Forming a building company

[Steve Fitz]

Yes you can be the registered builder and director - this is common.

Essentially to open a building company you form a company - generally create a trust which owns the shares of the building company, then you apply for registration as a building company and name your registered builder who is acting as the supervisor.

It's pretty simple. You'll need a business plan, cash flow forecasts, balance sheet etc for the builders rego as they will want to see equity positions etc.. You also need equity to get indemnity insurance (though it might be different in NSW).

After reading your posts though, i'm not really clear on why any of this is neccessary? On the one hand you're saying you'll have more control and pay less for your developments, then you're saying you'll draw down and pay your wage from your developments?

Are you just changing jobs? Landscaper --> Builder?

If your friend is willing to let you use his ticket to builder at a reduced margin on your projects, why start a company? Why not sign a building contract under his name and have him pay you to supervise etc?

Also, don't become a director in a building company unless you want a huge risk portfolio. If you're a landscaper (and i mean no offence by this) you're probably not qualified enough to understand the pitfalls of being a builder, or the requirements put on you as a builder. I'd imagine you are familiar with the HBCA1991 but that doesn't even scratch the surface.

Building companies are also not the best business to grow and sell as the good will value is really small. So this line of thinking shouldn't come into the equation. Builders make money when they operate, and close the doors when they decide to shut up shop. They're rarely sold for any significant amount of money.

All in all, i'd stick with your current job, pay your mate a reduced margin to build and then get him to pay you as a contractor to supervise etc... to avoid license lending.

 

[Steve Fitz]

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

I'm thinking you must be talking about Cost Plus contracts Cian, because 15% is extremely rare as a fixed price contract.

Also, any building contract under $500,000 incorporates the HBCA which DOES NOT benefit the builder at all. It's actually fairly neutral. You just need to be aware of yours and their obligations beforehand.

If you're looking for liquidated damages do your calculations before signing the building contract and agree to a specified time frame that is suitable to you. Then add a special condition to the contract that nominates a calendar day when the project is to be completed.

I've had people ask for that from me before and I suggested they agree to pay the agreed liquidated damages amount for each week it finished ahead of schedule and i'd pay them if it finished late. Not sure why they didn't like that offer?

 

[Rockstar]

After reading your posts though, i'm not really clear on why any of this is neccessary? On the one hand you're saying you'll have more control and pay less for your developments, then you're saying you'll draw down and pay your wage from your developments?

Basically I want to develop and build property but haven't got a licence. He offerred this to me through a company structure and I posed some questions in this thread. We both haven't got a clue if it is the best thing to do but I thought it was worth asking for advice. If I have control over a project I know I can finish it quicker and to a higher standard than a project company or local builder. I don't have to **** around explaining things to the builder and keeping an eye on their tradesmen.

From your post I can see that it could get complicated but it's good to get feedback from experienced hands like yourself.

Thanks

 

[Sheryn]

In NSW the Department of Fair Trading have been holding 2 hour Information Sessions for Partners of Builders.

The main piece of information to come out of the above sessions is Builders are being informed to form a company for asset protection especially if they are sole traders or in partnerships.

Subcontractors are also being advised to form a company for asset protection.

COMPANIES, companies everywhere.....

So I can see why Rockstar's Builder has asked about forming a company together.


Regards
Sheryn

 

[ok180]

Developer is one thing

Builder is another

Build and Develop another again.

I work in the building industry. The real money being made albeit a bit risky is by the developer. By buying land and the process of bringing it to a higher value is where the meat is. The building basically just costs what it costs. If you want a career change then go for it. If your doing it to save a dime you'll probably be disappointed with the returns when you take into account the time your putting in.

 

[Steve Fitz]

In NSW the Department of Fair Trading have been holding 2 hour Information Sessions for Partners of Builders.

The main piece of information to come out of the above sessions is Builders are being informed to form a company for asset protection especially if they are sole traders or in partnerships.

Subcontractors are also being advised to form a company for asset protection.

COMPANIES, companies everywhere.....

So I can see why Rockstar's Builder has asked about forming a company together.


Regards
Sheryn

While there is some flimsy protection forming a company most suppliers etc... make directors sign personal guarantees before doing business, and if you can't get suppliers you have no business - so you've signed away a lot of protection.

You can argue personal guarantees are easily challenged etc if things go pear shaped but it's not a water tight arguement.

Again, my main point is, if your friend is happy to build for you why not just agree to a rate he is happy with and don't bother with the company or any other involvement.

 

[Rockstar]

Again, my main point is, if your friend is happy to build for you why not just agree to a rate he is happy with and don't bother with the company or any other involvement.

