Forming a building company

[Rockstar]

Wasn't sure which section to put this thread into so I've decided on innovation as it will be innovative for me (as I haven't got a clue) but probably basic for others.

As some of you may know I have been developing duplexes by purchasing land with investment loans and using builders to contract the construction part. A friend of mine is a builder and has just offerred me an opportunity to form a company with him which would enable me to use his licence to coordinate the whole project and thus cut out any contracts with builders. I am quite capable of organising building projects and this may present great opportunity for me in my developments as it gives me more control over a project. It would ensure efficiency in the whole process.


Does anyone have any experience with this company business structure?
What are the pros and cons?
I will speak to my accountant and solicitor in the next week but thought I would get some thoughts from you folks first.

Thanks

 

[Aaron Sice]

Pros - if they're not obvious, don't do it.

Cons - a business partner.

 

[Chomp]

Rockstar, I have experience with this, Im not sure how it works it NSW but in WA there are a couple of different ways you can set the company up, so you would need to investigate that further.

Pros - you cut out the builders margin 20% ?
- tax benefits of running a business
- you get to make the decisions
- Obviously you are not just using his license as you put it, he would be there to guide and advise for his money, otherwise it would be illegal.

Cons - you take responsebility for everything, including all insurances,workload and risk that comes with building.

So I guess you need to make a decision if you can bothered with the work load and the risk to save on the margin.

If you are building basic project homes, I wouldnt think it would be worth it. But if you were building around the 3-400k each house and doing 3-4 a year maybe.

Chomp

 

[Cian]

Pros - you cut out the builders margin 20% ?
- tax benefits of running a business
- you get to make the decisions
- Obviously you are not just using his license as you put it, he would be there to guide and advise for his money, otherwise it would be illegal.

Builders margin of 20% is very high in my opinion. 15% max

There are so many pot holes when running a Constuction Business. Delays with suppliers/ bad workers/ permits/ Plant etc

You would be far better to word you own contract rather thn accepting the builders one which is written to benefit the builder, if you write your own or take a standard form of contract (AS-4000, 2424, ABIC or PC-1, deping on what you are building) you'll could save that 15% in profit and overheads that the builders charges and also hit them for LADs if they dont complete on the date they said they would.

If they want the work, they'll accept the contract. Contracts are becoming more, more in favour of the client and putting the risk on the contractor so why accept a contract that favours the Contractor to take their time and essentially have you fund them to build the project?

C

 

[Sheryn]

Chomp & Cian

Rockstar is now trying to take the next step and form his own building company. Rockstar has a track record on SS of building and selling duplexes just wants more legal control.

His builder has suggested he form a building company with his builder. The question is 'how can Rockstar form a company with his builder? IMHO


Do they both put in equal $?

Does Rockstar include his wife as Director too?

Should the builder be employed as an employee on the 'proviso' that 3-4 duplexes are built each year.

I think the issue is Rockstar can manage most aspects of the process but is not a licenced builder.

By most processes I mean....

• Find block of land
• Visualise what can be built
• Source funding
• Apply for DA
• Project Manage & discuss and organise all subcontractors in a timely manner
• Get hands dirty when necessary
• Complete within budget
• Sell property & make profit

Start above process again

Back to the title of the thread - what does he need to do to form his own building company?

Speculative business edge would be Rockstar's landscaping skills, street appeal IMHO.



Kind Regards
Sheryn

 

[Aaron Sice]

Builders margin of 20% is very high in my opinion. 15% max

C

if you're running a 15% margin, i have about 250 homes coming up that can use you.

we're staring down the barrel of 30%+ margins with project builders.

 

[oc1]

if you're running a 15% margin, i have about 250 homes coming up that can use you.

we're staring down the barrel of 30%+ margins with project builders.

When building units/twonhouses, my experience is that you will save the 20% builders margin and save about another 10% on building costs by fine tuning your costs when compared to a volume builder.

 

[Chomp]

Sheryn,

I thought I answered all of Rockstar's questions in his post, I specifically said to find out more information from the builders registration board in his state as to how he could set up a construction business.

It might or might not even be possible, there are a few criterias to be met regarding the licensed builder and other standard things like cash flow, accounts with suppliers, indemnity insurance etc.. so we would be speculating until further informaion is sought.

Chomp

 

[Cian]

if you're running a 15% margin, i have about 250 homes coming up that can use you.

we're staring down the barrel of 30%+ margins with project builders.

