Property

Caveat emptor

As the credit crunch continues to affect certain areas of the economy more than others, notably the building sector, 2009 should be a buyer’s market. John Cahill, however, cautions against pushing too hard for lower prices

Independent schools remain a remarkably stable and sound investment from the point of view of the financial
marketplace, despite the current economic problems. Those schools that enjoy a more solid financial base may believe that now is a buyer’s market; and that they might be able to launch into a new building project at a huge discount. There are deals to be done and bank loans to be had at a good rate.

But wait! I sat in a meeting recently where all participants were being put under pressure to re-tender for a number of contract packages because the client was convinced that better deals must now be available. Energy prices are going down, some raw material costs are going down and labour is easy to find, if not cheaper in some areas, so why can’t a school cut sub-contracted packages by 25 per cent? To a certain extent this is true, but schools in this situation should bear in mind that the construction industry is more complex than they might think.

Some of the major brick manufacturers, for instance, will not be making any bricks for at least the first three months
of 2009 and one manufacturer is mothballing its works for at least 12 months. It has been stockpiling its bricks
(because of major demand) but has been losing a small fortune over increased energy costs. Now it has enough
bricks to supply the industry for the next one to three years, without actually needing to spend any money. Across the brick industry there will be a rise in costs of about 14 per cent in the first quarter of 2009. It is no good looking at alternatives in Europe thanks to the strong euro; material costs are not much cheaper.

Lower is better?
The other problem is that you cannot be sure why prices might be getting cheaper. Of course, a well run company will be examining its overheads carefully, paring everything to the bone to keep a good turnover without losing money, but there will be some that are so desperate in their desire to keep their company going that they will buy in work at a price that they cannot afford, build up a loss and if things don’t pick up, the company goes under. The construction industry has a graveyard full of such stories, all exacerbated by the tradition of paying in arrears during the construction process. A company only needs two or three bad debts to risk bankruptcy.

Second thoughts
If you do think it is a good time to begin a new project, do not think you can force the best deals out of companies, because you might be the one client to put them so near to the financial edge that they are forced into liquidation during the course of your work. This is the time for the greatest control of your cashflow and that of the companies with whom you are contracting. The best choice may not be the cheapest, but it may be the most stable. If your contractor or sub-contractor goes into liquidation during the course of the works, you will realise there is almost no price too high to guarantee that that does not happen.

When people boast to you that they have just agreed a really good deal for a building project, it will be interesting to discover how small a price they paid and whether, in a year or two’s time, they will think it was worth it.

John Cahill is managing director of Barnsley Hewett and Mallinson. John can be contacted on jc@bhmarchitects.com 

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