REAL Reasons Builders Go Into Liquidation - The Builders Edge

What are some of the reasons why building companies go into liquidation?

They don't know the numbers. They've taken shortcuts. They'll work on pure volume and turnover. You know, if you're running and building companies like, you really should order yourself as well, building sites, sitting there for 12 months, 18 months and beyond, unfortunately.

20% cheaper than another builder. Is that a point where you can go, hang on, why is this so cost effective?

We're all wise enough to understand it was too good to be true. It's too good to be true. You don't want to go signing up on the cheapest price because you could deliver. The next person has a half employed home.

Norm, what are some of the, the reasons why big and small building companies go into liquidation?

Yeah, look, good question that they're like, unfortunately we do see, you know, a lot of larger building firms, companies, you know, and some smaller ones go into liquidation there. And, you know, that's generally, you know, because of, you know, multiple reasons, you know, that they've been sweeping the, you know, the garbage under the rug and the rugs is getting bigger and bigger and better until it explodes. But, you know, the main reason is, you know, that they don't know the numbers. They really don't, you know, they've taken shortcuts through certain processes there. They'll work on pure volume and turnover. And, you know, that's where they start getting into the aspect of robbing Peter to pay poor, you know, like. But, you know, please don't understand that too, that there are often very good builders that find themselves in this situation. And that's, you know, not because they're bad people at all, you know, I mean, it's just because they don't know what they don't know, you know. So, you know, just because the building company goes into liquidation, you know, doesn't mean that they have been trying to sort of set themselves up for that. Like, no one wants that outcome. But sometimes there are other companies out there running so close to that red line and they're, they're just teetering with it, you know, and they're setting themselves up for failure there, you know, so a few things that they need to sort of consider, you know, if you're running a building company is like, you really should audit yourself as well. You know, like we personally audit ourselves every month. You know, everything, every job, everything that's going on there down to Descent, you know, you've got to keep your finger on the pulse and, and know your numbers, you know, for us we only quote from full plans and specifications. We don't just quote off concept drawings and chuck scratchings and then go to contracts with people and, you know, go, oh yeah, she'll be right sort of thing. You know, it's, we know our numbers on each and every job to what that's going to cost. You know, unfortunately, a lot of builders aren't aware that. And even contractors, you know, aren't aware of these things. Like you have a cost per job per day, you know, every day you have a job sitting there, it's, it's costing money, you know, and then you get these building companies there that will over commit themselves and extend themselves past their capacity. And that's where you start seeing building sites sitting there for 12 months, 18 months and beyond, unfortunately, which is just horrific. Like it should never take that long to build a home if you've taken on the volume of work that you can control, you know, that you can facilitate there. So, you know, the biggest pitfall that we sort of see is people just saying, yes, yes, yes, and they're, you know, signing contracts and they think things are hunky dory and things are so great, but they're signing contracts there below what it costs to actually construct. And the homeowner thinks, oh, well, that's great, you know, it's not my problem, but it actually could be your problem. If your home ends up only being half finished, you know, then they call on me to come finish it, you know, so it's one of those things that if a builder is not keeping their finger on their pulse and going through every little detail of the build and constantly managing that construction, things can get away from you very quickly. And if you have handfuls of builds out there and then these construction sites start bleeding cash, that compound effect and that dominoing that can come is absolutely enormous. So it's so important that builders really do the work and put the time in to quoting properly. That's each and every element, you know, making sure they are auditing their building company, making sure they're not taking money from their business that's not theirs. You know, it's all good and well that we get paid for all the stage payments that are there and they can be substantial amounts. But that's not your money. You know, you need to know the money coming in is there to pay your workers, your suppliers, your contractors. You know, these builders that are signing way too many contracts and taking them 12 months, two years and beyond to construct and finish a home. They're doing this because they probably didn't quote the project right to start with. So they've had to park your job over here and purchase other contracts over here and get deposits to help this here pay for this here, you know, so when you start seeing building companies taking so long to build and things don't quite seem to be lining up that it can be a bit of a telltale sign that are they actually in a little bit of hot water, are they robbing Peter to pay poor? You know, other ways you can look into this as well is that, you know, if you're thinking about building, look, you, you want to avoid being one of those statistics, you know, ask around to your suppliers, your contractors, you know, and find out there do they pay the bills in time or have they got a high turnover of staff and, and contractors and suppliers because they can't use this supplier here or contractor here because they haven't paid them for 90 days or 100 days or you know, sometimes unfortunately a lot further than that. And they'll go from one to the next and just keep piggybacking that round so they can keep extending that cash flow. But all they're doing is continuing to sweep a big mess under that rug and it's a volcano waiting to go off.

It's quite a scary picture you've just painted there in the industry.