30% !!

Are these single home projects? I'm used to dealing with larger projects. I find that alot of these home building companies are cowboys.

Does anyone have any experience with this company business structure?
What are the pros and cons?

These were the questions I was hoping to shed some experience on.

 

[Rockstar]

Thanks for the responses. I shall explain a little more, even though Sheryn explained well what my position is.

I have so far used a project builder and 2 conventional builders - one of whom is a trusted friend and has made this offer. I am an experienced landscaper and can competantly run a building site. I have been heavily involved in the process of all 3 developments so far. My builder friend will obviously be renumerated for providing experience and licence toward the company but will leave the selection, coordination and management of projects to me. I would therefore have a major share in the profits and gain control of the building process without having to deal with builders, building contracts and their inefficiencies. I am not planning to build for anyone else but myself. Some projects would be build and hold and others build and sell to create cashflow. Small is beautiful and I am into beauty. I am in the position to specialise in duplex and granny flat projects flowing from my knowledge and understanding of the local DCP.

I have no knowledge of company formation, structures so I thought I would begin here by asking you lot.

Rockstar, I have experience with this, Im not sure how it works it NSW but in WA there are a couple of different ways you can set the company up, so you would need to investigate that further.

Chomp, Are company laws different from state to state? I thought it would come under national law?

Pros - you cut out the builders margin 20% ?
- tax benefits of running a business
- you get to make the decisions
- Obviously you are not just using his license as you put it, he would be there to guide and advise for his money, otherwise it would be illegal.

Cons - you take responsebility for everything, including all insurances,workload and risk that comes with building.

Agree with this. Just need to get my head around the tax benefit part and legalities and flexibility of the structure. How does the agreement of distributing profit work? Can you make your own agreement? ie: is there much flexibility in the set up? Also what costs are involved in set up and ongoing fees?

Thanks,

 

[morty]

Hi Rockstar,

I decided to take the plunge and start my own building company about 3 and a half yrs ago. I'm a chippy by trade but have always been more into the developing side of things rather than the nailing, if you know what i mean. I knuckled down and got licensed and now i've got my brother on board (also a chippy) who organises most of the trades, workers etc while i concentrate on the business ie. sourcing sites, finance, sorting insurances, trade accounts, council, you get the picture.

We have slowly built things up so i am mostly doing the above tasks but early on, as we pretty much started from scratch, i was on the tools a lot as well. Persistence seems to be paying off however and the developing side is becoming my domain.

I have found the upside is that although our building company has to (obviously) charge our development company for each job, we can keep the margins to a minimum whilst also paying ourselves a wage from the building. This was the biggest problem i found when starting out (before we formed the building company) was living day to day when we were only getting paid on a job's completion. Nowadays however each job pays us a wage while it's underway and the end is the cream.

It has not been all beer and skittles mind you, we have had to give it a real crack, but we are starting to make some real headway and i think that you would not look back if you go ahead with it.

For some reason people always think you need to be able to hang a door or frame a house to be a builder. That stuff's all for the carpenters to worry about, the builder really has to wear every other hat and direct the traffic while the trades do their thing.

Good luck with it mate,

Morty

 

[Rockstar]

Thanks for the encouraging words Morty,
Congrats on your progress. We are obviously on the same development path although I had never considered the company set up until my builder mate called me this morning. He is also not sure of the way to set this up but merely knows that this is the way that others operate. I am not prepared to go out of my way to get a builders licence so it would be great if we can team up.

My solicitor has informed me today that he doesn't have the experience to help me on the company set up so I am going to have to find one who does.

I have found the upside is that although our building company has to (obviously) charge our development company for each job, we can keep the margins to a minimum whilst also paying ourselves a wage from the building.

Any chance of explaining the mechanics of this? And also what is involved in setting these companies up and what are the initial and ongoing costs?

 

[morty]

Hey Rockstar,

My accountant has been great in setting me up with the legalities of it all. My building company is a pty ltd company and i am the sole director and shareholder, i am currently working on including my brother in this but at this stage it's just myself. The company has 12 x $1 shares of which i have ownership of but i can add/remove shareholders as well as directors if and when it may be necessary.

We have a separate company for the developing, also a pty ltd co. of which employs the building company on a contract basis.

So my bulding company has the builders warranty insurance, public liability and contract works insurance, (all provided by the one insurance broker) but the builders license is in my name.

