Homebuilders: Use rise-and-fall clauses to prevent financial loss

“In Australia, we don’t have rise-and-fall clauses, so the situation has been even more extreme,” Stephens said. “In the US, where they do have rise-and-fall clauses, we’ve started to see a lot of builders struggle to implement those additional charges to the consumer, so it has affected them as well.”

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Stephens told MPA that at least 50% of US builders have lost money in the last 12 months, partially due to an aversion toward passing extra costs to the client. Rather than pass on higher costs to consumers, Stephens said, builders oftentimes will simply bear the brunt of increases.

But this is a slippery slope as the practice begins to erode on homebuilders’ equity: “This is where it gets really serious,” Stephens said. “When you lose money – all the equity and reserves that have been built up in the last few years – we’ve seen a lot of companies wipe those out just in the last 12 months alone which now puts them a bit of a knife’s edge [as] they’ve got to replenish those reserves.”

Simply being mindful of past mistakes and vowing not to repeat them may prevent many builders from losing money, Stephens said. “But we’re still seeing way too many building companies not react and still continue to lose money. Not all of them – mainly it’s been the large building companies and then it’s been the smaller building companies that simply don’t know their numbers.