Builders operating in the black despite market challenges
In particular, the APB noted, builders must understand how their sales will affect their margins. “Builders who do not are often forced to drop their prices in order to win jobs, which can then in turn create a long-lasting domino effect that will ultimately impact their bottom line,” the group cautioned.
Yet there are signs that builders are heeding the advice: “We are pleased to see that builders are turning record revenues and net profit margins as it hasn’t always happened this way, even with less economic turbulence,” Stephens said. “We’re seeing builders get smarter about how to operate their companies. They are turning more profitable as a result of a better understanding of their finances, implementing better technology, and putting in place better sales and marketing processes.”
Does construction do well in a recession?
Stephens was prescient in predicting improved margins during an interview with MPA last summer when he posited how a recession-like climate may actually help builders – as counterintuitive as that may sound to a layman.
“In some respects, it will actually help them and that’s because builders tend to lose money in a booming market because their costs rise faster than their pricing,” he told MPA last July. “They can be very busy, but not always making very much money, or any money at all.”
Under a recession, he added, builders “… have the ability to renegotiate materials and improve their margins.” But Stephens warned: “One thing they need to be aware of is demand is going to soften greatly once this recession starts to bite. That’s when they have to be prepared for that. They’ve got to be working on their marketing and their sales process now to ensure they can sign contracts in 2023. The sales cycle for a builder is very long. You’ve got to be looking ahead six to nine months if the contracts are going to be signed.”