Like it or not, inflation is a factor in the construction industry at present. If you want to keep it from cutting into your profits, you have to find a way to manage it. Try these five methods to keep an eye on the situation and provide greater protection for your contracting business.
Inflation doesn’t tend to run at the same rate for everything. As a result, you might notice a significant increase in prices for certain materials, while others remain stagnant or even drop in cost. The only way that you are going to know what to expect is to do that research on a regular basis. Now is a good time to keep an eye on what you can expect to pay for common building materials in your area, particularly things like steel and lumber. It’s best not to look at it every day so that you’re not riding on a roller coaster of shifting expectations. But updating your information every couple of months can make your estimates more accurate.
Buy at a Strategic Time
You can’t always anticipate what the market will do in six months, but you may have opportunities that allow you to buy equipment and materials at a better time. Read expert forecasts about pricing, and check the news for information about delays in the supply chain. If you wait too long to order something for a project, you may realize that you can’t get it. Inflation happens when supplies are harder to get, so prices go up. If you see a good deal on something that you know you’re going to need, now might be the time to go for it. This presumes that you have sufficient cash flow to purchase materials a bit before you need them, but ideally, you should.
Protect Cash Flow
You can’t always pass on increased costs to your clients, so it’s a good idea to protect your cash flow as much as possible. Cash flow is the money that you have available between your income and your expenses. If your expenses are too high, you might not have enough cash flow to keep paying your bills or staying ahead of projects. Take a look at your expenses, and see if there is anything that you can trim back. Selling equipment you don’t use is an easy way to increase your cash flow. If you signed up for services that you don’t really need, canceling them or switching to something less expensive can dramatically lower your overhead.
Of course, inflation often translates into higher prices for clients. It’s tempting to keep your bids at the bottom, as a way of securing more clients. But if inflation eats into your profits, you don’t want to end up in a situation where you are working for inadequate income. Your clients may be aware of worldwide problems with the supply chain, particularly as it relates to building materials. Be frank with them about what you are expecting for those costs, and make sure that your estimates are flexible enough to accommodate changes. That way, you’re not taking a hit for inflation that happens from one month to the next.
Work With Your Clients
There will be moments when prices are changing so radically that you feel like you don’t know what to expect. In those cases, it’s a good idea to get input from your clients. Some clients are prepared to pay more, in exchange for the ability to have the project done at the perfect time. Others may need to stick to a budget more than they need to stick to a timeline. Some might be flexible in the types of materials that you use or be willing to allow you time to source alternatives. You won’t know until you ask them, so it’s wise to get their opinions before you make big decisions that change the nature of the project.
Keeping inflation from damaging your business can be tricky, but it’s not impossible. To learn more about running a successful contracting business, visit CSLS today!