There are some signs that price pressures are easing, but materials and labor remain big challenges for builders. Can you pass on rising costs to customers? Finance experts say doing so might be worth the risk, and offer insights on this and other actions that may help construction companies “defang inflation.”
It’s All In The Numbers
The more you understand about the finances of your business, the more agility you may have in moving forward despite rising costs. For starters, though builders worry about passing on increases to customers, experts at Deloitte say doing so might be worth the risk: “Pass along higher costs to customers and they may just pass up doing business with your company…Yet the rewards of increasing prices often outweigh the risks…” For example, a company with a “35% gross profit margin that raises prices by 5% would need to suffer a 12.5% decline in sales before the price increase begins to erode profits.” According to Deloitte, three other strategies that may be worth pursuing include:
Reducing accounts receivable and increasing accounts payable. The depreciating dollar gives an advantage to companies that delay when they pay suppliers and nudge customers to speed up payment…That said, companies “risk alienating dependable suppliers at a time when supply chains are weak.
Holding on to your workforce. High labor turnover often accompanies high inflation, as employees quit for better pay elsewhere. Talent retention efforts become critical, including investing in training, talent pipelines and labor-saving automation….
Shifting borrowing to shorter maturities. Borrowing costs have surged, with the yield on the benchmark 10-year U.S. Treasury note more than doubling to 3% from 1.3% a year ago. Firms that need to roll over loans or bonds may want to favor shorter maturities until the Federal Reserve stops tightening and long-term interest rates begin to fall…while noting that current rates are still historically low.
If you are feeling unprepared for navigating forward, take heart: even experts at Deloitte admit: “Most financial executives are navigating unfamiliar terrain as they deal with overheated prices…The last time many sitting CFOs faced a soaring inflation rate similar to today’s would have been approximately — well — never.” These days, every financial insight you glean, gives you an important edge—and that’s what Colonial Surety does via The Partnership Account for Contractors®. With this free service, we will help you plot the growth of your business, strategically, one step at a time. The Partnership Account arms you with a private digital dashboard, providing you with a day to day snapshot of your single and aggregate limits, as well as your current and available bond capacity. As your work in progress decreases, you can even update your work on hand—increasing your aggregate so you can go ahead and move that next bid ahead. Take control of your finances—and get an edge issuing your own bid bonds, instantly, using our powers of attorney. Get started today: Pre-Qualify and Get Free Scores Here.
Follow The Money
The $739 billion Inflation Reduction Act recently signed into law contains $3 billion for Neighborhood Access and Equity grants. This funding will go through the Federal Highway Administration to state, local and tribal governments. As Construction Dive further reports:
The new grants can be used to build connections across highways and railroads, and to redesign roads that are dangerous to cross…The Neighborhood Access and Equity Grants can be used, for example, to cover a highway or convert it into a boulevard, add bike lanes or sound barriers, provide better connections to transit, build “green” stormwater infrastructure, add new safety features and more…About a third of the money is set aside for projects in low-income communities that have an anti-displacement policy, community benefits agreement and local hiring plan…In addition to the access grants, the IRA includes other items of importance to the construction industry, such as significant expansions of tax incentives for energy efficiency improvements to buildings. The law also contains about $5 billion for various programs that aim to accelerate the construction industry’s shift toward low-embodied carbon building materials.
With Colonial Surety as your partner, you just might find that you are more prepared to compete for new public bids then you think. The Partnership Account® allows you to use our powers of attorney to issue your own bid bond—and you can do so right up to the deadline, incorporating last minute labor costs, price fluctuations and supply substitutions. With Colonial behind you, you’re also armed with a complete, powerful online surety management system. In addition to issuing your own bid bonds, you can expediently order performance and payment bonds, run management reports, check your current and aggregate limits, view your underwriting profile—and more. Come on: let’s get you growing today.
Founded in 1930, Colonial Surety Company is a leading direct seller and writer of surety bonds and insurance products across the USA. Colonial is rated “A Excellent” by A.M. Best Company and U.S. Treasury listed.