Inflation and the Construction Industry: The Impact and What May Lie Ahead

Joey Randazzo
October 11, 2022
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Inflation is nothing new. A quick scan of history is all you need to understand we’ve been dealing with inflation for nearly 200 years. 

But with … 

  • A recent pandemic
  • Supply chain issues; and 
  • Increases in prices

inflation has hit the construction industry particularly hard in the last few years.

Those in the construction industry are now in a new place and must learn from the past and be proactive to know how to navigate inflation when it comes — because it will indeed come again.

In this guide, we’ll discuss how inflation has impacted the construction industry and what business owners can do to reduce the impacts of inflation in the future while focusing on company growth and customer experience.

Help Your Construction Company Navigate Inflation With the Flexbase Card

We know the construction industry and the cash flow issues that often come with the territory. The Flexbase Card is designed especially for construction business owners to help get over the hump when cash may not be readily available.

No doubt, you’ve experienced issues like these in your business:

  • You take on a job and provide a quote based on current materials prices only to find that prices have increased dramatically when it comes time to order them; or
  • You need to pay your subcontractors for work already done, but you’re waiting for the second payment from the client

You need a way to mitigate cash flow issues until client payments are in hand.

We’ve got what you need — the Flexbase Card.

The benefits of the Flexbase card are many:

  • 0% interest for 60 days - This gives you the time you need to buy supplies and pay contractors while waiting to receive client payments. You can avoid paying interest by paying off the balance when you have client funds in hand.
  • 10 times the credit - You can purchase those overpriced materials you need today or buy essential equipment when you need it.
  • Receipt tracking -  It’s inevitable. You’re in the middle of a job and run out of supplies, and someone needs to rush off to the hardware store to purchase more nails or plywood. The receipt tracking system of the Flexbase Card takes the administrative burden away by tracking the receipt and allocating the expense to the correct budget category.

Get pre-approved today and take advantage of all the Flexbase Card has to offer.

How Does Inflation Affect the Construction Industry?

As with most other industries, those in the construction business feel the effect of inflation through elevated materials prices. But the price of materials isn’t the only consequence of inflation. 

It also affects increases in:

  • Salaries
  • Construction inputs like:
  • Bid prices
  • Insurance costs
  • And more

Because all construction projects involve a relationship between the construction company, client, and employees, everyone feels the hit. 

  • The business owner may experience profit loss.
  • The client may need to pay more or experience a delay in project completion.
  • Employees may have increased expenses while still receiving the same salary.

Financial effects are obvious, but construction companies may also feel the impact of inflation as it concerns the relationship with their clients. 

John Hogan of Blue Nail Roofing and Siding in New Jersey believes trust is key to a positive customer experience

When inflation rises and prices increase, construction business owners may be forced to ask for more funds from clients or inform them of resulting project delaysboth of which can harm the relationship and negatively affect customer satisfaction.

4 Ways Inflation Has Impacted the Construction Industry

Inflation impacts go deeper than the immediate effect on prices. Construction companies also feel the heat of inflation in regard to other costs involved in doing business, climbing interest rates, and higher salary demands from employees.

When you’re met with the challenging effects of inflation, the Flexbase Card is a viable resource you can add to your tool belt. With available credit, you’ll be equipped to bridge the gap between current expenses and future income. 

0% for 60 days
The first credit card built for construction
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#1: Cost of Materials

Inflation causes the price of supplies and materials to increase. The increase may be rapid, or it may happen gradually over time, but when prices increase, they rarely come back down to pre-inflation prices.  

As a result of the Covid pandemic, many business owners were blindsided by skyrocketing costs of supplies. 

Blue Nail Roofing and Siding CEO John Hogan, experienced this when plywood costs nearly quadrupled. Because of the amount of plywood needed for his large roofing jobs (60 - 150 sheets), Hogan says that at this point, the change order price in their contracts was less than what they paid for plywood.

What are contractors to do when prices spike? Often they have no choice but to eat the cost, reducing their profit margin.

#2: Cost of Doing Business

Buying materials is only one of the many expenses of running a construction business. With inflation comes the increase in the cost of other goods that directly affects how a small company does business.

For example, fuel is needed to run much of the heavy equipment (cranes, bulldozers, and backhoes) on job sites. Rising fuel prices can stretch the budget when fuel prices begin to soar as they did in 2021 and 2022. The average cost of gas in January 2021 was $2.42 and climbed to $5.03 at its highest in 2022. 

This not only means a higher cost to run equipment on job sites, but it also makes transportation, in general, more expensive. Trucking companies delivering supplies also have higher fuel costs which, in turn, are passed on to the purchaser.

#3: Demand for Higher Wages

The demand for higher wages isn’t a new issue in the construction industry. A Bureau of Labor Statistics report revealed that hourly earnings for residential construction workers increased 6% in a year, from $27.01 to $28.66.

