The construction industry has been experiencing the same inflation concerns as the rest of the country in the last couple of years. Both labor wages and material costs have steadily increased. However, builders continue to balance delivering a superior product while maintaining profit margins.
What Challenges are Builders Facing?
The Housing Market Index Special Survey by the NAHB asked builders about some of the significant problems they faced in 2021 and what obstacles they expected to encounter in 2022.
- 96% of builders stated that building material prices were a significant challenge
- 91% faced obstacles around the availability and delivery time for materials
- 82% found cost and availability for labor to be prohibitive
Builders also expressed their concerns for 2022. They are more concerned about inflation within the US economy and the cost and availability of lots this year. While these were challenges for a sizable percentage in 2021, a larger majority are concerned about what this year will bring.
Construction Costs Breakdown of Projects:
It is critical to understand the breakdown of construction costs for each project to maximize a project budget and deliver the greatest return on investment. The chart below breaks down the final sales price percentage of a finished lot for each category.
- Finished lots account for 20-25% of the total selling price. About half of the lot price includes horizontal development and costs such as utilities and driveway.
- Building materials range between 25-30% of the total.
- On-site labor generally accounts for 20-25%.
- General overhead is about 6%.
- Financing costs are about 2%.
These statistics show that the average profit margin of a finished sold lot is between 12%- 22%. Each expenditure can make a big difference in net profit at the end of a project. Here are some ways to assure quality in your projects while protecting your bottom line.
Streamline Back-end Business Activities
Time is money. Focus on streamlining the administrative tasks that need to be done off the construction site. From requesting draws and managing subcontractors to listing a property for sale, the technology at Builders Capital is designed to help you. Our hard-working servicing team fund draws in 5 business days or less, giving you quick access to funds and increased efficiency on site.
The BIMQuote project management software allows builders to better coordinate with subcontractors and reduce project delays. Customhome.ai technology will enable builders to generate pre-listing materials and sell properties before development begins.
Stay on Top of the Supply Chain to Lower Construction Costs
Circumvent supply chain issues by staying ahead of material orders. Be proactive about ordering materials to have a buffer if something goes out of stock or gets delayed. The Builders Capital BIMQuote technology generates material quantity take-offs of precisely what needs to be ordered for a property, down to even the most detailed products, like door hinges.
Protect Yourself Against Rising Insurance Premiums
Insurance premiums have risen 5-15% annually over the last four years. This increase correlates with rising costs of building materials, land, and site theft. Use these strategies to lower your insurance premium and insulate your construction budget.
- Lower the risk you present to insurers by safeguarding tools, equipment, and other job site supplies.
- Consider installing security cameras on-site to deter theft.
- Provide employees with protective gear to reduce liability claims.
Hire Quality Employees to Reduce Turnover
Hiring and training new employees is an expensive undertaking. It is also costly to lose good employees. Make your labor force feel valued through competitive wages, benefits, and a strong work-life balance.
Builders nationwide have shown their resilience in this inflationary economy. With careful planning and persistence, builders can reap the benefits of a robust real estate market and have their businesses thrive.