By Ro Bhatia, PlanHub CEO
Rising inflation continues to cause major problems for our economy and construction industry. Contractors — especially subcontractors — bear the brunt of higher costs and uncertainty.
· Headline inflation has sent prices of essentials soaring, from food to fuel to office supplies and rent
· Supply chain issues continue to drive up material costs
Key construction materials skyrocket during and after pandemic
· Fears of a potential recession in 2023 create additional business challenges
The way construction industry professionals develop strategies to overcome these financial hurdles could mean business success versus difficulty The difference between the way forward.
The impact of inflation on the industry
Rising labor, material prices, Fuel and maintenance place a heavy burden on contractors and subcontractors. Supply chains have been thrown into turmoil by the pandemic, America’s homebuilding boom has exhausted available lumber, and rising rates are now straining construction budgets.
Contractors and subtractors are being forced to grapple with high material costs, critical skilled labor shortages, and ongoing supply chain issues that drive up costs and hinder projects. For example, the price of steel, an essential part of data center construction, has fluctuated wildly, surging more than 200% from March 2020 to mid-2021 before finally stalling this summer. Other key inputs also increased. In fact, the cost of key building materials is up 16% from a year ago and 41% since the pandemic began. While supply chain bottlenecks in the industry have decreased, contractors and subcontractors continue to experience significant material cost challenges.
Another industry hurdle is the steady rise in fuel prices. For a subcontractor with a small fleet of 3 Ford F-150s, at $3.70 a gallon (the current national average), just filling up those tanks twice a week could result in a monthly out-of-pocket payment of over 2,000 Fuel costs in dollars. Fuel costs can be as much as 35 percent higher in California, the Pacific Northwest and the entire East Coast.
Soaring diesel prices are more of a concern for industries that depend on heavy equipment. Earlier this year, diesel costs jumped 33% in just five weeks, sending prices soaring to an all-time high of $5.78 a gallon in June. Diesel prices have risen 141% since the start of the pandemic, according to the EIA.
Materials account for approximately 35% to 60% of the total construction cost. Inflation has sparked a record jump in construction project costs over the past three years, while creating new risk management hurdles for contractors. While the construction industry has weathered the pandemic’s economic slowdown better than most industries, construction professionals still face significant obstacles to success.
Due to the nature of the industry, inflation is extremely damaging to contractors and subcontractors. It can create cash flow management issues, extend production times, reduce sales and exacerbate other construction operational challenges.
On most construction projects, contractors and subcontractors must purchase materials in advance and expect to pay for these construction materials within 30-60 days of purchase, far from Get paid for their work earlier than they do. As costs rise, the holes in these budgets will only continue to widen. Contractors and subcontractors are in danger of losing bids and potential contracts because the cash flow required for floating projects simply does not exist.
The $1.2 trillion bipartisan infrastructure plan widely considered a life raft for construction has paradoxically created other problems for the industry. Making available funds for large new projects is increasing demand for already scarce materials, exacerbating existing inflationary pressures. Basic economic principles tell us that increasing the dollar to address commodity shortages is a quick and easy way to lead to higher inflation. Without concrete steps to help reduce material and energy costs, prices will only continue to trend upward, and contractors and subcontractors will continue to face thin margins. It’s clear that snowballing costs have a devastating impact on the bottom line, encourage construction delays, limit a project’s upside rate of return, and risk scrapping a project entirely.
Technology can mitigate inflation Impact
Experts don’t see much relief in 2023 from rising inflation and uncertainty. So how are contractors and subcontractors supposed to secure new projects that could become unprofitable due to fluctuating material prices?
First and foremost, construction professionals must focus on finding solutions within their control. Thankfully, innovative, easy-to-use pre-construction techniques can enhance control and productivity. These platforms improve planning, increase efficiency, and help general contractors, subcontractors, and suppliers collaborate more easily to create lasting connections that increase stability and success.
Pre-construction, the critical first phase of any project, is used to create a strategic project plan, including design plans, verification of supplier qualifications, raw materials and labor, and communication with Owner establishes communication. The most effective digital tools connect all pre-construction information in one place, bringing contractors, subcontractors and suppliers together, improving collaboration and reducing the time required for traditional processes.
While the construction industry is beginning to prioritize implementing technology into its practice, it remains an “old school” business that is relatively change-averse. Nearly 40% of specialty contractors say they still primarily use spreadsheets, whiteboards, paper-based processes or other methods rather than construction technology platforms
Proper construction planning and management The solution digitizes the most important information and documents used by contractors and subcontractors. Instead of sifting through old bid documents, spreadsheets, and random notes, software solutions provide quick and easy document duplication, streamlining bidding and other important processes, and saving businesses time and money.
For example, digitizing estimating and material take-off tasks reduces the time required to complete proposals and repetitive paperwork. Improved accuracy also reduces the likelihood of cost overruns and makes cash flow easier. Automated and cloud-based technology also enables contractors and subcontractors to find new projects faster and easier, and provides a complete set of tools to help you create winning bids and get there before the competition.
This technique is especially useful during critical bidding processes. Easy access to documents and data helps create more detailed, accurate and faster bids. The right app can also inform construction professionals about new projects in their service area and can help them stay ahead of competitors and gain an edge in bidding.
Of course, effective bidding requires more than speed or low bids. Contractors and subcontractors need to build trust with project developers and demonstrate attributes that make them a better fit than their competitors. The integrated construction platform allows construction professionals to complete a broad overview of their business. They can create and save data that speaks to their success, such as previous project completions, safety records, licenses, and more. This provides potential clients with the full scope of the company’s true value and capabilities.
Digital solutions can revolutionize the way contractors and subcontractors save money, maximize efficiency and reduce the impact of rising inflation. Now, by leveraging innovative construction planning and management technologies, construction professionals can improve key business functions, enhance collaboration, and better meet future challenges.
Ro Bhatia is the CEO of PlanHub, the leading cloud-based pre-built platform enabling General contractors, subcontractors, and suppliers are able to connect and collaborate on construction projects across the United States. PlanHub was created by contractors, for contractors, to simplify the construction bidding process.