Builderpulse: A Financial Health Check to Ensure Your Builder is Alive

When you sign a building contract, you're trusting a business with your life savings. You can check a builder's licence, look at their display homes and read their reviews, but you can't easily see whether they have the cash to finish your house. That's the gap Builderpulse is meant to fill.

In an earlier post I argued for stricter quality control: mandatory Inspection and Test Plans (ITPs), third-party oversight and a demerit point system. Builderpulse is the second half of that idea. A builder who is financially stretched will cut corners, because cutting corners is the only lever left.

Construction Quality Issues: When Is Enough, Enough?

Residential construction quality in Australia often falls short, leaving home owners “holding the bag”. In this post we discuss the need for stricter quality control, including mandatory ITPs and a demerit point system, to improve accountability and ensure compliance with NCC and Standards.

ConstructorAnthony Painter

Before going further, a word on what this is and isn't. I'm a builder and construction manager, not an accountant. Builderpulse isn't an exact accounting model. It's an attempt to start a conversation about a simple, transparent number that homeowners could understand and that would show whether a builder can deliver what they've promised. I welcome feedback, debate and improvements.

What homeowners can check right now

You don't need Builderpulse to do some basic financial due diligence. In Queensland, a fair bit already exists.

QBCC licensees must meet Minimum Financial Requirements (MFR) at all times as a condition of their licence. At a minimum that means:

• A current ratio of at least 1:1 (current assets at least equal to current liabilities).
• Net tangible assets of at least $0.
• Enough working capital to support their annual turnover, which sets their maximum allowable revenue.

Each licensee sits in a financial category (SC1 and SC2 up to $800,000 a year, then Categories 1 to 7 above that). Companies holding a contractor licence, and individuals with a maximum revenue above $800,000, must also lodge annual financial reporting with the QBCC.

So before you sign:

1. Look the builder up on the QBCC licence search. Check the licence class covers your job, the licence is current, and note their financial category.
2. Ask how many homes they currently have under construction and what their annual turnover is. If a builder in a small category is running a big volume of work, ask how.
3. Check their QBCC history for disciplinary action or directions to rectify.
4. Ask who supervises your job and how many other sites that supervisor runs.
5. Ask how long they've been trading under this company name. A string of past companies is worth a question.

The problem is that MFR reporting is annual and backward-looking. A builder can meet it on paper at the end of the financial year and be in trouble six months later. Commercial reports such as a D&B (Illion) financial assessment give some insight into payment risk, but they're mostly sold to businesses, and private companies don't have to publish their accounts. Homeowners are left with a sales pitch.

Consumer credit reports underpin car loans, credit cards and mortgages, yet homeowners can't see a credit-style report on the business they're trusting with their savings. That's not a level playing field.

If you want more questions to ask, my checklist covers them.

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Why I think this matters

During COVID, demand ran ahead of supply and many builders took on more fixed-price work than their cash flow could support. When costs jumped, a lot of them couldn't finish the jobs they'd signed. Homeowners carried the loss.

Plenty of builders are so focused on getting through the week that they never step back to understand their real capacity. I'd like to see every builder complete RTO-delivered training in cash flow forecasting, financial assessment and quality management as a condition of keeping their licence. Better financial management and better quality management go hand in hand: both make building easier and homes better.

I raised the Builderpulse idea with the QBCC. They acknowledged my email but I haven't heard back. I understand they're busy, but the regulator that issues licences is the obvious body to run a tool like this. If you think the idea is naive, I'd genuinely like to hear your alternative, as long as it isn't self-serving and it actually protects homeowners.

What Builderpulse measures

Builderpulse is a score from 0 to 100 that shows how well a builder can manage their current work and whether they can safely take on more. The idea is that the builder's accountant, CFO or bookkeeper submits and verifies the figures regularly (say quarterly, or monthly for larger builders), so the number is current, not 12 months old. There would need to be real consequences for false figures.

It has five parts. The percentage is the weighting each part carries.

• Liquidity (40%). Can the builder cover what they owe in the short term, with a cash buffer for slow periods and late payments?
• Gross profit margin (20%). Is there enough left after direct costs (materials, labour, trades) to pay overheads and absorb price rises?
• Operating cash flow (20%). Has the business actually generated cash from its work over the last four quarters, without leaning on borrowing?
• Stress test (10%). Could the business survive higher costs, slower builds and tighter supplier credit?
• Contagion risk (10%). How much is the builder relying on unpaid subcontractors to fund their cash flow? If a builder falls over, that's the debt that takes the trades down with them.

How to calculate it

Step 1: Gather the figures

From the balance sheet and profit and loss:

• Current assets (cash, receivables, inventory) and current liabilities (trade payables, short-term loans, anything due within 12 months).
• Cash plus receivables you expect to collect within 30 days.
• Average monthly costs: total direct and overhead costs for the past year divided by 12.
• Gross profit and total revenue.
• Operating cash flow for each of the last four quarters.
• Trade payables owed to subcontractors.

Step 2: Score each part from 0 to 1

Liquidity score.

• Current ratio = current assets ÷ current liabilities.
• Liquidity score = current ratio ÷ 2, capped at 1. A ratio of 2.0 or better scores the full 1.
• Liquidity buffer = (cash + receivables due within 30 days) ÷ average monthly costs. This is the number of months you could keep paying the bills if no money came in.
• If the buffer is under 3 months, deduct 0.2 from the liquidity score (minimum 0).

Gross profit margin score. Gross margin = gross profit ÷ total revenue.

