And how to deal with the rising material prices and steer away from the inflated building costs.
Since the start of the pandemic, material costs and hence construction prices have gone up significantly. There are several reasons for this.
Ongoing lock downs and restrictions in Australia and overseas have meant many sectors had to reduce their production. Hence, there are less available products and materials on the market.
The same has happened to deliveries. Many ports and distribution centres are still working at reduced staff levels, leading to longer delivery and lead times. Container prices have also gone up sharply.
All the lock downs have meant that many projects have been delayed or were ‘forced’ to start around the same time. Putting more strain on the construction industry and leading to an increase in labour cost. Time delays are just as bad for the overall costs as the material shortages.
In an aim to boost the economy, last year the government had introduced the home builder grant. This led to a record number of projects lodged / contracts signed. Which means, there are less builders and trades people available to take on a jobs. And, if a service is in high demand some might also increase their margins or be more picky in what jobs they take on.
Some builders were / are making losses on current projects or even going bankrupt. Putting a further financial burden on new and future projects.
Reason being for projects that were started before the price rise happened the builder has to adhere to the agreed-on contract price. Meaning if the material cost has gone up significantly since they had signed the contract, they can’t ask for a variation and might make a loss on the project. So potentially some builders have to put on something extra on current projects.
So, one big problem is that many material prices have gone up significantly. But the biggest problem is that they are set to go up even further.
That means when a builder puts together a quote for you, they have to take into account the inflated current cost. But also put a security buffer on top to cover for any potential increases. To make sure they won’t make a loss and that they have a profit left in the end.
What happens then is that all the tradies have to put on a security margin. And the builder has to put another security margin on top. Meaning you will get ‘penalised’ a few times.
Reason being that once you sign a contract with the builder, they have to honour that quote. And cannot increase the cost if the material prices go up.
So, is there some things you can do to tackle the rising build costs?
We had a virtual catch-up a with the passive house association a while ago with other builders, designers and architects. Where we spoke about the difficult current situation and how to deal with the rising material costs.
Together as a group we came up with 2 possible solutions to avoid this security margin on top of the inflated cost.
We would recommend having a chat with your builder. What he thinks. And if he would be open for one or the other option. Or a combination of both.
A) list any critical items as a provisional sum.
That means that rather than paying a security buffer / margin on top of the already inflated prices. You will pay the actual material cost.
So, for instance for any structural timber, the windows or any other big-ticket items that are subject to the material shortage now. Rather than paying a cost estimate. You will pay the actual cost at the time of order.
Obviously, that might mean that the cost is a bit higher than it is now. But you would not have to carry a security buffer. Potentially you might be lucky, and the cost might be less.
Unfortunately, with some materials that have very long lead times, suppliers might not accept payment of the items when putting through an order. And will instead ask you to pay the price that is current at the actual delivery time. So, you / the builder needs to check this with their suppliers.
For sure, this needs to be discussed with the builder. And both of you have to be open and honest with this approach and the builder has to have an open book with his quotes and trades.
- B) pay / order any or all critical materials in advance
This is the approach that we are doing with our builder. Or rather a bit of a combination of both.
Even before we had our permit, we have put through the payment for the windows, the sips and we paid him the deposit payment and half of the first stage payment. So that he could order and pay for all the timber and the concrete needed.
Also, most of the other big-ticket items we will either buy ourselves, or the builder has them in as a provisional sum.
The problem here obviously is that this option only works if you have some cash available that you can use before finance is approved (which you can only get one the building permit has been issued)
I would recommend discussing these options with the builders to come up with a plan forward you are both comfortable with.
Does that make sense?
Of course, the first step should always be to optimise your design and the construction.
I’m a strong believer that if you have enough money to build a custom designed home: You DO have enough money to build a highly energy efficient home. Even a Passive House.
Often, when building a home, it’s the architectural features that do cost a lot of money.
When you build a house on a budget, even more so if you are aiming for a passive house, you have to pick and choose your features. Not everything in your house can be custom built and bespoke.
This does not mean the house won’t be beautiful and look custom designed. Rather the opposite.
You have to be smart with your selections and finishes. Using off the shelf products where possible. And most importantly, get a builder on board early on, to optimise the design and the structure.
If you want to know more about how to design and build smarter. Please get in touch.