IN THE KNOW —
Can you pass on cost increases to your clients? For years we have been lamenting the poor productivity of the New Zealand building industry in comparison to other developed countries, and it’s a documented fact backed up by solid evidence.
It’s not that kiwi builders are lazy or incompetent – the causes relate more to geographic and population factors – but it does mean we pay more for building materials and services than we should do. The preferred solutions are greater competition in the building materials sector, greater reliance on prefabrication, and greater standardisation of buildings, but they are tough obstacles to overcome. The Ministry of Business Innovation & Employment (MBIE) is trying to free up prefabrication from red tape and improve the product certification system, but at the same time they are making life tougher for builders and building merchants through increased liability. Then add to that mix the impact of the COVID-19 pandemic, and we have building prices going through the roof. It’s all due to basic economics – demand exceeding supply. Demand has increased due to the Government pumping borrowed money into the economy and consumers not being able to spend it on overseas holidays. Supply has decreased due to a reduction in domestic timber milling capacity, domestic and overseas manufacturers mistakenly reducing their production
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in anticipation of a pandemic-induced recession, and the global freight industry doing the same thing. Given that builders are signing up projects that won’t be able to start for six months or more, and substantial price rises over that period are inevitable, there will be an increased focus on the builder’s ability to pass on cost increases in the months to come. And that will create tension not only with clients who can’t cope with the inevitable budget blowout, but also with their banks who are increasingly insisting on genuine “fixed price” projects and are seemingly blind to the realities of variations, provisional sums, and cost fluctuations. Because those are the three main reasons why so-called fixed prices are never fixed.
How to protect yourself How are builders going to protect themselves against their profitability being eroded by these unprecedented price rises in the aftermath of the pandemic? The best way is by charging on a cost reimbursement (also known as cost and mark-up) basis so that property owners pay the true cost of materials and labour at any given time.
