The surge in inflation driven by record fiscal stimulus, pandemic lockdowns and restrictions, supply-chain disruptions, and the war in Ukraine has created a major challenge for business owners in the construction industry in bidding on new projects and maintaining sufficient cash flow. Many of the commodities used in construction are subject to changes based on third-party events outside of your span of control such as changes in world market prices and geopolitical events. Despite the Fed’s tighter monetary policy, inflation appears to have become embedded in the economy and may continue to persist at elevated levels for some time. Construction Cost IncreasesThe following table lists some examples of changes in the Producer Price Index (PPI) reported by the Bureau of Labor Statistics for key materials and other inputs used in construction.
Along with these costs, labor and wage costs have increased in response to inflation and worker shortages. Average hourly earnings in construction rose 5.8% from February 2021 to January 2022 for hourly tradesmen. The average for similar workers in the overall private sector jumped 6.9%. Unfortunately, these wage increases have not kept pace with inflation and further wage increases may be required to keep your skilled staff employed with your company. Overhead costs have also experienced inflationary increases. Personnel costs, rents, and other administrative costs have surged. Unlike construction materials costs, which rise and fall with demand and supply, overhead cost increases tend to become ingrained in a company’s cost structure. Impact of Inflation on Profit Margins and Cash FlowInflation in construction costs has squeezed contractor profit margins significantly. The PPI for input costs rose 1.8% for the 12 months to September 2020, matching the 1.8% increase in PPI for bid prices. But the 19.6% increase in PPI for input costs for the 12 months ended December 2021 far outpaced the 12.5% increase in the PPI for bid prices. Contractors must take steps to factor inflation into bid prices, improve the accuracy of their bids, and ensure the project retains profitability. Inflation erodes a project’s profit margin and if left unchecked can create serious cash flow issues. The risk of inflation increases with the size, length, and complexity of a project. Size increases the potential magnitude of impacts from inflation. The length provides the opportunity for inflation to occur and reduces the reliability of estimates. Complexity increases the number of variables subject to potential change. Whether you’re a general contractor, subcontractor, or in another segment of the construction industry, the following tips will help you develop your project bids in an inflationary environment. Tips to Improve Bid Development ProcessReview the way your company develops bids to improve accuracy.
Implement Project Management TacticsIf your bid is accepted there are many project management tactics that can be used to mitigate the effects of inflation.
Include Inflation Terms in Contract LanguageConstruction cost inflation has not exceeded 5% for over three decades so many contractors do not have experience in an inflationary environment. Adding a few percentage points to bids for inflation won’t protect you sufficiently in this type of environment either. There are many different approaches to mitigate inflation risk in bids.
Take Control of Inflation’s Impact on Your Working Capital with FactoringInflation increases the amount of working capital needed to fund a project and also negatively impacts your cash flow if left unchecked. Invoice factoring through funding sources such as Capstone is an excellent cash flow management strategy for construction contractors looking to combat inflation’s negative effects. Business owners obtain the additional working capital needed to finance projects as well as the cash flow for operations. Factoring can be provided for a single invoice/ payment application, or as a program for all of your accounts receivable. Credit approval is based on the financial strength of your customer, not the creditworthiness of your business. Keep in mind that in an inflationary environment, the value of your accounts receivable lessens the longer they remain outstanding. Instead of waiting 60+ days for customers to pay, business owners can convert their outstanding invoices to immediate cash. Having access to those funds provides you with staying power until cash flow catches up with expenses. ———- How Capstone Can HelpCapstone Capital Group, LLC is a leading commercial finance company that is focused on providing businesses with sufficient access to working capital. Capstone has the experience and resources to provide customized invoice factoring and PO financing programs that fit your needs in an inflationary environment. The post Tips on Bidding New Projects in an Inflationary Environment appeared first on Capstone Capital Group. via Tumblr Tips on Bidding New Projects in an Inflationary Environment
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