Inflation is rising, according to official reports, and that means prices are on the up! But how do construction firms cope with raw materials inflation?
The price of goods and services you purchase can go up and down but mostly up. Not dealing with price increases can eat into your profits and makes life difficult.
Construction firms can be seriously affected by inflation as the cost of raw materials within quotes or contracts can change significantly to when the contract starts.
Also throw into the mix is that some raw materials are still suffering shortages thanks to Covid and Brexit. Timber, bricks and cement and electrical goods were all hit by restrictions, which means their prices have risen sharply. The BEIS says planed and sawn wood saw a rise of 73%!
With so many pressures, you need to be aware and think ahead of price rises. So, here are our top tips…
3 ways to manage inflation
1. The price is right?
The cost of raw materials and labour dictates how much of a profit you make on each job. So, the first thing you need to do is price those increases into your quotes and contracts.
Not by an actual number but by a clause in the quote or contract giving you the right to increase costs once the threshold is reached. This is more important for longer term contracts as just cost of living increases can cause your profits to be seriously eroded.
According to reports, the businesses that survived the 2008 recession were those that took steps to counter inflation by increasing prices. They made the increases in line with inflationary rises.
Doing nothing now in 2022 isn’t an option. While you may fear losing jobs due to the price rises, remember that you can’t work for nothing and realistically all project costs need to be passed on to your customer.
Consider making provisions in contracts for material delays and price increases.
Alternatively, apply appropriate indices to cover the risk, such as RICS’ Building Cost Information Service (BCIS) inflation indices. This is available as a subscription service via the RICS website. There are three indices in total: the Tender Price Indices, Resource Cost Indices and the Output Price Indices.
2. Review suppliers
Stay ahead of materials that are in short supply or that are rising in cost. You may need to use different suppliers or bulk buy in advance to avoid project delays.
Speak to your suppliers to keep track of the availability of materials. This will also help you understand delivery schedules.
Use a supplier dashboard as part of your project management tool to keep track of these details and you will keep ahead of issues.
Paying suppliers on time is a great idea. While you may think it will hit cashflow, it helps to build good relationships with suppliers. It means that when there is a shortage of materials, you’ll go to the front of the queue when compared to others who leave it longer or pay late.
3. Keeping track
Where does your money go? If you don’t know what you’re spending it on, then your costs can rise without you noticing.
Project managing is key. Matching your actual spend in real time with the quote or contract will highlight what is costing you more and you can deal with it quickly.
We recommend a good accounting package with a project module such as QuickBooks online which will report job profitability as often as you want.
Keep accurate records really so you can act quickly to cut unnecessary costs and start the repricing negotiations sooner.
If your project management isn’t giving you the transparency you need and you need a solution to the pricing pain. Book yourself a no obligation, free discovery call or contact us if you want to keep your business more profitable.