the builders who are a part of the G.J. Gardner Homes franchise network leverage collective buying power and scale to secure supply. They also focus on building a trusted reputation in their communities to ensure that they are a preferred employer for local tradespeople.
- Focus on Your Finances
It’s essential to have visibility over your real financial position at all times. You should be making a profit every time you build a house, but that’s difficult to do if you’re not tracking your expenses in a timely way. A lot of builders manage their cash flow in spreadsheets or take a glance at their bank accounts to check if they’re on track. It’s an error-prone method that often gets ignored.
If you invest in financial management software, you can easily track your overheads, forecast your profit margins, and control job costs. There are so many simple actions you can take today to avoid an unprofitable situation in the future.
- Deliver Accurate Quotes
Every quote you share should accurately reflect costs and have a healthy margin factored in so that you have a buffer against the very real risk of inflation. However, this is difficult to do if you don’t have an advanced estimating system. Normally, if a supplier adjusts a price, you have to remember to reprice the job manually.
However, the estimating software used within the G.J. Gardner Homes network automatically updates supplier pricing and estimates. As a result, it’s easier to produce accurate quotes quickly and identify where margins are being eroded.
- Negotiate a Healthy Mark-Up and Margin
Rather than discounting or sending your customers a fast quote, try negotiating a price with a comfortable mark-up and profit margin factored in. A home is one of the biggest financial investments that a customer will ever make and many would rather work with a reliable builder at a higher price, than an unprofitable one who might be forced to cut corners when times get tough.
Inflation is a risk for you and your customer. If you’re going to be running at a loss and can’t deliver on a job, then the customer also loses time and money. While selling at a higher price might reduce your conversion rate, a reputation for reliability will drive demand and sustainable growth.
- Review Your Contracts
The sharp rise of inflation has hurt many builders that sold many houses with a thin margin when the COVID-19 government grants were released. Fixed-price contracts that were signed at the beginning of the pandemic might only just be moving into the build stage, and the increased cost of goods combined with late delivery fees are having a huge impact on profitability.
That’s why it’s so important to look at clauses and contingencies that will protect you in the long run. It’s never been a better time to seek external legal advice and talk to other builders about how they’re navigating contract law to create more security for themselves in uncertain times.
- Keep Up the Pace
Your overheads won’t stop just because your work slows down. Speed is the key to unlocking cash flow because a complete job means you can move on to the next one, drive revenue and cover your costs. It also gives inflation less time to impact your margins.
A scheduling system can help you procure labour and supplies on time. It will help you identify who and what needs to be on-site and when. Once you can shift from working in your business to on it, it’s easier to identify bottlenecks and ensure that every critical path to job completion keeps moving forward.
It’s Not a Race to the Bottom Line Thin margins don’t leave room for error. If you have the right systems in place, you can set your prices with precision, negotiate a healthy margin, build a trusted reputation, and scale.