How supply chains are affecting construction material prices and how to protect your bottom line
To say that the past couple of years have been tumultuous would be quite an understatement. It would be more accurate to say that they’ve been some of the most challenging humanity has lived through in generations.
Many of the issues we’ve faced have been personal, but the business world is far from unscathed. In fact, if you’re in the construction business – even if you’ve been using the best construction estimating software – you’ve probably noticed an enormous amount of volatility in pricing.
This, of course, makes running a profitable operation even more difficult. So, let’s take a look at why material prices are so volatile, when it’s likely to end and what you can do in the meantime to insulate your construction business.
Why Are Supply Chains So Unreliable Right Now?
When it comes to material pricing, even if you’re using the best construction estimating software out there, it all comes back to supply chains.
Construction products come from all over the world, which means they need to be shipped from one country to another. When they arrive in port, they have to be unloaded, put on a semi or a train, and moved to a distribution point. From there, they’ll be put on another semi and shipped to stores and suppliers. So, long before it ever finds its way to your site, your product is already a world traveler.
When the world was working normally, this wasn’t too big of a problem, but it hasn’t been working correctly for a while. Here are a few of the things that have thrown a giant wrench in the works.
The Covid Pandemic
It’s hard to talk about anything these days without mentioning the pandemic and the effect it’s had on us all. You might have noticed an impact on the pricing in your residential construction estimating software too.
Covid has actually driven up material prices in several ways.
First, there were border closures. China, India and many of the world’s other construction material manufacturers shut their borders almost entirely for weeks or months at a time. Many also shut down non-essential industries – so companies were not even making products, and no one could ship them anywhere.
Now that borders are reopening, and people are going back to work, there are still considerable backlogs to deal with, and when demand outstrips supply this way, prices often go up.
The pandemic may be tapering off in parts of the world, but we’re still not entirely out of the woods, and it will take many more months before things normalize everywhere.
The Suez Canal Blockage
As if dealing with the pandemic wasn’t enough, on the 23rd of March 2021, the 1,300 foot long Ever Given ran aground in the Suez Canal, blocking one of the world’s busiest shipping corridors. It stayed there for six whole days.
Ships that were already heading towards the canal were stuck with nowhere to go, and those that did turn around were forced to go thousands of miles out of their way around southern Africa.
The effects of that blockage are still being felt as shipping companies try to get their schedules back on track.
The War in Ukraine
As if a global pandemic, closed borders, shut down factories, and a once-in-a-lifetime shipping disaster weren’t enough to contend with, global supply chains have now been hit by the war in Ukraine.
Global currencies and exchange rates have been affected. Markets are unstable. Sanctions and bans on Russian oil and gas have sent ground transport costs soaring, with no end in sight.
Even if you haven’t felt those things in your residential construction estimating software yet, you very probably will – sooner rather than later.
No matter what your personal feelings about any of these issues are, the fact is that when global economies are in a state of chaos, you will feel it in your construction business.
Insulating Your Construction Business Against Material Price Increases
There’s really not that much good news on the global economy front right now. Economies are a wave, with troughs and peaks, so we know that at some point, things will start looking up. However, for now, we have to work with what we have.
The good news for your construction business is that you can take steps to insulate your business against losses due to material price fluctuations. Here are a few essential steps you should take.
1. Invest In Residential Construction Estimating Software That Auto Updates
If you’re like most construction businesses, you probably estimate anything from dozens to hundreds of quotes every month. Many customers take their time deciding, though, so you also have to update those quotes when they’re ready to start making decisions.
Manually updating all the pricing for every quote is time-consuming and costly. Someone is going to have to sit there, calling suppliers, getting pricing and changing each line item.
Residential construction estimating software like CostCertified uses clever technology like web crawlers to automatically find and update material costs, so you can automate the process of adjusting quotes. Instead of spending hours on each one, you can get the job done in minutes. Which leaves you free to quote more work, get jobs done, and take care of all the other tasks a construction business throws at you.
2. Shorten Validity Periods
In most construction businesses, it's pretty standard to hold quote validity for 30 days. However, with material prices changing weekly in many cases, that’s not enough to protect your profits.
Right now, many construction businesses are finding that they need to adjust quote validity periods to 7 or ten days to ensure that they aren’t caught by surprise material increases.
Whether you do your quotes manually or use the best construction estimating software out there, make sure you adjust this on all of your quotes so you are covered for any possibility.
3. Stock Up
When you have a residential construction business, it’s almost impossible to hold every product you need in stock. However, that doesn’t mean you can’t keep a larger supply of items like adhesives, hardware, abrasives, drill bits and other consumables on hand.
Buying these items in larger quantities than usual (and negotiating bulk discounts) is an excellent way to keep costs down.
Be careful, though! Some products have finite shelf lives and can’t be bought in too large a quantity, and you also have to consider the extra costs to store all those items. So only use this strategy for non-bulky items that won’t expire soon!
4. Expand Your Vendor List
Supply chain problems aren’t only hitting construction businesses and their residential estimating software in the dollar signs. It’s also making it harder to find many products.
Even if you’re not impacted by product price increases, availability problems can cause delays, and delays cost money.
If you’re still sourcing most of your materials from one or two suppliers, it might be time to expand your vendor list. Start talking to other companies that sell products you need, and see where else you can get a good deal. Get companies set up as vendors before you need to buy from them, so there’s less time to wait before you can have your materials on site.
Ideally, you should have at least 3 or 4 suppliers for every product you use at all times.
5. Increase Your Markup
Many construction businesses compete on price. That’s never a good idea because it’s always a race to the bottom, but it’s even worse when there are significant material price fluctuations.
One easy way to insulate your business from some of those changes is to increase your markup. Adding five or ten percent extra to the top of your quotes can make all the difference when there are unforeseen differences between the price you quoted and the price you’re paying.
6. Improve Productivity
Every quote you do on your residential construction estimating software and send out the door has three parts: material, direct labour and overhead costs.
When material prices are increasing all the time, the best way to keep costs in check is to reduce your direct labour and overhead costs. Improving productivity is the best way to do that. Even if your costs themselves don’t change, you will get more done in the same amount of time, so your cost per person-hour will effectively decrease.
There are several ways you can achieve this. In the field, you can use labor-saving equipment and tools. In the office, you can invest in software that automates time-consuming tasks like estimating and accounting. Every minute you can shave off one job is a minute you can use somewhere else, and that adds up fast!
7. Upsell Your Customers
Another way to make your business more profitable – even now – is to upsell your customers. A higher markup combined with higher end products means more money on the backend. That means more of a buffer if one or two items do increase in cost while you wait for your quote to be accepted.
When you make it easier for customers to choose higher end options, most do. In fact, with CostCertified’ s live, real time upgrade options, we’ve found that more than 80% of customers will choose at least one upgrade. Even better, because upgrade options are built right into your quotes, you don’t even have to prepare a new quote!
Changing the Way Construction Business Happens
If there’s one thing that’s certain in the construction business, it’s that there will always be uncertainty. We know. Long before we started CostCertified, we spent many years in the construction business ourselves.
Our own experiences taught us the value of embracing innovation and change. At times like these, when it feels like there is nothing dependable out there, having systems you can rely on really is a saving grace.
So, if you still haven’t found the best construction estimating software for your business, consider setting up a free demo. While we can’t fix material prices for you, we can help you to build a more profitable and resilient construction business that will stand the test of time.