Many factors are affecting the home building industry today. Inflation, labor shortages, supply chain challenges, and a lack of housing supply are all combining to create a unique environment for home builders to work in. These factors are directly and indirectly contributing to changes for home building business owners. For instance, this past quarter we saw home builder profit margins vary depending on project size, the average time to build a custom home increased, and more mid-sized projects used fixed price contracts than last quarter. See below for our full findings from our Q1 2022 residential construction data.
Home builder profit margins increased for mid-size builders and dipped for larger projects
The change in average project profit margin for home builders varied wildly depending on the price of the project. Residential construction projects priced below $250,000 were consistent, staying right around 25.5% for the third straight quarter. The average profit margins for home building projects priced between $500,000 and $1 Million, however, continued their steady rise for the fourth straight quarter. This group of projects has grown at least 2% for three straight quarters, by far the most consistent trend among home builder project margin trends.
The biggest surprise from our Q1 2022 data set came from projects priced over $1 Million. These projects, which typically see the largest quarter-to-quarter variation, precipitously dropped 7% to an average profit margin per project of 13.2%. This drop-off for larger priced projects could be a result of inflation affecting material and service prices. While this issue affected projects of all sizes, larger sized projects could be more susceptible to inflation due to their likelihood to use cost-plus contracts or from inflation compounding on larger projects needing more materials.
The average home built in Q1 2022 took a month longer to complete
Supply chain shortages, inflation, and labor challenges all combined to dramatically increase the average time it takes to build a home in Q1 2022. Homes built in Q1 that were priced above $750,000 took on average 40+ more days to complete than the previous quarter. This increase is the single largest quarterly increase that CoConstruct has measured over the past two years. This sharp rise could also be a contributing factor to the decrease in home builder profit margins that high priced homes saw in Q1.
Homes built in Q1 that were priced between $250,000 and $500,000 saw a 12% increase in build time. These sized homes took an average of 217 business days to complete which is only two more weeks than the average build time for these homes in Q2 of 2022. Homes priced between $500,000 and $750,000 saw the least quarterly variation of any sized homes built last quarter.
Some movement in fixed price contract usage
For home building projects priced above $1 Million and projects priced below $250,000, there was not any significant fixed price construction contract usage movement. However, this was not the case for other home building projects. According to our data, projects priced between $500,000 and $1 Million rose from 70.3% to 74.3%. This 6% quarterly increase was the largest of the quarter and the second such quarterly increase projects of this size saw over the last year.
Since Q2 of 2021, projects priced between $500,000 and $1 Million have seen a 10% increase in fixed price contract usage. This persistent trend suggests that the recent market factors affecting the residential construction industry are pushing businesses that previously used open book, or cost-plus, contracts to use fixed price contracts instead. At first glance, this trend is counterintuitive. With inflation causing ballooning material costs, cost-plus contracts would seem more attractive to home builders since they can easily pass along increased prices to home buyers. However, since the opposite is happening, home builders must prefer the increased average profit margins that fixed price contracts provide over the ability to directly pass on material costs in open book projects. Additionally, with price fluctuations being so rampant home builders may be more hesitant to openly sharing their cost breakdowns which is necessary in the structure of open book pricing.
Where we got our numbers from
CoConstruct helps over 100,000 building professionals manage clients and trade partners, schedule work, track financials, and more. Aggregating and analyzing the data builders input into the system, CoConstruct can identify trends and highlight emerging issues in the residential construction industry. By using and sharing this information CoConstruct is doing its part to eliminate the chaos of project management and help create rewarding experiences for both home builders and clients.