Difficult economic conditions, managing workforce levels and trying to get commercial projects built at a price sufficient to make an adequate return on investment are among key challenges in leading and managing a medium-sized property and construction company in Australia today, the head of a Melbourne-based residential and commercial building firm says.
In an interview with Sourceable, Varcon Construction managing director Michael Ahmet outlined five areas in which he feels developers and builders face challenges in the current operating environment.
1. Subdued economic conditions.
This is a particular challenge in Ahmet’s home state of Victoria which, unlike Western Australia and New South Wales, is experiencing a slowdown in residential building following several years of abnormally high activity levels and in which Ahmet says consumers are reluctant to spend amid concerns about their ongoing security of employment.
In order to manage this, he says Varcon has held off on some developments. He also says some pre-sales on larger projects are necessary in order to secure bank funding, albeit with these coming at a cost due to the need to offer discounts and incentives and the lower level of pricing power associated with trying to make sales at that early stage of the development process.
But he remains confident conditions will improve and that moreover, good projects in the right locations at the right price will sell – the only question being how long they take to do so.
“Once they’ve (householders in Victoria) got their job security in place, I think we will have a little bit of a hike second half of next year,” he said. “I think we should be in a good position where things settle down and people’s confidence comes back.”
2. Cost Control.
In terms of the commercial sector, Ahmet says there are challenges associated with maintaining a sufficient level of cost control in order to retain reasonable profit margins from a property development point of view – a situation not made easier by the high cost of labour on commercial sites and recent upward pressure on raw material prices associated with the low dollar.
Ahmet says the best way to manage this is to scale back projects. Rather than targeting the high profile jobs, he says Varcon will typically target three or four smaller profile developments, where some use of non-union labour is possible and the overall task of delivering quality output at a reasonable cost is less difficult.
3. Managing Workforce Levels.
Ahmet says this is an ongoing concern, with firms finding themselves picking up a sudden flow of orders and having to go out and source new contractors.
While overall labour supply is not a problem at the moment, he says sourcing extra help can be problematic in busier climates, and that even in relatively subdued conditions, challenges remain in securing the right contractors in order to maintain Varcon’s reputation for quality especially in the luxury home market.
Ahmet says Varcon’s core contractors have both residential and commercial accreditation, and thus the firm is able to use some of its residential workforce on commercial projects.
That, however, poses challenges in itself in terms of differing rates earned by residential and commercial contractors – a challenge he addresses through up-front communication.
“You’ve got guys coming from commercial sites, guys coming from residential sites and they say all of the sudden, we’ll hang on, you’re earning this, we are earning this,” he said. “There becomes a bit of politics behind the game. But we try and iron that out before we enter into the contracts and try and put everything on the table so people are aware about this.”
4. BIM/Mobile Workforce Technology
Asked about the opportunities in terms of technologies such as Building Information Modelling (BIM) and mobile workforce tools, Ahmet says these have potential but pose a challenge for many builders in terms of transitioning from traditional ways of working.
“Look, that technology is out there and I’ll be honest with you, I don’t think a lot of builders have really embraced it as much as what I think we should,” he said. “Most builders are still sticking to the way they do things. But I think it’s just a transition period for them to understand well, hang on, we need to look at alternative solutions to overcome the high cost of building.”
5. Sustainable Building
Finally, Ahmet is a strong believer in the need to create more sustainable buildings and communities, saying the industry has a big role to play in this area.
He does not see cost as a major impediment and says by and large, any price differential between eco-friendly houses and those constructed using conventional methods and materials should not be overly significant.
“I know for us, we’ve just finished a project where we’ve got a seven star rating on it and it has done well for us. I think that’s the future,” he said. “I think eco-friendly housing and recycled, reusable building materials are the future for a lot of our projects.”