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What to look out for when choosing a building company

4 March 2016

Kevin Atkinson, chief executive of top 10 national building company Generation Homes says people engaging with building companies should check the companies’ robustness by asking for particular information before signing any contracts.

The demise of Stonewood Homes has jangled the nerves of prospective new home owners.  While failures in the residential and wider construction industry have not been uncommon, to see a volume builder fail gets everyone’s attention.  Such receiverships shouldn’t be a familiar rebuild tale.  There are at least two sides to the success of any residential home build, even through the buoyant construction times that have been seen in Christchurch, Auckland and other parts of the country.

Firstly, the building companies themselves need to put processes in place to make sure they are ready to tackle problems that can arise – from cash flows being temporarily cut short to building material costs rising. Unfortunately in Christchurch many building companies, not just home building companies,  who have failed in the past five years were small contractors who started post-quake and expanded too quickly to try to cash in on the $40 billion rebuild.

Secondly, people engaging with residential builders should be asking for particular information to get a guide on a company’s robustness. They should be ensuring any company they engage with has a long and well established reputation. In 2014, more than 22 companies working in the wider construction industry failed, going into liquidation or receivership. The common theme with most of these companies was that they were less than five years old.

When a building company fails it is often the subcontractors left out of pocket that are among the most financially impacted, along with homeowners caught in the midst of a failed building process.  However homeowners are usually protected under the Master Build Guarantee run by Registered Master Builders NZ or Residential Build Guarantee run by New Zealand Certified Builders (NZCB).

A Residential Build Guarantee, which covers for loss of deposit and non-completion of a project, will help give a home buyer confidence. Customers should also be careful only to pay agreed sums to a builder on the staged completion of work.

Building companies, particularly those ramping up work, should be careful of cash flows. Some that have failed in the past have got into trouble because of time delays in payment or post rebuild delays from payments owed by insurance companies.

Some managers simply take their eye off the ball. They can be too focused on seeking out new customers and forget about keeping financials robust and keeping to a strict building schedule. Smaller companies can be hit if staff take time off through an injury or illness.

Within the Canterbury rebuild some firms have faced higher costs as subcontractors, with lots of work on, are not always available to move on to a build on the agreed dates. This can create a domino effect and push out building date completion and costs.

In the meantime prices keep rising. Other items like scaffolding, which due to increased health and safety laws need to be kept on site for longer than in the past, push up costs.

Some larger companies have realised their processes are poor, and brought in an independent board to oversee processes. Quality directors with excellent governance skills can make all the difference.

So what can prospective homeowners do to ensure they find a great building partner? They should use the traditional method of asking for recommendations as to who is the best in the market.

Checks can start at a builder’s website, but also involve the customer getting out to see the quality of projects the company has on the go and, particularly talking to others regarding their build experiences with the company. If new builds by a particular builder have visibly stalled, this is a bad sign.

Any mention of “PC”, “provisional costs” or “prices to be confirmed” in contracts should be avoided. This means a builder has not set in stone the price for a certain part of a build so that it can be altered if costs balloon.

However, the current economic backdrop should still be seen positively.

Kiwis wanting to invest or build new homes remain buoyed by low interest rates and strong net migration. The most recent figures from Statistics New Zealand show an annual net gain of more than 65,000 into the country.

Christchurch building companies faced off against land quality issues, a slow response by insurance companies and delays within council consenting processes. However many of those barriers have now been removed and people wanting to build their own home can be assured there are a lot of quality and reliable builders working in Canterbury.