With an astounding increase from 8.6% in May to 9.1% in June 2022, annual inflation is at the highest level in 40 years. This trend indicates the likelihood that the construction industry will be affected, both directly and indirectly.
Volatile building costs and ever-changing supply prices are creating unstable market growth. If you are in this, you must anticipate potentially declining sales, extended production timelines, cash flow management, and other factors related to rising expenses.
How can you go about protecting your bottom line despite the inflation headaches you’re experiencing? This blog briefly describes the impacts you can expect and recommends ways to deal with these challenges and their hidden risks.
Inflationary Challenges Builders are Experiencing
Inflation continues to drive up the price of machine rental charges, skilled labor, building supplies, and other resources. These price hikes are creating significant challenges for builders everywhere and threaten to disrupt project completion, which hurts the bottom lines.
Here are some of the most recently reported issues by construction firms:
Material Pricing Increases
Prices of many conventional construction materials continue to go up over time due to inflation. This price hike can impact things like bids and ongoing projects. The amount spent on construction materials should be between 30% and 60% of the overall costs.
Because profit margins shrink as project bids go up, receiving your materials on time or earlier is critical to prevent delays and additional labor costs.
Across the Board Overhead Hikes
Other costs have also risen for construction companies due to inflation. Necessities such as machinery, technology, fuel, and transportation are getting more expensive over time, though the recent break-in in fuel prices is appreciated.
Additionally, it’s not unusual for construction equipment producers to often raise prices due to the rising cost of raw materials. Manufacturing delays are often a result of inflation which lowers the profitability of a project.
Labor Costs Surging
The problem of having a shortage of workers only makes this problem worse. It’s so troubling because skilled workers are demanding higher wages because they can’t afford their everyday living costs because of inflation. Increasing employee compensation during a project will take a bite out of your profit margin.
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Mitigating Inflationary Impacts on Your Construction Business
Is there a way that contractors can ‘beat’ inflation-led problems in the construction industry?
Directly addressing these issues by developing a technique to create a budget at the beginning of a project is a great start. Then, as a contractor, you need to think about how inflation will affect your final budget estimations and plan from there.
Listed below are some steps to consider before beginning any project:
Who should share the risk under the contract terms? Contractors and project owners should, either through alliance agreements or by substituting the conditions in the contract negotiations for all agreements now and in the future.
One thing is very true, as a construction business owner, you have to be realistic about any potential additional costs and make the necessary modifications or adjustments when placing bids.
Consider modifying your bid strategy to incorporate contingencies in the prices presented to account for inflation.
Review and Modify Your Insurance Coverage
All construction firms realize that inflation will raise the cost of everything from materials to the services provided. However, one aspect you have not considered is how it will affect your business insurance coverage.
It’s vital to determine the inflationary impacts of these policies, especially when it comes to protecting your equipment, designs, employees, materials, and more.
Because inflation has driven the price of replacement and rebuilding costs up, construction firms that suffer a complete loss of equipment, tools, job site materials, or facilities could face financial devastation.
Use Value-Added Bidding Strategies
Communication is important. As a contractor, you should be able to communicate value beyond price. Don’t concentrate on the lowest offer you can make but instead lean on business knowledge, excellence, speed, and even expertise.
While prices are important, customers also value knowing these non-monetary aspects are significant.
Purchase Materials Early
One of the best things you can do is monitor the supply chain and gauge its resistance to delays and price increases. Then, weigh the advantages of stockpiling essential supplies against higher security experiences and increased storage rates.
Stabilize Your Cash Flow
Keep cash flowing to offset these latest inflation effects on your construction business. Most building projects require a down payment from the contractor before actual construction starts.
This down payment may be just enough pressure to keep you focused on managing expenses, especially when these expenses spike because of inflation.
Final Thoughts on How Will Inflation Affect Construction Business?
Excessively high and rapidly rising material costs and supply chain interruptions impact how financially stable contractors are. This problem is worsened by not having enough skilled laborers. Unfortunately, there isn’t a single magic solution to address these challenges.
Remember to protect your assets and other investments when deciding what steps to take to counteract or mitigate the current economic crisis.
A comprehensive insurance policy is key to making this possible, so be sure to take time to explore your options and speak with an insurance representative for more information.