How COVID is Impacting Construction
October 9, 2020ADVERSELY!
That’s the short version…
COVID is making a huge impact on the construction industry. We’re seeing it all over the world. Shortages in material due to restrictions of all kinds which then increases….you said it….costs, is making the construction world a little stressful to say the least.
Today we’re talking about residential construction but much of this obviously applies to commercial as well.
If you’ve had a bid on your home for either a renovation or new construction expect a few things:
1. Delays. Everyone is working very hard to get the materials they need but there is only so much they can do.
2. Increase in costs. When shortages in supplies exist people have to pay more to get what they once did when there weren’t shortages. Econ 101. If your builder comes to you and says the prices for the big ticket items increased significantly expect some negotiation. If builders absorbed all of those costs to build your home and every other one they have going they would go out of business. It’s not practical much less feasible. Most try to stay within the scope of the contracted amount but understanding what’s going on and being reasonable goes a long way.
3. More stress. You may be okay with it taking longer and maybe with it costing a bit more but your builder is not and here’s why.
When they place orders for materials they have a specific amount of time to pay that bill just like we all do. The problem is they don’t get ANY money from the bank to pay those bills until that material is fully installed and meets inspection. During COVID (and any other time there are material shortages) they may have to pay the bill before they are even getting their material. Now you understand why your builder looks 10 years older. No money to pay sometimes 100’s of 1,000’s of dollars in bills.
Some of the supply companies can work with their builders but they are in the same position. Most of the time there are more than one middle man so everyone is in the same very stress-filled boat…
The other reason the stress mounts is your builder has to live too. They have personal expenses to pay too so when things slow to a crawl so does their income. Sure, they may be building 20 houses at a time and appear to be fine but when we have a global pandemic that just means the bills for those houses are through the roof.
Now that being said, the long-time builders have been through this before during the housing crash and brutal burn. They have lines of credit set up. They have payment plans set up when possible. They work to be pretty liquid…but let’s be real here. Cash flow is KING and it can go away in a hurry.
WHAT YOU NEED TO KNOW
Expect to carry your own construction loan. Some builders will carry these for their clients for a variety of reasons but during times like these you really need to carry your own and here are a just a few reasons why.
1. If you are approved for a construction-perm loan it’s done no matter what the market does from the time you sign on the dotted line to when you get the keys to your brand new home. You won’t be in a position to be denied when the house is finished.
2. A spinoff from #1….your builder isn’t left holding this house when you can’t qualify due to market shifts or job losses/layoffs.
3. The more leverage your builder carries the more opportunity costs he or she incurs. The details of this are vast so the full explanation of how this all works is for another day and post but the simple answer is as follows. They build spec houses, commercial projects and buy homes to renovate too so if they are carrying pre-sold construction loans that prevents them from being able to do these other projects due to a high debt-to-income ratio and thus prevents further diversification of their business.
WHAT YOU CAN DO
Be an awesome client! The article How to be a Rock Star Client will cover this with humor:)
Be decisive. When your builder needs you to pick out your siding type & colors, windows, doors, etc don’t flip and flop. Make a decision and stick with it. During times like these he or she has to get your orders coming NOW so they can be here in time for things to keep moving forward. Being indecisive is a killer to progress.
Be patient. There is literally nothing your builder can do about any of this so getting upset will only damage your relationship with them.
Ask. Yep. Ask what you can do to help. Sometimes calling your bank who is being stingy or slow with draws goes a long way. Ask if there are selections you can make now that will make things easier.
Be flexible. If the doors you want won’t be in for 2 months but similar ones can be here in 2 weeks choose the faster option. Sometimes there are big differences worth waiting for but most of the time it will be okay.
Reduce your overall budget for your project. If you know prices are rising it would be wise to keep a cushion for that. Do some math and make some decisions on what things can be cut or reduced. If you come in under budget, yay! If you come in at budget, great. But if you go way over budget that’s a big mess.
We hope that helps and as always, shoot me an email if you have any questions!
-Teresa