The latest construction industry trends offered some much-needed aid to home builders and remodelers in the form of falling lumber prices. In Q3 we saw this relief take the form of stable profit margins, decreased project duration, and more projects using fixed price construction contracts. See the full findings for the latest construction industry trends in Q3 below.
Consistent profit margins in Q3 for all projects except those priced over $1M
Residential construction project profit margins remained flat for projects completed in Q3 2021. Compared to projects completed in Q2, projects completed in Q3 saw average increases of 1.4%, 1.8%, and 3.4% for projects priced below $250K, between $250K-$500K, and between $500K-$750K, respectively. These same projects also stayed within half a percentage point of their average profit margins the last two quarters, suggesting fairly predictable profit margins for projects of this size. The outlier to these construction industry trends were Q3 projects priced above $1M which saw a 4.14% decrease in average profit margin and had more variation in average quarterly profit margin per project. Notably, projects priced below $250K are the only price group that has had two consecutive quarters of positive profit margin growth.
While one to three percentage point swings may not seem like a lot, this directly affects a contractor’s bottom line. For instance, the 3.4% average profit margin increase for projects priced between $750K-$1M meant builders brought home on average $2,436 more per project. Conversely, the 4.1% average profit margin decrease for projects priced over $1M equaled an average of $98,595 less in gross profit per project.
Project starts return to pre-pandemic levels
The last nine months have been a wild ride for the residential construction industry as shown through the above chart displaying the productivity of CoConstruct builders. After 1.03 average project starts per quarter in Q2 2020, housing starts surged the next three quarters to a high of 1.46 starts per quarter in Q1 2021. But since then starts per quarter has fallen 12% and 22% in back-to-back quarters. CoConstruct builders started on average 1 new home in Q3 2021, the lowest number in any quarter since Q4 of 2019.
While down by 2021 standards, Q3 average project starts is up 6% versus 2019 numbers suggesting that the recent construction industry trend is reverting from inflated pandemic numbers back to normal operating levels. This could be the byproduct of factors including lumber prices returning to normal and labor shortages.
Residential construction project duration is on the decline
Home building project duration in Q3 2021 is down across all project price points except projects priced between $750K-$1M, which bounced back from a 4.1% decrease in Q2 to 5.1% increase in Q3. That increase amounted to 12 more business days for projects to be completed. Projects priced below $250K saw the biggest decrease of 6.5%, or 13 less business days to complete. Construction projects priced between $500K-$750K and above $1M both saw a 1% decrease in average project duration which equates to 3 less business days to complete.
More residential construction projects are using fixed priced contracts
Over half of projects in CoConstruct, no matter the price point, utilize fixed price construction projects. Lower priced projects in particular tend to use fixed price contracts more than higher priced projects. From Q4 2020 to Q2 2021 there was a construction industry trend of higher priced projects using less and less fixed price projects with projects priced over $1M only using fixed price contracts 49.1% of the time in Q2 2021. However, in Q3 this trend reversed itself with 54% of projects priced over $1M using fixed price contracts.
Open book contract usage, on the other hand, experienced the opposite trends with higher priced projects using less open book contracts. Notably, 15.1% of residential construction projects priced below $250K used open book contracts, the highest percentage over the last four quarters for that price range.
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 construction industry trends and highlight emerging issues. 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.