Companies in the construction industry are facing continual increases in economic and financial indicators as they plan future projects and adjust to ongoing changes. The annual U.S. inflation rate, which peaked in 2022 at 9.1%, was up 3.2% this past February over the previous 12 months. At the same time, construction input prices continue to rise. The cost of concrete, for example, has increased by 14.8% since 2022, and the price of equipment has risen by 12.2% over the same period.

Contractors, who often operate on slim margins, can develop strategies for managing their business’s bottom line when inflation and costs are high. Here are 10 strategies that can help maintain profit margins even in the current inflationary environment.

1. Reassess your bidding process. Make sure initial estimates and final project bids accurately reflect your true material and labor costs. Be realistic about these costs and make any necessary adjustments to your bidding process. Consider adding contingencies to your pricing models to give you flexibility in the face of future price uncertainties.

2. Keep the communication lines open. Everyone up and down the construction supply chain is affected by inflation and feeling the pinch, so make sure the lines of communication remain open. The same goes for your project managers and subcontractors. For example, be sure to communicate changes in costs and delivery dates to everyone who might be affected, as well as any constraints and challenges these changes might present.

3. Monitor economic and cost data carefully. Keep a close eye on cost trends for materials that are critical to your business, whether these are lumber, concrete, steel, insulation, siding, masonry, etc. The cost of these materials can swing wildly from month to month so you want to be prepared for how increases could affect your profitability.

Also, carefully monitor both micro (local) and macro (global) economic conditions. Use your experience and analytical skills to gather the economic data that’s most impactful to your business so you can forecast material and labor costs accurately. A sophisticated and knowledgeable strategic partner can help you choose the right indices to monitor and plan financial strategies based on the relevant data.

4. Approve design packages early so you can pre-purchase materials. Contractors hesitate to approve designs early to release funds for material pre-purchase because they don’t want to overspend due to downstream supply changes. Releasing funds early to pre-purchase materials, however, lets you lock in prices at current levels, eliminating the risk that you’ll pay more later. This can also improve the accuracy of your project estimates.

5. Stock up on commonly used materials. If there are certain materials that you use on a regular basis, consider buying these in bulk at current prices and storing them for later use. Note: Make sure the materials are imperishable and you have adequate warehouse space to store them, and weigh the cost of storage and security against the inflation benefits.

6. Use construction management software. Software can help you streamline processes and eliminate inefficiencies to reduce construction costs without sacrificing build quality. With the right software, you can eliminate communication errors that lead to cost overruns, compare estimated and actual costs in real time, and optimize the use of resources on the job site to boost efficiency.

7. Consider renting construction equipment. From forklifts to scaffolding, renting equipment might be a smarter strategy today when you consider the recent 12.2% rise in construction equipment prices. Equipment rental offers a host of other benefits as well, such as improved cash flow, simplified budgeting, protection against equipment obsolescence, and potential tax breaks.

8. Join a group purchasing organization (GPO). As a member of a GPO, you can benefit from economies of scale when purchasing commonly used construction materials. Construction GPOs such as CBUSA enable small and mid-sized contractors to jointly negotiate better material prices, similar to the prices enjoyed by large national contractors, as well as earn rebates through brand partnerships.

9. Consider risk sharing. Talk to your stakeholders, including project owners, about your inflation challenges and whether they are willing to share the inflation risk with you. This can be done through alliance-style agreements or alternate contracts. Risk sharing occurs in some regions of the world that have been experiencing high inflation for a long time, including Latin America.

10. Revisit insurance coverage. Higher project material and labor costs will result in higher finished project values. Check to see if your insurance limits are high enough to cover these values to avoid the risk of underinsurance. Your insurance broker can help you assess your policy limits in light of higher project values.

Incorporating these strategies and tactics into your operations could increase your company’s bottom line.

The professionals at Dembo Jones are eager to help construction companies – and all businesses – explore how they can best respond to increases in inflation and costs. Give us a call to put our experience to work for you.