The way we work it is the dev co. buys the site and pays all outgoings, the build co. writes up a contract and then it is treated like any other client build as far as invoicing, stage payments etc go. We draw a wage from the build co and the dev company makes most of the profit which at this stage is mostly all rolled into the next job, or as you have mentioned some of the houses are kept.

Some banks sherked at our dev co employing the build co as they saw it essentially as owner/builder but we have been using westpac business banking for a few yrs now and although they move slowly, they view the contract as if from any other building company so it works well.

Not sure if i'm helping you at all or just ranting but i'd def have a chat with your accountant first and see what he recommends then you need to find an insurance broker that handle builder's insurances.

Hope all this helps

Morty

 

[Rockstar]

Not sure if i'm helping you at all or just ranting

Mate, I am very grateful that a stranger is even trying to help me. The world becomes a better place when more people help others without expecting anything in return.

I will organise an appointment with my accountant.

What lvr does wbc lend to and do you have to personally guarantee the loans?

 

[grossreal]

hi
maybe you need to look at a very different structure
you can do the same as you are doing but you buy the land and then put a developement management agreement in place that sits above the site.
the builder does the build at cost and you share the profit of the management agreement
this way you are not partners
we do this in alot of deals
yes there is a company and trust that is the development company but each makes no profit and closes at the end of each project
with your structure the banks have an issue where the builder is the developer as well
with the above he is just a share holder and gets a share of the profits
you still have the risk on the land and he still has the risk of the build.
but is a very smooth structure and the banks do like this type of structure
if you wish you have my numbers
I don't see alot of point in being part of a building company unless you wish to be on site as part of the building group

 

[Chomp]

Rockstar,
I can only talk about WA, we have a Builders Registration Board, they show you how to legally set up a company using a licensed builder. this would be your first step, then see an accountant on how to structure it after that.

There are a couple of ways to do this, one is for the licensed builder to be an employee of the company, but he can only do this for a certain amount of companys at one time.

I am an employee of a building company, because I am licensed the company has been issued its own building license number, it doesnt use my number. However if I leave half way through a project, then they need to find another registered builder to carry on construction, which sort of puts them over a barrell, you need to have a fair bit of trust. Some people set up a company and just employ a registered builder which is not the correct structure and they have been fined, although they probably had good intentions, so you need to be aware of this.

You can also go into a partnership or form a pty ltd company.

WA also has the MBA master builders association, they are also very helpful regarding this sort of thing although not the cheapest.

Chomp

 

[Rockstar]

Onya Chomp,

Sheryn has just booked us in to the 2010 MBA Building Spectacular in a couple of weeks time at Ballina, NSW, so we can go and seek out some answers.

Some people set up a company and just employ a registered builder which is not the correct structure and they have been fined, although they probably had good intentions, so you need to be aware of this.

Is it legally ok if the builder who is employed by the company is also a director of the company?
This is the scenario that I require. To be able to use the licence of the company (backed up by the licence of the fellow director) to run building projects despite having no licence myself. The builder has complete faith in me to competantly manage development projects from start to finish.

 

[Savanna100]

Corporatoins law is federal but most solicitors could help you with incorporating. They often field the work out to companies who just do incorporations.

However, get someone who can give you sophisiticated advice about trusts/Pty Ltds for a full explanaton about the way you should go.

Also, whilst you may have a main company as a business structure, most of my development applicants in the past had a separate company for each project, this seemed to give the best protection. You could start a company for each construction, run the job and then close it down at the finish of the defects liability period for maximum protection.

 

[Rockstar]

You could start a company for each construction, run the job and then close it down at the finish of the defects liability period for maximum protection.

Hey Savannah,

If we are building spec houses is there a defects period? I thought it was only relevant for building contracts. ie: builder and client scenario?

 

[Chomp]

Is it legally ok if the builder who is employed by the company is also a director of the company?
This is the scenario that I require. To be able to use the licence of the company (backed up by the licence of the fellow director) to run building projects despite having no licence myself. The builder has complete faith in me to competantly manage development projects from start to finish.

I couldnt see why not, but do not take this as advice.

Rockstar I think you should do a bit of part time study to be honest, construction & materials subjects might be enough. Scheduling trades is one thing, but making sure you and the trades are doing their work correctly and complying with the acts & regulations is another.

Chomp