How to Estimate Your Construction Project with Inflation Going Crazy?
Estimating is hard enough. There are site visits to do, measurements to take and double-check, drawings to analyze and a million questions to get through before you have the whole picture.
Then the real work starts, doing your take-off, getting prices from your suppliers, and putting it all together. Even if you have construction estimating software, it’s a big job, and with inflation through the roof around the world, it just got a lot harder.
Why Inflation Hits Construction Hard
There are several reasons whycompanies in the construction industry feel the effects of inflation so intensely.
First, of course, is the cost of transport. When inflation goes up, it almost always takes fuel prices with it, and that increases the cost of every type of material dramatically.
Then there’s the typical time between quoting a project and getting an order. Construction is one of the few industries where it could take months between giving your customer a quote and getting on-site. In that time, material prices go up, wages increase to keep pace with inflation, and it all eats into your profits.
Fortunately, there are several strategies construction businesses can use to stay ahead of inflation and protect their bottom line.
1. Keep Your Price Lists Up to Date
Whether you still have printed price lists in a binder or you’re using construction estimating software, make sure you always keep them up to date.
Many material suppliers are increasing prices as often as weekly and have been for a while. This means that keeping your prices up to date could be a full-time job.
One option might be to hire someone specifically to manage your price database. Another could be to use construction estimating software like CostCertified, which uses clever web crawlers to use the very latest prices every time you create or update a quote.
2. Increase Your Margins
Even using the latest prices for all your estimates (whether you do it the hard way or the easy way) still doesn’t guarantee prices won’t go up in the time between when you get your order, and you start placing material orders.
One easy way to give yourself a little more leeway to absorb price increases is to increase your margins. Even an extra 5 to 10% markup on your prices could mean the difference between taking a hit or making a decent profit on each project.
3. Shorten Your Validity Period
When prices are changing on a weekly or bi-weekly basis, it’s not possible to hold your price for 30 days.
Another easy way to ensure you always have an opportunity to check material prices before you accept an order is to shorten your quote validity period. Instead of 30 days, offer a quote validity period of one week or 14 days.
Even if you do end up doing the job for the price you originally quoted, if prices have got completely out of control, you will have the option to revise your price.
4. Look for Higher End Work
If you’re struggling to keep up with inflation doing lots of tiny jobs with tight margins, it might be time to revisit your business model.
Construction companies that survive the tough times are the ones who get higher-end projects with healthy profit margins and who manage those projects well.
Start looking for a niche or specialty that you can focus on where you don’t have so much competition, and you don’t have to race to the bottom with your pricing.
5. Consider an Escalation Clause
While they’re not common in residential construction and renovation projects, escalation clauses are common in commercial and industrial construction contracts.
In a nutshell, these clauses allow contractors to adjust their prices during the contract based on material and other cost increases. There is usually a complex formula based on the inflation rate, but it’s worth crunching a few extra numbers if it puts more money in the bank.
6. Or Offer Cost Plus Pricing
Another easy option for construction companies who want to inflation proof their businesses is to offer cost plus pricing. These types of quotes are based on the actual cost of materials and labor with an agreed markup. During the job, contractors submit invoices and timesheets to their client along with their progress billing.
This is not a common option in the residential construction world, but it is a good way to ensure that your costs will always be covered.
7. Improve Your Project Management
If you’re not already paying close attention to project management on the projects you work on, now is a great time to start.
Even if you do lose a little because of inflation, there are always opportunities to recoup those losses when you create change orders or quote additional work.
Project management is one of the most valuable skills your construction company can have on the team, so if you don’t already have a great PM team, it might be time to start hiring. Alternatively, if you are a smaller contractor where estimators take care of project management on their jobs, consider sending them for formal project management training. The investment is sure to earn dividends.
8. Improve Your Technology and Accuracy
When things are going well for the economy, it doesn’t matter as much when you make a little mistake calculating a quote. However, when inflation is through the roof and every penny matters, you really can’t afford any errors.
If you’re not already using construction estimating software, communications tools, time tracking and other technologies, now is a great time to start. It might sound counterintuitive to invest in technologies now, but when you need to account for every dollar you spend, these kinds of tools will pay for themselves very quickly.
9. Stock Up on Commonly Used Materials
If you can afford to bulk by materials you use frequently, locking in lower prices might make the extra storage cost worth your while. Just ensure you don’t buy too much of any product with a limited shelf life, or you might end up losing money on the investment.
Contact suppliers you regularly buy commonly used products and ask them for bulk pricing. They might offer you a better deal than you typically get, and those savings could offset some of your additional inflation-driven costs.
Remember, the Economy Is a Wave
Now that we’ve covered some of the ways you can limit the impact of inflation on your construction business, it’s a good idea to take a breath and remind ourselves that the economy is like the ocean. Sometimes it goes up, sometimes it goes down, but it always finds its way back to some kind of equilibrium.
When times are tough in construction, companies that run a tight ship on and off-site tend to do better than those that have looser systems and procedures. So instead of wondering when things will go back to normal, spend some time working on how you operate and how you can boost profits.
When things do eventually go back to normal – and they will – your company will still be a lean, mean, profit-earning machine, and things will be better than ever.
If you need to improve your estimating processes to make that happen, we’d love to help. The CostCertified construction estimating software platform is like nothing you’ve ever seen before, and it can help you to implement the changes you need to make quickly and efficiently.
Contact our team to schedule a demo and find out why so many companies have transformed their businesses with CostCertified.