The Quake Factor in pricing
Pricing projects is a very subjective role as the estimator, as well as trying to best gauge/guess/assess the cost of labour, material and profit also tries to guage the market conditions and competitors and where to pitch the price.
While listening to an interview on Radio NZ National with some builders and tradespersons in Christchurch who were claiming the rates being set for work were unrealistic and considerably lower than what was needed to meet their current costings. EQC and insurance companies have been taking quite a public bashing and some of it is justified, however there are also inaccurate, inconsistent and unbalanced articles about what is happening in Christchurch, so we investigated to see what was behind this latest claim.
The ‘Quake Factor’ was first bought to my attention following the Edgecombe earthquake that occurred 2 March, 1987.
One of the bread and butter roles of a quantity surveyor is the setting up of rates for pricing work, or challenging someone else's rates in defence of a client who should be only paying reasonable prices. So when the prices for building repairs following the Edgecombe earthquake started to rise unjustifiably, the nickname ‘Quake Factor’, or in this case the ‘Edgecombe Factor’, was born.
And the reason for this increase?
Quite simply it was the locals increasing their rates because of all the extra work that suddenly became available. This situation was soon recognised and solved by bringing tradespersons from other centres who were happy to do the work at more acceptable rates.
After talking to reliable and trustworthy sources, we are told that the preset rates used by some PMOs authorised to allocate work in Christchurch are higher than the market rates used prior to the earthquakes and therefore realistic.
With the promise of an increase in work there is always the desire for trades to want to take all the work that comes their way but that usually means expansion and an increase in financial commitment. Under such circumstances there is a need for cashflow linked to actual work outcomes so extra care is needed before the work arrives and good business practise in running an efficient business.
We have also been told there are some ridiculous prices and claims being ‘tried on’ and this has been confirmed by Wellington contacts who are also involved with some of the Christchurch work. From the information obtained we have created an example of an unrealistic business practise:
Once upon a time there was a good painting sub-contractor with great ambitions who was promised lots of work and on that basis decided he must expand. Things looked so great that he employed labourers on $30.00 an hour to be part of his expanded team and he also needed and got more vehicles and supervisors for the extra work. In reality his new staff was over-paid and didn’t have the expertise required; quality suffered, outcomes were lower and more repeat work was necessary. The firm didn’t get all the extra work expected, but still had the increased overheads. To continue to operate this painting business justified an increase in rates to cover all costs. In simple terms the business needed higher payments to cover costs of a poorly run business.
So what's the possible outcome of the Quake Factor increases?
As noted earlier, rates for most work in Christchurch are higher post-earthquake. It's not possible to use the Edgecombe solution of bringing in extras because there's too much work over too big an area.
There will be those who would be happy to see the high fliers, who set up to take advantage of the glut of work, have their wings clipped, however there will also be concern that the standard of work will suffer as tradespersons look to cut corners to keep up with the work or to add margin to a poorly run business.
It's hoped that there is a comprehensive quality control system to ensure this does not happen. – is there not one?
It does mean that companies will need an efficient operation for their construction processes to make a profit and be very careful when expanding to meet increased demand. Unfortunately the residential construction and trades sector is not known for its business expertise and that includes their pricing ability or even knowing what profit if any they have achieved on individual projects. The price breakdowns that are being provided to gain work and complete insurance claims are often far more detailed than a lot of the companies’ own internal costings systems.
The obvious outcome that is already happening, which was part of the news item I was listening to, was that work was slowing down or drying up. From an insurance business view point there will be budgets and limits set and until these are met, or rates factually challenged, any stalling tactic that can be used will be used until realistic prices are forthcoming.
Remember current competitive trade prices were the basis of insurance house premiums for repairs and replacement costs set at that time of the policy, pre -earthquake. Therefore there is no way that such work is going to be approved and paid for at exorbitant costs. If this doesn’t seem fair to you, consider the other side of the coin. Would you be prepared to pay increased premiums on your insurance policies in anticipation that there may/will be above normal rates needed because of excessive demand?