How Can Construction Companies Beat Inflation in 2023?

Many industries are struggling to cope with the problem of high inflation in the U.S. economy, and the Construction industry is no different. Because of this, you've most likely encountered issues making ends meet with the increasing construction costs in 2023.

If you're reading this article right now, you're most likely in a bid to balance staying competitive in the industry and making a profit that'll keep your business afloat. The sections in this article will discuss what inflation is and how to mitigate inflation risk in construction.

The Basics of Inflation

Our modern financial system is complex and has plenty of interconnected parts, all coming together to form our modern economy. One aspect you'll learn more about today is 'inflation.'

Inflation is the term you would use to describe increased costs of goods and services due to money becoming less valuable. For example, you bought a screwdriver for $5 six years ago. If you head to a hardware store today, that same screwdriver costs $7. There isn't anything special with the screwdriver either, and the reason you have to pay more is that the dollar is worth less than it did six years ago.

Inflation Benefits

Believe it or not, inflation is one of the signs of a healthy economy. With more money being printed out and going through the economy, you'd be more likely to spend that money on goods and services. In effect, producers are more likely to increase production to meet demand.

The U.S. Federal Open Market Committee (FOMC) has stated that a small amount of inflation (around 1.5% to 2%) is one of the keys to preventing deflation. A harmful deflation is a phenomenon where there's a sharp decrease in prices and wages and is commonly associated with a weak economy.

The Problem of Too Much Inflation

If inflation can be good, then what exactly is the problem? Too much money. To cope with the economic effects of COVID-19, the U.S. Treasury's Bureau of Engraving and Printing printed much money to cover lost income and debt repayments. More money means less valuable money, resulting in a sharp increase in inflation. Because of this, the U.S. economy experienced the highest 12-month inflation rate in 40 years.

However, printing more money isn't the only cause for the increased prices. Many governments built more infrastructure to stimulate the economy while under lockdown. The U.S. Congress approved a $550 billion infrastructure development package in 2022. While this package is excellent for promoting the construction sector, it drives up demand for construction materials and becomes a cause of inflation in the construction industry.

Managing the Effects Of Inflation

Now that you've read a little about what inflation is and its causes in 2022, it's time to learn how to best manage the building materials costs of 2023.

• Cost Tracking

Controlling expenses is crucial for you to beat construction inflation. To manage costs, you'll need to have visibility on your spending. Specifically, how much money you have and how you're spending it. If you're looking for apps specifically designed to help you out on this, our article titled Top Apps For Contractors and Those In The Industry will surely help you with this.

Complete cost tracking allows you to categorize where you're money is going. In addition, it's also the perfect measure of accountability for everyone in your business. Since you're keeping tabs on where you're spending your money, you make better-informed decisions, ensuring you get the most bang for your buck.

• Lean Construction Methodology

This methodology focuses on eliminating waste in the entire construction process. Firstly, your company should be open to continuous improvement to avoid downtime and unnecessary expenditures. Moreover, it would be best if you had a listening ear, as your workers can perform better when given a chance to solve problems and guide improvements.

Lean construction is also the perfect time where you can implement pull planning. This planning method is a collaborative effort of the entire team to develop the most efficient use of time during the project and identify any potential obstacles that need to be solved. As a result, you increase your team's productivity by making the most efficient use of time and beginning problem-solving as early as possible.

• Being One Step Ahead

In times of high inflation, your current price quotes might not be the same once the project starts. The sooner you can get your team together and start on the project, the less impact inflation has on your operations.

Contact your engineers, architects, and suppliers as soon as possible and collaborate on sharing real-time information. Also, it's essential to incorporate money-saving tips like the one detailed in our blog, How to Save Water on Your Next Building Project. Doing these allows you to wrap up planning sooner and get the project started as quickly as possible while being economical.

• Bid Pricing Adjustments

Getting ahead of inflation means planning, and you'll also need to find ways to pass on the expenses to your customers. As mentioned earlier, you should expect prices to be higher once the project starts, and you should account for this. Give your clients a price reflecting your expenses when the project starts and when you begin planning.

While you lose out on your edge with competitiveness, you can inform your client that a more accurate bid that accounts for inflationary prices ensures you won't go over budget and complete the project on the scheduled time.

Hardships Bring Improvements

It's tough enough for you to be managing a business, and you need to adapt if you want your business to stay afloat. Hopefully, this article has allowed you to stay informed on the current situation and stay ahead of the competition.

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