The home-building industry is affected by many factors today. Home builders have a unique environment to work in. This includes labor shortages, inflation, supply chain challenges and a lack housing supply. These factors directly and indirectly contribute to the changes in home-building business owners. This quarter, for example, we found that home builders’ profit margins varied depending on the size of their projects, that the average time coconstruct software took to build a home was increasing, and that fixed-price contracts were used more frequently in mid-sized projects than last quarter. For our complete Q1 2022 residential construction data, please see below.
Builder profit margins rose for mid-size builders, but fell for larger projects
The price of a project affected how much the average home builder’s profit margin changed. For the third consecutive quarter, residential construction projects below $250,000 remained steady at 25.5%. However, the average profit margins of home-building projects between $500,000 to $1 Million continued their steady increase for the fourth quarter. This group of projects has experienced a minimum 2% increase in profit margins for the past three quarters. It is by far the best-known trend among homebuilder project margin trends.
Our Q1 2022 data set revealed that the most surprising results came from projects valued over $1 million. These projects, which often see the greatest quarter-to-quarter variation in profit margins, dropped 7% to 13.2%. Inflation could have an impact on the prices of materials and services. This is why larger projects see a drop in profit margins. This issue was not unique to projects of any size. However, larger projects are more likely to be affected by inflation because they may use cost-plus contracts.
It took a month to build an average home in Q1 2022.
Inflation, supply chain problems, and labor difficulties all contributed to a dramatic increase in the average time taken to build a home during Q1 2022. Homes that cost more than $750,000 took an average of 40+ days to build. This is the largest quarterly increase Construction Estimating Software has seen in the last two years. This sharp increase could also have contributed to the decline in profit margins of home builders that high-priced homes experienced in Q1.
The build time of homes built in Q1 at prices between $250,000 to $500,000 experienced a 12% increase. This average home took 217 business days to build, which is two weeks less than the average time it took for similar homes in Q2 2022. The lowest quarterly variation in any size home built during the last quarter was for homes priced between $500,000 to $750,000.
Some Movement of fixed-price Contract Usage
There was no significant movement in fixed-price construction contract usage for home building projects above $1 million and below $250,000. This was not true for other home-building projects. Our data shows that projects between $500,000 to $1 Million increased by 70.3% to 74.33%. This was the largest quarterly increase in the quarter, and it was also the second such quarterly rise that projects this large experienced over the past year.
Fixed price contracts have increased 10% in the last quarter of 2021 for projects between $500,000 to $1 Million. This consistent trend indicates that businesses that used to use open-book, or cost-plus contracts, are now switching to fixed price contracts. This trend seems counterintuitive at first glance. Cost-plus contracts seem to be more appealing to home builders than cost-plus ones, as they can pass on higher prices to their customers. Home builders should prefer fixed price contracts over open book projects because they offer higher average profit margins and the possibility to pass on material costs directly. With price fluctuations so prevalent, home builders might be less willing to share their cost breakdowns as it is essential for open book pricing.
Where our Numbers Came from?
CoConstruct is a platform that helps more than 100,000 professionals manage their clients and trade partners, schedule work and track financials. CoConstruct analyzes the data that builders provide to the system and can spot trends and highlight issues in residential construction. CoConstruct uses and shares this information to help eliminate the chaos in project management and create rewarding experiences both for home builders and their clients.