He is not happy to build for me. He is happy to build with me as he lives 1000km away. He is happy to have me manage development projects that he would only have minimal involvement in. ie: licencing, planning and technical matters. Like I said we are not building for other parties and our developments are very low key simple duplexes.

 

[grossreal]

hi all
couple of things
first the money in a development is not in the building its usually between 5 and 10% margin its in the front at land purchase and at the end property sales
the developer needs to do three things
one buy at the right price or well under it
get a da for as little as possible
and then sell for a margin over 21% after all costs
now a builder is required to quote the building work out costs and have a margin of 5 to 10% in the build
so which is the more profitable
also the builder has a problem with both cashflow and gst and this is one of the major reasons builder go into liquidation and so on and the reason that they use companies and trust to close off at the end of the project.
forming a company to reduce costs in the building section for me just is not worth it
a DMA costs a few hundred dollars and does the same thing but you are not setting up as a ongoing group they are single deal agreements.
oh and in nsw its a 5 year coarse to be a builder and you have to have come from a trade so a landscaper could not from my understanding be a builder in nsw and unless he did a trade carpenter electrician plumber etc he won't get past first base.
are you looking at this company reducing costs (which I don't see it will) or to secure your builder so he will do your building cheaper
they are very different

 

[Sheryn]

a DMA costs a few hundred dollars and does the same thing but you are not setting up as a ongoing group they are single deal agreements.

What is a DMA?


Thanks in advance
Sheryn

 

[Melbournian]

interesting - i am looking to form a building company to do a few owner builders (1 of myself the other 2 my parents). Going on the owner builder course in victoria and then proceeding to get the permit organize the trades etc. You going ot have to get all the insurances etc however it still works out cheaper than getting a normal builder to build.

 

[Steve Fitz]

He is not happy to build for me. He is happy to build with me as he lives 1000km away. He is happy to have me manage development projects that he would only have minimal involvement in. ie: licencing, planning and technical matters. Like I said we are not building for other parties and our developments are very low key simple duplexes.

You've solved the problem with this comment Rockstar - he cannot operate as a supervisor of a building company being 1000km away. You would need a local person who can nominate as the registered builder for the company and he must be 'on the job' so to speak.

Short term (ie <6 months), 1000km away is OK and there are allowances for that, however if this is the long term arrangement you'll find yourself in trouble.

 

[grossreal]

hi sheryn
have a read of my post before
a DMA
is a development management agreement and is used on sites where the land owner wishs to share in profit but not in the developing group.
so in effect the land owner stays the land owner and the development company builds or develops on his land
its a bit more involved then that but thats it in a nutshell.they are becoming more popular as alot of the land deal are not encumbent so its a simple deal just doing one thats a 21 unit development site where the land has no debt
make the deal easier from a funding point of view as well
as the funder is funding the builder more then the developer

 

[Steve Fitz]

interesting - i am looking to form a building company to do a few owner builders (1 of myself the other 2 my parents). Going on the owner builder course in victoria and then proceeding to get the permit organize the trades etc. You going ot have to get all the insurances etc however it still works out cheaper than getting a normal builder to build.

I think this is a similar thought line to a lot of car owners who decide to become their own mechanic to 'save money'. Generally speaking most things you'll try to fix yourself will end up taking you longer to do yourself, probably not done as well and if you actually paid yourself the hourly rate you can earn in your day job you'd find you would be better off getting a mechanic to fix your car. Oh, and housing is far more complex than fixing most things in a car.

Cars always show up on site when they say they will.
Cars don't half complete the work but invoice you for the full amount, then not return to site because you've already paid for the job.
Cars parts don't go up because you only have 1 car to fix.
Cars don't cost you more the longer they take to fix.
Cars don't steal parts off you.
Cars parked in your garage don't have worksafe inspectors arrive and give you orders to remedy.
Car parts rarely arrive in short quantities
Cars don't leave your garage because you're short on parts and refuse to return for 2 weeks, even though the parts arrived 2 hours later.

I could go on but i think you probably get my point.

 

[Minx]

I think this is a similar thought line to a lot of car owners who decide to become their own mechanic to 'save money'. Generally speaking most things you'll try to fix yourself will end up taking you longer to do yourself, probably not done as well and if you actually paid yourself the hourly rate you can earn in your day job you'd find you would be better off getting a mechanic to fix your car. Oh, and housing is far more complex than fixing most things in a car.

Cars always show up on site when they say they will.
Cars don't half complete the work but invoice you for the full amount, then not return to site because you've already paid for the job.
Cars parts don't go up because you only have 1 car to fix.
Cars don't cost you more the longer they take to fix.
Cars don't steal parts off you.
Cars parked in your garage don't have worksafe inspectors arrive and give you orders to remedy.
Car parts rarely arrive in short quantities
Cars don't leave your garage because you're short on parts and refuse to return for 2 weeks, even though the parts arrived 2 hours later.

