The rising cost of construction and delayed timing for completion of projects has been a major problem in the construction industry in 2021. Contractors and consumers have been subject to the rising cost of construction materials in everything from wood to copper, aluminum to paint. This is a combination of unprecedented levels of demand and bottlenecks in the supply chain for these materials. Keep reading to learn more about the causes behind the supply issues, and how your firm can mitigate the risk associated with fluctuating costs and supply delays.
Behind rising supply costs in 2021
Typically, costs fluctuate based on changes to supply, demand, or sometimes both. Right now, construction firms are seeing large changes to both supply and demand due to the pandemic.
There are several contributing factors to the rise in demand of new construction projects.
- The public has more cash in hand, with more than 70 percent growth in volume of money held by the public between March 2020 and March 2021.
- In addition, the construction industry is seeing some of the best readings in decades. Housing starts are up nearly 20 percent, and the Institute for Supply Management (ISM) manufacturing index was at 64.7 as of April 2021.
While demand is seeing major growth, the pandemic has caused some large disruptions and delays to the supply of materials. Just-in-time manufacturing strategies have allowed manufacturers to remain flexible to market demands but it doesn’t allow them to ramp up production for major increases in demand. In addition, both manufacturers and shipping companies are hampered by COVID-19 safety precautions, causing bottlenecks throughout the supply chain as human capital is limited.
Keeping up with this market
With materials costs on the rise and supply chain bottlenecks causing delays, it’s important to have a good understanding of your construction firm’s cash flow and upgrade your contract negotiation practices. Spending time to forecast cash flows and updating your contracts will provide benefits to your business in this market.
To improve your cash flow during this time, consider the following:
- Monitoring cash flow at a job level
- Understanding why jobs are being underbilled
- Structuring terms to allow billing for materials at the earliest possible point
- Processing change orders quickly and correctly to avoid delays in billing
- Utilizing a line of credit when needed to avoid payment penalties
In addition to managing your cash flow, improving your contracts can benefit both your firm and your clients. Start by understanding the terms of contracts before entering into them and be aware of your contractual rights. From there, consider:
- Building a clause in that allows you to renegotiate payment amounts with changing costs of materials
- Discuss allowing for alternative materials if a supply chain delay is going to cause major issues with the construction timeline or rising costs will cause budget concerns.
- Negotiating materials costs before incurring them.
- Shortening the period of time submitted bids are valid for to make sure materials prices are current with market rates
- Leveraging relationships to increase communication about potential delays in delivery of materials and project deadlines
Finally, working with your team to be aware of potential challenges with ongoing projects is essential. Timing, data, insights, and planning are key parts to successfully navigating the construction industry in the current market, and your team can help. Also, if your firm is mainly relying on spreadsheets, consider upgrading to more robust planning and management systems.
If you or your team has questions on cash flow management, our team is available to help. Give us a call today.