In addition to the above issues, tariffs, existing labor and housing shortages are also impacting the construction industry. So, while the economy works through the supply pains of turning the economy back on with booming demand, costs will likely be uncertain.
Steps to Mitigate Economic Uncertainty
There are several steps your company can take to navigate the unknowns of the current economic and supply-chain environment.
1. Rely on Cash Flow Projections and Contract Negotiation
With the cost of construction materials creating short-term and long-term uncertainties in the construction industry, understanding your company’s cash flows is critical to effectively managing these challenging times.
Understanding cash flows at a company and job level is essential, especially when managing a project through uncertainty and increases in construction material costs.
Knowing the answers to the following questions can help you plan and mitigate potential impacts from the cost increases.
- Are you monitoring cash flows at a job level?
- Are you actively following up on jobs with underbilling to determine the reason for the underbilling?
- Are you structuring your contracts and schedules of values in a way that allows for billing costs as early as possible?
- Are there unprocessed or pending change orders preventing billing for all costs incurred?
- Does your contract allow for alternative materials that may provide cost savings for the owner and the contractor?
- If needed, do you have access to a line of credit or other financing sources to weather the storm created by rising material costs?
2. Understand Your Contract and Contractual Rights
Understanding your contractual rights is key to securing payment for unplanned costs. Is your contract a fixed price, or does the contract structure allow for more flexibility in dealing with price increases? No matter the contract, it’s critical to apply these best practices:
- Negotiations. Start negotiations for pricing changes early on, before you’ve committed to and incurred costs.
- Contract lengths. When bidding new work and negotiating contracts, consider shortening the period for which bids are valid.
- Contract terms. Include contractual language related to escalations in construction material costs.
Know Your Customer and Contractors
It’s important to build relationships with fellow contractors and project owners. Leveraging that relationship capital can help you have proactive conversations about the project, material shortages, and related costs and delays.
Knowing your customer and their cost and risk appetite for the overall project cost is important. If lumber, steel, or concrete prices increase the total project cost by 30%, 40%, or 50%, is there a point when the owner will either cancel or put the project on hold?
3. Leverage Data and Technology
There are a few common themes in the current business environment: timing, data insights, coordination, and planning. These are facets of business that can provide valuable insights and put your company a step ahead.
When supply chains are constrained, it’s important to plan as far forward as possible to secure resources. This means coordinating across multiple teams in your organization. It also means understanding what to expect as your production progresses.
Many times, there are valuable insights embedded in your historical data that can facilitate decision-making and accelerate the planning process. The question is how to access and leverage that data to facilitate efficient coordination and planning.
If you rely heavily on spreadsheets, you’re not alone. But there are a variety of solutions that streamline the process and return a positive return on the investment, including:
- Data analytics platforms
- Scenario planning with corporate performance management (CPM) systems
- Enterprise resource planning (ERP) systems
Data Analytics Platforms
Data analytics offer insights into past performance and can reveal trends and opportunities to facilitate change, in addition to supporting a data-driven culture. Organization-wide transparency is highly valuable in keeping an organization nimble. This analytical information informs scenario planning.
Corporate Performance Management (CPM) Systems
A CPM solution engages coordinated planning across all departments and provides holistic results with realistic timing.
Changes in one department immediately flow through the solution to show bottom-line results and effects on other areas. The ability to plan quickly and holistically is key to staying a step ahead and moving with confidence.
Enterprise Resource Planning (ERP) Systems
Results from scenario planning flow into the ERP solution to effectively secure resources well in advance when there’s still time to negotiate. Often, these solutions pay for themselves with just a few good decisions by a well-informed team.
The solutions will automate time-consuming tasks and leave more time for higher value-added analysis to support decision-making. Implementing these solutions successfully is a value-driven exercise.
When adapting to economic and supply-chain volatility, it’s important to start with the end in mind. It can be easy to get distracted from key steps that are valuable and actionable—such as creating strong contracts and adapting your company’s technology systems.
When focusing on what’s valuable, you’ll find that it comes back to the common themes: timing, data insights, coordination, and planning. Choosing solutions to help automate information flow will uncover business value and keep your business a step ahead.
We’re Here to Help
If you have questions on finding a solution to meet your business needs, please contact your Moss Adams professional.