Why are builders so expensive?




Before we get into specifics about the costs of builders we need to understand how builders work and think. Being a builder is tough and making a living can be very tough, in fact a lot of builders companies go bust. But how can this be when they charge so much. This article will look into what builders factor into their costs and how the cash-flow system works throughout a build.

You may also be interested in ‘Why are builders so unreliable?’

Builders costs and margins

When a builder quotes for a job they first need to make sure they break even on the raw jobs costs, which include time for workers, materials, machine hire etc. On top of this builders have hidden costs that self-build clients probably do not think about. There are general overheads that while not specific to any one job are factored in to any building quotes. These include office rent, phone bills, vehicle and travel costs, insurance etc. Also the builders time needs to be covered and thus this cost is spread out across various jobs. This includes admin costs and estimates for jobs. These ‘hidden’ costs add about 15% on to the raw job costs.

Once these base costs are taken care of then the builder can add a real margin to their quote, that in theory gives them some profit. In most cases a builder would be happy with around a 15% margin on a building job, but there are certain factors that will probably mean they will factor in a higher margin than this.

If a builder is busy and has plenty of work on they may add a 30%, 50% or more to the break even (+ hidden costs) quote. They do not really need to take on your job so they can quote high prices. This of course works the other way and you will get a lower quote if the builder is short of work. While I mentioned that most builders would be happy with a 15% margin, in reality these same builders know how easy it is to loose cash on tightly quoted jobs, and therefore add some risk factor into their quotes. The amount of risk is a personal choice, and helps explain to some extent the variations on quotes among builders for the same job.

Risks for the builders

Money and cash-flow are probably the biggest headaches (and risks) for builders. The paying customer always works on the premise of paying after the job is complete, however for the builder this means they are almost acting like a bank that finances your build and offers the very reasonable interest rate of ZERO. To make matters worse for the builder is that they are offering this credit with very little guarantees that they will ever see the money at the end of the day, making it extremely risky.



An argument is that builders can buy materials on credit and therefore do not need their clients money up front, but this credit is normally just for 30 to 60 days, and on top of that are wages to labours and other sub-contractors on-site. These bills need to be paid by the builder and thus they are quite often running up huge overdrafts that puts a huge financial strain on their business.

A way to make the relationship between you and your builder smoother is to plan out how payments will be made, and stick to these plans. If you are bound by cash release terms from your mortgage lender (read more about getting finance here) make sure your builder understands what needs to be completed before you can get your hands on any cash, so they are not in the dark about what is required by them to get their money.

None paying clients

Sometimes people over spend and run out of money. When this happens the builder suffers. They have basically given you free finance for your build and you have not paid them. Sometimes clients can say that money is locked up for a month or so and when it becomes un-locked they will pay, but in reality this money does not exist and the builder has to basically accept it or take legal action, which is an option nobody wants because it can take a very long time and cost a lot of money. None payment for jobs causes builders to go out of business.

While most people are genuine and have simply ran out of money, there are some scammers out there who fabricate excuses to avoid paying. They will say workmanship is not good enough, or the job is unfinished just to avoid paying in full. To make matters worse to add credit to their claims they will bad mouth the builder and their quality to anyone who will listen, and this in effect hits the builder with a double whammy. They do not get paid and their reputation is tarnished all because the client can’t or won’t pay for the work done.

Builders union, driving up quotes

There is a practice known as ‘Covering’ that some builders use. Sometimes an architect will contact various local builders about a job and look for a quote, but instead of saying they are too busy and risk offending the architect (and thus missing out on future work) they put in a very high quote that will be rejected.

It is however not as transparent as this, what actually can happen is that the builder speaks with other builders that have been contacted by the architect and tells them to put in a quote so they can put in a higher quote. This means that the lowest quote is actually not that low at all but the other builders have agreed to put in noncompetitive quotes. This is a win win situation for the builders because someone gets a good price for their work while others keep their face and are considered for future work.

‘Covering’ partially stems from builder being too busy, but also because it costs them a lot of money to keep quoting for jobs, which in itself is a time consuming process. Builders often get quantity surveyors to do the quotes for them and this can get expensive since it can take 5 or 6 (free) quotes to land a job. So when the option arises to work with other builders to fix prices for a quote when you have no intention of doing the job then they will take it.

Summary

Builders can seem very expensive, and in a way they are. However the different areas discussed above shed some light on why builders quote what they do. There are hidden overhead costs, raw job costs, and a large amount of risk on the builders side that needs to be factored in. Making a profit is very tough and in a lot of cases a builder is just one un-paid job away from going under. While this may not help the self-builder who needs to get a large mortgage to pay for building work, it can go some way in explaining why builders can charge a lot of a building job.

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