"Risks associated with home building"
Small construction companies often employ what we call a ‘rollover’ strategy – using the monies from a new project to finance an old one because of poor cash flow or an underbid project. Therefore, the existing project does not get the attention or resources it should be getting. When a project cost is unrealistic, this is quite often the strategy to survive. Eventually when the going gets too tough, there is always the risk that the contractor would abscond with whatever cash he has by simply abandoning the project.
One of the biggest causes of a contractor’s inability to complete a project is poor cash flow. Many start off well, largely because the initial 10 per cent down payment is a good sum to kick off any project. But contractors – like small businesses everywhere in any industry – have been known to succumb to the allure of a sudden large sum in the pocket, and therein lies the problem.
The math can speak for itself. If a project costs $500,000, a 10 per cent down payment is $50,000 in cash. To the affluent, it may not seem much, but to a lot of people in this trade, it’s a lot of money. The amount can be used to place a 20 per cent down payment on a new Mercedes, and still leave behind a five-figure sum.
This kind of personal spending – which happens frequently in the industry – is akin to spending money ahead of it being fully earned. If any unforeseen circumstances should arise during the course of the project, it will inevitably plunge into losses because part of the amount meant for the project has already been spent. Hence, what is commonly referred to as a ‘loss-making’ project by builders, is in reality loss making because part of the funds have already been diverted elsewhere. In a financially well-managed project, the only reason it could go into a loss is when either funds are diverted, or the company’s total overheads are too high relative to the size of the project.
As mentioned in some of the earlier articles, while staff numbers are a measure of business activity, it is no way an indicator of profitability in this niche sector. In a labour-intensive industry, the total productivity coupled with tight labour and resource management while developing a critical mass in tiny Singapore is key to long-term survivability.
Typically, rather than incurring heavy losses on a project, a contractor may just opt for abscondment or bankruptcy. Alternatively, he could look out for another project at another low price, so he can prolong his survival with the new project (and extended time). Sooner or later, this ‘rollover’ game will have to end, and the last project will be left unfinished. And the home-owner loses…in more ways than one.
We have heard horror stories of projects which stand unfinished for years because the money ran out. Some of these are under-budgeted for in the first place, so there are no excess funds to cater for contingencies like increasing material and/or unexpected costs that are work-related. Some of the smaller construction companies are also notorious for submitting rock-bottom quotes just to secure a project. And to a large extent, that is what the market demands! The builder is pricing according to what the market expects – low prices – but at the same time a high level of quality and competency. (My earlier articles have mentioned that in construction, this is a near sure-fire way of the project getting into trouble.)
While a low-price-good-quality approach can be quickly sussed-out for an off-the-shelf consumer item, this method of construction is almost always a formula for disaster, and a source of frustration to both yourself and the whole building process. There are far too many ways of cutting corners without anyone knowing what and where, except the builder himself.
The building industry is a highly complex one and involves many people. It will test the whole gamut of a contractor-proprietor’s business practices from financial discipline to accounting, organisational management and people skills. Unfortunately, it also paves the way for the company’s financial baggage to be transferred from its past and current projects to future ventures.
In the context of this industry, baggage typically accumulates over time and can continue to develop; historical record is no measure of future performance (think blue-chip companies and how they too can fall from grace). The sheer number of sub-contractors and tradesmen working on a house project – and their respective loads of baggage – can inflate the many risks already faced by a home-owner.
