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By Amy teutenberg, Hotwire
September 12, 2017
Financing is by far the biggest challenge faced by developers and builders in Australia. Projects are finding it harder and harder to secure the funds required to begin construction with the recent tightening of lending policies by the Australian banks in Australia for property development financing. As a result, a large number of projects are either put on hold or cancelled. So how can construction companies offset financial restrictions on developers and end-buyers, whilst facing pressures to build quicker and more efficiently?
The recent change of lending policies has restricted the flow of funds to prospective developers. The tightening came after the Australian Prudential and Regulatory Authority put pressure on banks to rein in on investor lending.
In the residential market, banks now require the value of pre-sold apartments to equal a hundred per cent or more of the bank’s loan, rather than the previous 80 per cent. Conversely, the loan-to-value (LVR) ratio has dropped, which means banks will only lend 75 per cent of the total development cost, down from 80 per cent.
In addition, added pressure on end-buyers has triggered some banks, like AMP, to stop lending to investors for off the plan developments all-together to avoid the risk of not settling. When you put all these factors together, the strain on developers and builders grows exponentially.
Will Li, Director of SF Capital, tells Jobsite: “Banks are requiring higher presales, higher equity contributions (lower LVRs), more previous experience, and a myriad of other restrictions and controls.”
Li explains this challenging financing environment means developers without in-house finance expertise may struggle.
"Developers need to look for financial advisors who can problem solve and think outside of the box to navigate the financing process.”
The construction industry in Australia has already been running on tight margins, with one major error having the potential to send either the project or, in extreme cases, the entire company bankrupt. Making sure you’re meeting or, preferably, beating the product margins is even more important in a restrictive financial market. But beating the margins while remaining a successful and innovative company can be tough.
So how can you solve the small financial problems, in order to give yourself the best chance of success? There are some expert strategiesconstruction companies can use to make costs more predictable and, therefore, achieve the desired margins in today’s tough financial market.
Make sure estimating for projects is a collaborative effort. Consult project managers who are tasked with delivering the job ahead of signing off the estimate. It’s also important to evaluate estimates after completing a project to understand where they could have been better, and why a budget was or was not blown.
Get everyone building off of the latest information through cloud-based construction management software. This will allow one person to update drawings quickly, post RFIs, and publish them on the platform everyone has the access to, so that all relevant parties on the project have the latest information. This will increase efficiencies as no one will have an excuse to turn up on site with outdated documents.
Keep track of field tickets digitally to make sure that none go astray. This also means they can be added to the system on-site in real-time so that project managers and subcontractors are all aware of the changes. Taking field tickets digital will drastically reduce surprise bills for change orders that you didn’t know about which you can no longer reimburse, preventing you from experiencing fee erosion.
Don’t Do Extra Work At Risk
In construction, builders often have good relationships with their client. In order to keep the job going, they will work in good faith, believing they will be paid back for costs incurred for changes. Technology will help provide a system that makes it easy to track changes and receive input from the client, so that at a minimum, they are aware of the change and have approved the costs involved. You do not want to get into a situation where you have done a lot of extra work without an official sign off. At the end of the month,, when you have a number of change orders to deliver the client, they could dispute the price and you wind up not getting as much back, cutting into your margins.
Charge For Technology:
Charge for technology that adds value to a project by increasing efficiencies. Technology that helps manage projects should be in the job costs. It is a tool, just like a hammer, drill or crane that is necessary to run the project, eliminate risk, and reduce costs. We all want to limit overhead and make everything predictable. To understand what your true overhead is versus the cost of running the project, the technology used on projects should be in the budget.
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