The number of times we hear the word “inflation” seems to grow proportionately to the rising inflation rate, and it’s safe to say that we all feel worried about the prices going up. Although no one can escape the effects of inflation, there are some practical ways to ease the pain for your construction business - check it out!
For more than 2 years now, we are observing how common products, accommodation, energy and services are getting more and more expensive. The Euro Area annual inflation has reached over 8% and is continuing to rise in many European countries. In the UK, the inflation rate has reached 9% - the highest number since 1982. With Russia’s invasion of Ukraine and the deepening breakdown of the economic relations between the US, Western Europe and Russia, the food and energy prices are expected to keep spiking, fueling further inflation in the upcoming months.
With all of the recent economic uncertainty, as well as the labour and construction material costs rising since the beginning of the Covid-19 pandemic, contractors need to implement new solutions and strategies to help them navigate these difficult times and still be able to get some profit. Let’s find out what strategies you can implement in your company in order to ease the pain of rising inflation rates.
Inflation means an increase in the prices of goods and services within the economy. It is also signified by the lowering of the value of a currency.
The fluctuations of inflation rates are normal, but the real problems start when the economy is facing a prolonged period of elevated inflation.
As the inflation rate is rising, so are the costs of executing a construction project. In 2021, the cost of construction materials increased by over 20%! The other costs going up include energy, fuel, equipment and machinery and labour - in short, almost everything you need to put together an operating construction project.
Beyond this, inflation can affect supply chain partners, disrupt project timelines and construction demand, as well as increase pressure from workers to increase pay, since they too will struggle with higher costs of living.
As construction businesses often operate multiple projects, which stretch over a longer period of time, there is a chance that the cost of carrying out a project will increase significantly during its execution - which can put your profit and cash flow at risk.
It all seems rather gloomy, especially given the fact that inflation is something totally out of our control. But, while you probably can’t save your business from being affected by inflation, you can find some ways to mitigate its negative effects.
Here are some key areas to take action:
According to some sources, even 40% of construction companies don’t track their spendings! Yet, getting good spending visibility is a necessity in taking good care of your business finances. Only once you know precisely where, when and how much is spent can you start making informed financial decisions.
Not to mention that in times of uncertainty, knowing exactly how your money is spent and if you’re staying within the budget will help you feel more confident while planning ahead.
In times of disruptive changes on the market, it’s more likely to make rash decisions that will ultimately prove to harm long-term growth or, at least, not bring the best return on investment. That’s why it’s very important to create a clear distinction between strategic and non-strategic expenses.
If you can think through your long-term goals, you will be able to determine which expenses support this goal - so that when trying to cut costs, you will look somewhere else.
Now that you’ve determined your long-term strategy and you have a detailed picture of your spending, you are in a great position to decide where to cut expenses without much pain.
Take a look at the tools your team uses - maybe you pay for a subscription that nobody really uses but you didn’t have time to cancel it? Or maybe, you pay for services or products that could be replaced by cheaper options?
In other words - reevaluate your actions and processes! With growing labour costs and a general shortage of skilled workers, eliminating work is the number one way to cut costs. Try to look at your operations with a clean state mindset and critically evaluate both what activities your team is performing and how they are being done.
Look for space for automation and optimising activities necessary for smooth project execution. This brings us to the next point:
Once you review your processes, it’s very likely you will find some repeatable tasks and operations that could be automated. Introducing automated workflows, intelligent document management or even using reporting tools instead of having to put reports together manually can help you and your team save a lot of time and stress. Not to mention that moving your data to the cloud will make it much easier for everyone to access the information they need and, again - save time!
Another time-saving innovation is the introduction of IoT on-site, which supports a smooth running of a project, for example by monitoring the amount of the construction materials, helping locating tools and people or monitoring machinery and sites for needed maintenance.
The construction market is very competitive, which often leads companies to bid on unsustainably low-profit margins, which can turn the whole project into a financial fiasco and put the company at risk if the cost of delivery unexpectedly rises. Competing on the price alone can very quickly take away your profit and put you in a tight spot if the inflation rate grows.
Instead, you can try to increase the competitiveness of your offer by bringing in value beyond the price. Focus on the experience and quality, speed of delivery, sustainability of your projects or even excellent communication with a client.
Price is not the only thing your potential clients care about and there are people willing to pay more for something they value.
If it’s possible, try to purchase all materials you’ll need right at the start of a project. With the inflation in material costs and supply chain issues, you can save a lot of money, time and stress if you stock up on materials right at the beginning of the process, so that the costs you estimated when signing the contract don’t get thrown out of the window with the spike in prices two months into the project.
If you are interested in more strategies on how to deal with the rising costs of construction materials, check out this article -> Rising Cost of Materials in Construction: How to Deal with It?
To rest assured that your company is far from losing liquidity, it’s crucial to establish a good monitoring process over your company’s finances (which takes us back to the first point of the article) and establish crucial financial metrics that are always kept up-to-date and regularly inspected.
Also, if you keep all of your invoices only in paper form, this kind of documentation has a bad habit of getting lost or forgotten - consider digitising your invoices and storing them all in the cloud, where every information can be easily accessed to keep track of who hasn’t paid yet and how much they owe you.
Last but not least, it is crucial to take care of your team. Inflation affects all of us on a personal level with costs of living getting higher and uncertain social and economic situations putting everyone under a lot of stress.
In the reality of labour shortage, having reliable and highly skilled professionals on your team is one of the greatest assets of your business - don’t lose sight of that. Also, please remember to take good care of yourself as well. Prolonged feelings of uncertainty and stress can lead to serious mental health problems.
Running a successful business is always a bit tricky and adding a growing inflation rate to the picture certainly doesn’t help. There are multiple strategies to soften the impact inflation will have on your company and it is up to you and your company to decide which ones make the most sense for you. One thing that is certain is that being conscious of your long-term goals, plans for growth, finances and processes will help you determine which methods are appropriate for your business.
If you would like to learn more about successful finance management, you might find these articles helpful:
And if you want to know how Archdesk can help you with this, have a chat with our specialists!
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