I could go on but i think you probably get my point.

Interesting way to put it.

One thing that I will say is please do not get into the construction and building game as a "builder" unless you know how it all works.

I can say that my other half who is a chippy by trade and still works as a chippy as well as a "builder", he will not do work for an owner builder. The reason being is that based on past experiences, and recent conversations with others, most, if not all ob's rely on their trades in order for the project to progress. Also, if he has been requested to do work by a builder that he does not know, he will do his research and ask around to ascertain if that builder also relys on their trades.

When I say rely on the trade I mean that it is expected that the trade will complete materials lists, call the steel manufacturers organize the sequence of the other trades etc - basically all the things that a builder should be responsible for.

 

[Tools]

interesting - i am looking to form a building company to do a few owner builders (1 of myself the other 2 my parents). Going on the owner builder course in victoria and then proceeding to get the permit organize the trades etc. You going ot have to get all the insurances etc however it still works out cheaper than getting a normal builder to build.

As an owner builder you can only get one permit in a three year period, and you must be on the land title as the owner and intend to live in the house.So if you are on your parent's title and are going to live in all of these houses as they are completed over the next 6 years then your plan might work.

Tools

 

[Rockstar]

first the money in a development is not in the building its usually between 5 and 10% margin its in the front at land purchase and at the end property sales

Hi GR,

Appreciate the feedback. I would have expected around 20% on smaller developments like mine.

the developer needs to do three things
one buy at the right price or well under it
get a da for as little as possible
and then sell for a margin over 21% after all costs
now a builder is required to quote the building work out costs and have a margin of 5 to 10% in the build
so which is the more profitable

Yes the developer receives more profit in this scenario but, again, do builders seriously operate on such thin margins? I don't see how a builder would build a 200k house and only expect 10 - 20k for 4-5 mths work. I am planning to make 20% on the build and 30% on the development. But moreso, to be in control and self reliant will give me a more enjoyable and efficient outcome.

oh and in nsw its a 5 year coarse to be a builder and you have to have come from a trade so a landscaper could not from my understanding be a builder in nsw and unless he did a trade carpenter electrician plumber etc he won't get past first base.

I realise this which is why I need to rely on someone elses licence. To spend 5+ yrs is not an option

 

[Rockstar]

he cannot operate as a supervisor of a building company being 1000km away.

Hi Steve,

Well that's up to him. He would visit the site as and when necessary.

Short term (ie <6 months), 1000km away is OK and there are allowances for that, however if this is the long term arrangement you'll find yourself in trouble.

What kind of trouble would this be? I know a builder who lived in Byron Bay and carried out all of his building work in the Blue Mts. (previously lived there and formed his team while he was there) Sure, he had to visit occasionally but his team was regular and worked efficiently without him around most of the time.
In this case, I have the team and he trusts me to keep an eye on things thus reducing the need for him to travel up every week.

 

[Rockstar]

I think this is a similar thought line to a lot of car owners who decide to become their own mechanic to 'save money'. Generally speaking most things you'll try to fix yourself will end up taking you longer to do yourself, probably not done as well and if you actually paid yourself the hourly rate you can earn in your day job you'd find you would be better off getting a mechanic to fix your car. Oh, and housing is far more complex than fixing most things in a car.


I could go on but i think you probably get my point.

Well I don't accept this in my case. I understand where you are coming from but there are always exceptions to this rule - and I am one.

Oh, and housing is far more complex than fixing most things in a car.

Not for me mate. Nothing is too complex to understand if you have a passion for that particular activity. Just don't ask me to fix your car.

 

[grossreal]

hi rockstar
what returns did you think they make
your 20% is on the development not on the build
what returns did you think a builder makes
they make about cost plus 10% if they get the cost down then its better for them
they have to allow a 5% contingency for roduct movements
but am interested to see what you think they make
its usually all costs plus 10 have not seen alot that can get over this as the other bulders will under cut
unless you have a person doing cost plus 20 and then he is the winner
if we areing a builder to build to do a cost plus and he is just using his license its cost plus 5% and we cover costs thats why I could not see why you would want to get into this part of the deal

 

[Rockstar]

hi rockstar
what returns did you think they make
your 20% is on the development not on the build
what returns did you think a builder makes

I would have thought they require 20% on small projects such as mine. Of course, on larger projects and larger volumes this would reduce. But, saying this, I am just going from my experience in my local market. I am far from an expert on the matter.

I could not see why you would want to get into this part of the deal

Appreciate the concern GR, but I really enjoy the whole process and I believe I am making 20% on the build. It may seem like buying myself a job but it is invaluable experience in understanding the whole industry and its processes. It will make me a better developer.