Developer’s - Don’t Catch A Cost Induced Cold Because of Increased Prices in 2021
Updated: Jan 14, 2021
Every now and again we get significant events that instantly reshape the outlook of things. The landscape of construction and property development is set to brace itself for further conjoined impact of the COVID-19 pandemic and Brexit. After early and symptoms of the pandemic left many industries at breaking point during 2020. The full-blown ‘cold’ from Brexit and the prolonged impact of the pandemic may cripple others for years to come.
If you are still early in the development process, you have an opportunity to re-assess your estimated construction costs to make sure you are still achieving your target profit margins. It is also an opportunity to check that your development finance facility suffices to absorb any increased development construction cost projections.
Sounds trivial, right? It will surprise you how many developers run into this problem. If this happens this can lead to the entire supply chain feeling the effects too. Take the simple step of tracking construction cost movement and adjusting your borrowings to suit intime. Don’t be that developer who runs out of cash or the financier who funds a ‘dud’!
2021 will see a myriad of changes and amongst them an increase in development construction costs. Based on the material cost increase notices from some UK’s main suppliers, I have run a cost model to assess how this could impact a new build development providing 20 houses that average 120m2 (1291ft2).
The exercise focused on a handful of components, Internal doors, Insulation, mechanical and electrical components for new build residential properties.
Your contingency/risk allowance can absorb the increased cost or reduce I say your bottom-line profit. I can guess which one you'd prefer. Other considerations that may increase the estimated impact is the trade skills shortage, local construction market supply and demand etc.
So how do you mitigate the impact to the increased prices?
1. If you are early on in your development cycle, check the construction cost inflation projections. The industry term is ‘TPI’, Tender Price Index. When you complete your feasibility estimate and high-level programme, you can adjust your estimated cost to allow for this. By doing this you will have future proofed as much as practicably possible.
2. If you are slightly further down the line in design process, you could order some of these components and finishes ahead of time and store them. Obviously a cost benefit analysis on this will need to be undertaken. By ordering some these direct and issuing them to your appointed subcontractor to install, this may save you some money. Be mindful of the risk involved with this. For example, if the materials cannot arrive intime for the contractor to install, you may have to pick up the tab for the contractor’s standing time. Make sure you are (or appointed professional is) au fait with of your potential exposure under the terms of your building contract. But, if done right – you can save yourself some money.
3. If you are about to tender your project to a contractor and ordering materials ahead of time is not for you, you can incorporate non fluctuation clauses in your building contract. Your appointed Quantity Surveyor should be able to advise on this.
4. If you are midway through construction and your contractor is asking for you to cover increased costs–check the terms of your building contract and act accordingly.
In conclusion, I’d like to encourage you, to include “Cost Check Gates” in your development process so you don’t catch a cold as your project progresses. Be cognisant of the changing times as you analyse and strategize for your upcoming developments. Monitor market fluctuations on cost as this can dramatically affect your profit levels.
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