Volatile Material Prices: Push Back
As persistent challenges with material costs impact construction overall, small and midsize business owners are likely facing the biggest hurdles. Rising prices of essentials like concrete, lumber and steel can have a dramatic impact on the bottom line. Accountants and business advisors encourage pushing back by taking practical steps with the planning, pricing and management of projects. Read on for pointers.
Strategies to Protect Profits
To protect their bottom lines, builders now need to anticipate and adapt to persistently high and volatile material costs. One of the most important ways to do so, according to Carrie Fortier, a CPS at Jones & Roth, is to update bidding practices:
- Your bidding practices can also help you strategically address high materials costs. One option is to build some cushion into your bids to account for the risk of price hikes. However, this approach is tricky: If you overestimate the risk, you may lose out on jobs. If you underestimate it, you may undermine your profit margin. Another option is to consider bidding on smaller, short-term jobs. These tend to be less vulnerable to fluctuating materials prices.
- When possible, identify price-volatile materials as separate line items in your bids. Doing so allows you to adjust for changes more easily and helps owners understand how materials costs affect total project pricing. In addition, if you’re not already, use real-time pricing data. Instead of relying solely on historical cost estimates, incorporate current supplier quotes or market indexes into bids. This can make estimates more accurate and defensible.
As you reconsider your bidding strategy, remember that Colonial Surety Company can help, via both our Hometown Bond Program and The Partnership Account® for Contractors. It’s also smart to reach out proactively to your customary suppliers, who can help you anticipate cost shifts related to tariffs and other factors, and may sometimes even be able to arrange locked-in prices. Another wise strategy for protecting your profit margins is to shift risks during contract negotiations, as Fortier explains:
- Shift some risk to the owner (or general contractor) by negotiating a provision in your contracts that adjusts the price periodically to reflect fluctuations in materials costs. This approach protects you financially while keeping bids as low as possible. And because there’s no need to build a cushion into bids to absorb the risk of price volatility, the owner benefits from a lower initial contract cost.
- Often, these provisions are referred to as “escalation clauses” because they target rising materials prices. But such clauses are more palatable to owners if they also provide for downward adjustments in the event materials prices fall.
- It’s important to design escalation clauses carefully, paying attention to price adjustment triggers. Contracts will commonly provide for an adjustment if materials prices rise or fall by 2% or 3%, as substantiated by supplier invoices, one or more published price indexes, or some combination of the two.
Job Costing
Construction pros point out that if you are not effectively and consistently implementing job costing at your construction business, you are operating in the dark, and may be experiencing declining profits, even if your annual revenue looks impressive. By regularly subtracting the materials, labor, equipment and supply expenses of a project from the revenue it brought in, business owners can assess whether or not a project was actually profitable. Over time, the discipline of job costing on every project can lead to dramatic profit improvements. As Shauna Huntington of Small Business Bootcamp explains, job costing gives business owners intel to guide all the big and small decisions that stack up to success: “Job costing is the accounting activity of assigning your revenue and expenses to the specific jobs/projects that they relate to. This allows you to see the profit you’re making on each specific job instead of only seeing your revenue and costs in total.” Try following these tips from Huntington to implement a robust job costing practice at your business:
Implementing job-costing is no small feat. Job-costing requires increased tracking, additional tools, and participation from more than just the accounting team. With job-costing, every cost associated with producing a project is assigned to that project or customer – materials, labor costs, equipment and tools. Every cost should be assigned. For example, labor cost is not just the hourly wage or salary paid to a team member. Labor costs include benefits, taxes, workers comp, retirement match, paid time off and any other costs associated with that team member. While it is a big undertaking for any business, the insights and data job-costing provides are invaluable.
Ready To Break Out?
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