A financial expert provides valuable advice on strengthening business practices, emphasizing the importance of monitoring costs and planning for the future.
Inflation and Its Impact on the Construction Industry
As you monitor the market, it becomes clear that inflation is affecting products and services differently. While the inflation rate for some goods is slowing, others—particularly in the construction sector—are continuing to rise. Here’s a breakdown of inflation concerns and the key numbers contractors should be paying attention to.
Inflation Challenges
Even if inflation rates stabilize or drop, you shouldn’t expect prices for goods and services to return to their pre-2019 levels. For instance, the price of certain construction commodities showed a modest decrease of around -1% in June 2024, with the notable exception of natural gas, which saw a 36% increase. However, the overall price increase since February 2020 remains significant, ranging from 30% to 50%. These figures do not even account for increases in services, utilities, insurance, fuel, and interest rates. Contractors have faced ongoing challenges, and these rising costs are expected to continue affecting material and operational expenses throughout 2024 and into 2025.
Contractors should be realistic about the cost of materials and services. It’s unlikely that input costs will decrease substantially unless a recession prompts vendors to offer discounts to move inventory. Even in this case, it doesn’t mean contractors can reduce their prices accordingly. Market prices may have fallen, but contractors might still have to absorb losses to clear excess inventory.
A particularly challenging area for contractors is rising insurance premiums, even for those with a solid claims history. This is one cost category where contractors should work closely with their insurance agents to review policies, identify potential billing errors, and explore ways to restructure coverage to lower premiums. Often, businesses pay for coverage they can’t use because their claim procedures do not meet the policy’s requirements, such as with cyber security coverage, which can be expensive if the terms are not followed.
Key Business Metrics for Success
To improve business performance, it’s essential to focus on hiring the right people who can meet project expectations rather than taking on every task yourself. Although staffing continues to be a challenge, contractors can look into coaching or consulting services to help address problem areas in their business. Resources like builder-resources.com provide useful templates and financial worksheets that can help business owners make better decisions about their operations. Working with external experts to enhance your reporting processes can help keep your business on track.
Using easy-to-understand metrics to track business performance is also crucial. Metrics like Sales Per Employee, Gross Profit Per Employee, or Operating Income Per Employee provide valuable insights into your company’s performance. For these calculations, remember that “employee” includes both full-time and part-time staff (with part-time employees counted as half). If you notice significant changes in any of these metrics, it’s a signal to investigate the underlying cause before costs spiral out of control. Consider exploring other industry-specific metrics to gain additional insights.
Consolidation is also becoming a common strategy for business owners looking to exit their companies. Recently, I worked with Nathan Perkins from FMI Corp. on a guide for those considering employee stock ownership plans (ESOPs). Even if your business isn’t a good fit for an ESOP, the guide offers valuable advice on preparing your company for a transition. ESOPs are particularly useful for contractors who often face a limited pool of buyers.
Managing Cash Flow and Debt
Finally, it’s critical to focus on managing your balance sheet and cash flow. Always prioritize financial stability and be cautious about taking on new debt unless you are certain the investment will yield a solid return. Assess potential investments carefully to ensure they make sense for your company’s long-term financial health.