Look, look, it is, it's it. And you know, and this is the thing like it's all about taking that right process, you know, and you know, skipping down that, the right yellow brick road, you know, unfortunately we're all become a bit like sheep at times, you know, and we all follow the herd, we all follow the big billboards and the flashing lights and you know, oh, my friend built here and it was great, you know, but it doesn't necessarily mean that you're going to have the same experience, you know, good chance that can happen. Yes, but you still got to be able to do a bit of your own research and groundwork there. You know, if building companies.

Are over committing themselves and signing contract after contract after contract and they're sitting still that long, they've obviously over committed themselves, you know, so do you really want to put yourself in that situation that you're waiting 18 months or more to be in your home and look, yes, your home might get finished but you know, old Peter over here is probably paid for your project to be finished because your, your money here pay for someone else's job, you know, so it's a big risk taking that, that journey there.

So, so from Your perspective, how does that vicious cycle end? Because if these bigger building companies, robbing Peter to pay Paul, as you say, they, they're constantly in the red. They're constantly chasing. So how, from your perspective, how do they. What should happen?

Look, unfortunately, there's a lot of companies out there that are actually trading insolvent. You know, that's the facts of it there, you know. And look, I did say before, you know, there are some companies that, you know, don't realize that that's a position they're in because they just don't have, you know, the, the skill sets or the, you know, I guess the knowledge and the things in place to be able to get that reporting and those numbers and understand, I think just getting numbers from your accountant, that's okay. You know, they've got to start understanding their wipa, the workflow. You know.

It'S highly critical that a builder actually runs a very tight ship and understands their numbers there.

So if, if, if I'm a homeowner, I'm looking to build.

I have this concern that if I may engage a particular builder, that they may go into liquidation. What are some practical ways that I can do that would help me gain a better understanding of where they're actually at and not just take what they say at face value?

Yeah, look, look, it is like if you think that you're engaging a builder that might go on liquidation, you probably need to turn around, go the other way straight away if you've got those gut feelings. But, you know, realistically, you, you really need to make sure that the builder that you're engaging, you have good communications with you. You need to be asking around and making sure they've got the report with paying their bills on time. You know, they're very punctual. Importantly, too, that they've been around for a long time. You know, like, if there's a lot of people now that think it's easy to start up a business there. You know, so many businesses fail in the first couple of years, and then the ones that succeed after that are the first two or three years. You know, a lot of them fail as well. Like, it's a big journey in running a construction business there. And it's so important that.

The messages that have been portrayed and given out there are true and accurate. Too many people think that all these builders making all this money and all these things, all great, but the truth can be there's a lot of building companies that they're not making any money at all, you know, and they're signing all these contracts and then when normality hits them or they stop signing these contracts there, their cash flow isn't there. They don't have money to pay their tax, their subbies.

Yeah. So do you reckon, is that, is that a red flag in itself? If a quote comes back and it's, you know, 20% cheaper than another builder is, is that a point where you can go, oh, hang on, why is this so cost effective?

I'll look most definitely like it. Look, we're all wise enough to understand if it's too good to be true, it's too good to be true. Do you know, it's, it's important, you know, if you're getting something that you believe is fantastic for you, you know, but you don't want to go signing up on the cheapest price and just going, oh well, she'll be right. So then, because you could literally be the next person that has a half completed home and then your home could be into courts for the next five years, you know, so then what it cost you after that, you know, it's, if you're getting those feelings, you know, my advice with any of that sort of stuff there is get a second opinion, get a third opinion, you know, get your solicitor, do a bit more groundwork there. You know, like a good builder should be able to openly communicate and show financial security there, you know, if it means of, you know, engaging, talking with their accountants. You know, obviously you have certificates of insurance and things that can be betrayed there as well. But easy early telltale signs are, are they taken on what they can handle and facilitate? If you, if your builder's got plenty of projects standing out there and timber frames are rotting in the weather month on month, it might be a bit of a telltale sign that they might have over committed themselves and that then can be a really, really dangerous game.

I love that. That's jam packed with value right there. Before we wrap up, I will just ask you one more question from our get to know your norm jar. Shifting gears towards the end.

Let's see what we get here.

All right, Norm.

Wrapping us up.

I didn't make this easy for you.

Norm. If you could eliminate one human emotion to make life easier, which one would it be and why?

Removing one human emotion to make life easy.

I actually think it was going to be an emotion. It would actually have to be the emotional attachment to how we get bounded to things itself because everything we do is driven by emotion, which is a good thing and a bad thing. You know, that that's what can also create procrastination and, you know, many positive things also. So I think it's the, the emotional aspect of it there, so we can maybe think a little bit clearer and make sharper, better decisions.

I love that. Well, thanks for your insight and your wisdom, Norm.

No problem at all. Thanks.

Till next time on the Builder's Edge.

Cheers, buddy.