As the U.S. economy desperately fights off months of high inflation, many industries are hard hit by skyrocketing business costs. Construction firms have endured especially difficult challenges thanks to supply chain issues wreaking havoc on building projects.
Politicians, economists, and pundits agree that these tough times won’t be going away anytime soon. So what does this mean for the construction industry as a whole, and how can your company survive the growing risks associated with the fallout of an inflationary market?
In this article, you’ll get a better idea of what new realities lie ahead and how to manage inflation in the construction industry.
What to Expect as Inflation Spikes Overall Construction Costs
Has inflation become a significant headache between your construction firm and its clients, suppliers, and stakeholders? You aren’t alone. Since the pandemic began nearly three years ago, supply chain issues have created a steadily creeping rise in project costs, some of which inflating higher than in other markets. Pricey building materials, machine rental rates, and workers’ wages are just a few of builders’ countless challenges when managing their projects and cash flows.
With the Federal Reserve considering another significant rate hike of at least 3.5% to combat inflation, the impact on your construction company affects several areas of your operations. To better prepare your organization for the trickle-down effect this newest rate will have, below is a quick overview of several aspects of your operations that will immediately feel a pinch:
Material Expenses Will Go Up…Again
As a contractor, you already know that suppliers and subs regularly adjust their rates to correspond with the current economic market. Yet, you’re probably still wincing from the exorbitant cost of building supplies and materials, including wood, steel, plastic, and concrete. This rollercoaster pricing caused by supply chain stress has your suppliers and sub-trades scrambling to find affordable restock. It’s also caused resistance to creating long-term fixed pricing for these goods.
Worse? Construction companies are waiting even longer to receive their orders. It’s not uncommon for it to take months before resupply is possible. These challenges translate into underbidding, project delays, and potential customer lawsuits for breach of contract.
Getting Specialty Construction Equipment is Taking Longer
Another area of concern is highly-specialized equipment needs. Again, be wary when purchasing these assets since lead times have ballooned from 2-3 weeks to six months or more without any guarantees included.
The name of the game here is communication. Owners need to know the facts early so they can plan accordingly.
The Labor Market is More Expensive
Despite the job market opening back up and plenty of job opportunities being available, the construction industry is struggling to fill these roles. Part of this challenge is due in part to wage inflation. Workers are also facing higher than the average cost of living expenses. From rent to utilities and food, your laborers feel the pinch in their wallets and need employment that pays enough for them to survive.
It’s possible to mitigate this issue by passing along the cost to your clients in a variety of ways, including:
- Billing for materials earlier in the project
- Build in price escalation clauses into your long-term contracts
- Do more than offer pay increases and incorporate other incentives to work for your construction firm
Surety Bonds are Not Keeping Up
A risk management feature that construction companies and contractors regularly rely on to protect their projects are surety bonds. For example, with inflation rising, a project that would typically cost $1M might now be $1.5M.
However, lenders may still not be willing to adjust the capacity limit of these bonds because they are well aware these values will likely tumble in the coming year. This puts builders in the difficult position of educating lenders and bond companies about how the marketplace has changed and convincing them to accommodate larger construction projects.
How to Keep Inflationary Impacts Under Control
While inflation is a constant factor in the marketplace, the excessive rise in costs may have you wonder if it will ever cool off and fall back to previous levels. The reality is it will, but until this occurs, your firm needs to mitigate its impacts.
While there are many aspects of your business that you can personally control, inflation itself isn’t one. Fortunately, some steps can help your business survive and thrive in these uncertain times until then.
Consider taking some of the following steps to get a better handle on inflation within your construction firm:
- Think outside the box. When taking on projects, consider the impact of the current market and the added risk exposure. Then, consider alternative methods to achieve milestones and mitigate your liabilities to get the results your clients expect.
- Place supply order sooner than later. While the supply chain has improved, the rising cost of supplies still hasn’t slowed and probably won’t plateau anytime soon. Order early to avoid any additional inflationary rise in expense.
- Communicate expectations early and frequently. As a contractor, you work by deadlines. Failing to meet this part of a contract could lead to damage claims by a client and cost you hundreds of thousands in settlement costs. Communicate early in the bidding process about potential delays due to the current economic environment. Create a strategy to best address these challenges so if they occur, none involved are surprised.
- Re-evaluate your risks. Take stock of not just your project risks but those associated with your daily operations, the impacts they would have on your business, and how to best manage them. For example, while it may be your supplier’s fault a shipment was sent out late, it’s not their fault you hadn’t prepared for the possibility of this occurring. Have mitigation measures in place for when things go wrong to minimize your liabilities further when they do. Review your business insurance and determine if your policies are adequate or excessive for your current situation.
You’re the Architect of Your Success
Despite the cloud of high-inflation hanging over the economy, the construction industry is essential for every market. Managing its impacts on your business will take effort but can give you an even better understanding of how your company operates and identify areas that could use improvement. Risk management is one aspect that many business owners take more seriously because of the increased liabilities that are inherent in an inflationary economic environment. Job site accidents happen, costing builders thousands in ruined building supplies, equipment failures, and damaged projects. Your current policy should have you covered in these situations, especially because of rising costs in materials, rental pricing, and labor expense. Insurance plays a key role in protecting your bottom line and reputation.