• 23% or more scores 1.
• 20% to 23% scores 0.8.
• Under 20% scores 0.5.

Operating cash flow score. Count the quarters with positive operating cash flow in the last four and divide by 4. Three good quarters scores 0.75.

Stress test score. Model three scenarios:

• A 15% increase in input costs.
• A 30-day delay in build times (and therefore progress payments).
• Supplier credit terms cut to 15 days.

Start at 1 and deduct 0.5 for each scenario that would cause financial distress (minimum 0).

Contagion risk score. Contagion ratio = trade payables to subcontractors ÷ current liabilities.

• Under 30% scores 1.
• 30% to 50% scores 0.5.
• Over 50% scores 0.2.

Step 3: Combine them

Builderpulse = 100 × (liquidity × 0.4 + margin × 0.2 + cash flow × 0.2 + stress × 0.1 + contagion × 0.1)

Step 4: Read the result

• 80 and above: healthy. Strong across the board. The builder can consider more work if the market supports it.
• 60 to 79: moderate risk. Generally sound, but with a weak spot or two: a thin buffer, margins of 20% to 23%, a bad quarter, or heavy reliance on trade credit. Improve those before growing.
• Below 60: high risk. Liquidity, margin or cash flow problems that leave little room for anything going wrong. Don't take on more work. Stabilise first.

A worked example

A builder has:

• A current ratio of 1.6, so a liquidity score of 0.8, and a 3.5-month buffer, so no deduction.
• A gross margin of 21%, scoring 0.8.
• Positive cash flow in three of the last four quarters, scoring 0.75.
• One failed stress scenario (the 15% cost increase), scoring 0.5.
• Subcontractor payables at 35% of current liabilities, scoring 0.5.

Builderpulse = 100 × (0.32 + 0.16 + 0.15 + 0.05 + 0.05) = 73.

That's moderate risk. This builder is trading fine, but a cost spike would hurt and they're leaning on their trades. They shouldn't be ramping up volume until margins and liquidity improve.

How many houses can a builder safely take on?

Builderpulse also gives a rough capacity check.

1. Available liquidity = current assets − current liabilities.
2. Cash needed per house = 20% of the contract value. On a $325,000 contract, that's $65,000.
3. Maximum houses = available liquidity ÷ cash per house. With $2,000,000 available, that's $2,000,000 ÷ $65,000 = 30 houses at once.
4. Adjust for risk. Below 80, take on fewer. Below 60, cut that number by at least 25%.

Why 20% of the contract value?

This is my working assumption, based on how house builds are funded:

• Upfront costs. Site start, slab, materials and labour all happen before the first progress claim. The deposit (capped at 5% in Queensland for contracts of $20,000 or more) doesn't cover it.
• Funding each stage. The builder pays for the work to reach each stage before they can claim it. Stage percentages vary by contract, but the enclosed and fixing stages usually carry the biggest claims and the biggest costs.
• Late payments and delays. Weather, labour shortages and slow bank draws all stretch the gap between spending and getting paid.
• Tighter credit. Suppliers shorten terms when the market gets nervous, just when the builder needs it least.
• Paying trades on time. Good subbies stay with builders who pay them. Losing them slows every job.

Gross profit versus net profit

I raise this because many tradies and builders proudly quote what they make, then forget their overheads.

• Gross profit = revenue − direct costs (materials, labour, subcontractors). It tells you whether your pricing covers the job.
• Net profit = what's left after everything else too: overheads, admin, vehicles, insurance, interest and tax. It tells you whether the business actually makes money.

Example: $1,000,000 revenue less $700,000 direct costs is $300,000 gross profit, a 30% margin. Take off $200,000 overheads, $20,000 interest and $30,000 tax and you're left with $50,000 net profit, or 5%. That's why a healthy gross margin matters. Without it, there's nothing left to pay the overheads.

Download the Builderpulse tool

Play with the numbers yourself.

What pushes a builder into trouble

• Late progress payments. The builder still pays suppliers, trades and overheads, so they burn working capital or borrow.
• Longer build times. More labour and overhead per job, and progress claims arrive later.
• Tighter supplier credit. Going from 30-day to 15-day terms drains cash fast.
• Rising material and labour costs. On a fixed-price contract, every increase comes straight off the margin.
• Falling demand. Fewer new contracts means less deposit and early-stage cash coming in to keep things moving.
• Higher interest rates. Borrowing costs go up and buyers' borrowing power goes down.
• Regulation changes. New code requirements can add cost and time to houses already priced.

How builders can improve their score

• Build working capital. Retain profits or inject equity before growing, and arrange a credit facility that covers the expensive enclosed and fixing stages.
• Forecast cash flow properly. Know what's coming in and going out for every job, every month.
• Keep a contingency. Price for delays and cost movement, rather than hoping they won't happen.
• Watch debt. Borrowing can fund growth, but debt rising faster than equity is a warning sign.
• Chase progress claims. Claim promptly when a stage is reached and follow up late payments.
• Use decent job-costing software. You can't fix what you can't see.

The bottom line

Financial health and quality are two sides of the same coin. A builder with a healthy margin and cash in the bank can afford to do the job properly. A builder who's stretched can't. Builderpulse, combined with strong quality management and real consequences for non-compliance, is my suggestion for how to give homeowners a fair look at who they're trusting before they hand over a cent.

Further reading

The Construction Integrity: Raising Standards Through Professionalism industry report looks at the relationship between time, cost and quality in a large construction company, with recommendations for improving the industry.