Recently, I was filling my car with petrol at $1.96 a litre and reflecting on when I thought 44 cents a litre was expensive. Pricing only ever seems to go up, and once an increase is given, it rarely comes back.
In the current market of increasing costs combined with a record number of dwellings under construction, every trade and supplier are approaching their builder for more money. What used to be annual price reviews has turned into monthly. In the past, it was a given that sub-contractors and suppliers honoured their quotes, but now it is more common for them to refuse jobs that they’ve quoted only months before, and just when you need them to start.
Volume builders operate in a cost-driven environment where time and quality can be relegated to the back seat. This, and the fact that they build from their own master plans and associated bills of quantities – which are often built over a hundred times – makes their builds relatively simple and them very good at understanding and managing their costs. The recent challenges and demise of industry leaders in this space demonstrates the unprecedented challenges builders are currently facing. Smaller builders that have come up through the trade tend to focus on quality and don’t always appreciate the complexity of the job they are undertaking, or don’t necessarily take the time they should to study the details or get quotes. Their pricing strategy may amount to comparing the work to their last job, or making some broad-brushed allowances and hoping it covers the work.
In any case, what used to be a simple estimating task can now be anyone’s guess in establishing the cost of a build in this market. Therefore, it’s more important than ever that builders take the time to conduct an elemental take-off and produce an accurate bill of quantities for new builds, and review the potential risk associated with each cost centre. Moreover, prudent builders will allocate additional contingency to address the risk of further price increases over the significant period from initial pricing to hand over.
While build costs and time frames have increased significantly since Covid-19, some items – like timber – have started to come back to more traditional levels; however, it will be a long time before supply and demand is re-balanced. We expect that this, like fuel prices, will look more like a stabilising of current costs, rather than a significant reduction in the future.
A big factor in all of this is the transition from near zero interest rates, which will lower consumers’ purchasing power. Since the costs to build have jumped, it follows that land pricing must give. It used to be that the house was the expensive part of a home and land package. This ratio was reversed over the last decade but will come under significant pressure to revert. Pricing for established homes is currently holding, and so it will be interesting to see what the market starts to value vacant land at.