Inflation only compounds the problem in an industry where the demand for higher wages is already an issue. 

Often the salary increases don't happen at the same rate as the price increases. When the cost of living increases faster than salary increases, workers may look for other jobs, which may result in a labor shortage. 

#4: Interest Rates

A rise in inflation often means a rise in interest rates which may result in:

  • Higher cost of materials
  • Lower demand in the housing market
  • Cash flow difficulties
  • Borrowing and lending constraints

When construction businesses are forced to pay higher interest rates on loans on top of higher costs of materials, it further eats into their profit margin.

5 Actions Construction Companies Can Take To Mitigate the Impact of Inflation

Even though inflation in the construction business is a given, construction companies can still be blindsided by the impact of inflation. 

It doesn’t have to be that way. 

If a construction company knows how to be proactive and prepare for coming inflation, it can diminish the impacts and come out on top financially in the end.

#1: Reevaluate Material Acquisition Methods

Since the increasing costs of materials is likely the number one impact felt by construction companies, finding new ways to acquire and use materials is a positive way to meet the challenge.

When looking at the supply chain and the likelihood of price increases and delays, buying supplies ahead of time and storing them may be a viable option. 

Of course, you’ll want to weigh the storage costs against the potential rise in costs due to shortages and delays. But in the end, stockpiling necessary materials may be the way to go.

Another way to mitigate increasing material costs is to find alternative materials at a lower price. As opposed to new materials, perhaps recycled materials can be just as effective but at a much lower cost. This not only helps you, the business owner but is also a way to save the client significant funds.

#2: Reassess Insurance Policies

It’s likely that insurance premiums will increase with higher inflation levels. You’ll want to evaluate your insurance policies to make sure you’re not underinsured because of a lack of keeping up with an inflation trend.

Your insurance broker should be able to help you assess your coverage in relation to inflation to make sure your policies are within proper limits.

#3: Update Bids With Current Costs

Preparing a bid for a construction project is undoubtedly one of the most important parts of the process to ensure success. Bid too low, and you risk a profit loss. Bid too high, and you risk being outbid by the competition. Add inflation to the equation, and it gets even more complex.

Blue Nail Roofing and Siding business owner, John Hogan, acknowledges, “It’s a very tough dance. You want to be customer-focused and make sure the experience is good and at the same time protect the business.”

Evaluating how bids are put together and making some changes in the bid-making process may be a wise way to come up on top in both protecting your business and ensuring customer experience.

When designing a bid, keep a regular pulse on the current cost of supplies, equipment, and fuel and take that into account in your bid, increasing it where necessary. 

Another option is to include escalation clauses or contingencies to provide for uncertainties in the market.

Either way, these preparations will benefit both parties.

#4: Consider Supply Chain Challenges

To combat supply chain issues, consider the following:

  • Alter timelines for both ongoing and future projects.
  • Order materials ahead of time.
  • Store stockpiled supplies, which may be less expensive than the cost of waiting for supplies to arrive.

#5: Address Risk Sharing With Project Owners

Communication is crucial with clients, especially when it comes to potential risks or cost increases.

When inflation happens and soaring prices come into play, no one wants to eat the cost. The customer doesn’t want to eat the cost, and the business doesn’t want to eat the cost. If you agree on a price in the contract, it’s difficult to go back to the customer and ask for more funds because the price of materials suddenly went up. 

Be proactive by using good communication, so project owners know the potential issues upfront. And then ask them to share the risk if necessary. 

In the end, clear communication and trust are necessary to protect your business and your relationship with your customers.

The Future of the Construction Industry in Light of Inflation

Unless construction business owners put some of these actions into play, they may be looking at a bleak future.

Steep price increases, delays due to supply chain difficulties, and other rising costs of doing business mean construction business owners may need to eat into their already-slim profit margins.

If business owners don’t estimate costs correctly, they risk making huge errors in bid pricing, which can have disastrous effects on the budget. Rather than working with fixed contracts, construction companies may have more success with alternative contract options.

Securing funds may also be a challenge that construction businesses face in the future. With high inflation rates, banks and other lenders may be wary of providing funding, especially for projects that are costly or have long timelines.

The Flexbase Card Lets You Access the Credit You Need to Help Your Construction Business Grow – Even In Uncertain Times

Yes, the future for the construction industry may be challenging, but Flexbase understands those challenges and has designed a solution.

Enter the Flexbase Card.

With 0% interest for 60 days, the Flexbase Card gives businesses the flexibility they need to meet inflation issues head-on, so they can refocus their efforts on building their businesses and taking on new projects.

Get pre-approved and enjoy the benefits of working capital with the Flexbase Card.

0% for 60 days
The first credit card built for construction
Get pre-approved
0% for 60 days*
The first card
built for construction
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