Ways to ensure profit margins aren’t eroded by rising prices by using construction cost planning
It’s official. The good times are back. Not only is the UK economy growing at the fastest rate in over six years, but consumer optimism is also the highest it’s been since 2005. This upswing in market confidence is inspiring construction companies to undertake speculative projects and expand their operations. Creating a chain reaction of demand that extends from multinational corporations, right down to local tradespeople.
The improving fortunes of UK Plc are worthy of celebration, but they do pose specific challenges to the construction sector. Subcontractors are increasingly sought after, which means their rates are rising at record levels. Careful construction cost planning over the lifetime of a project is therefore more important than ever for any company wanting to realise a profit in the final account.
Up, up and away
The key elements in any construction project are labour, plant and materials. In a rapidly growing market, upward price pressures in all three areas can be exacerbated by increased demand outweighing existing levels of supply. One way to avoid this is by engineering rate increases into estimates. If bricks cost £500 per thousand today while tendering for a construction job, it’s likely to cost appreciably more in two years time when the bricks actually need to be purchased.
Clients may initially object if they’ve become used to fixed-price contracts during recent periods of economic stagnation, but inflationary pressures over a project’s lifetime shouldn’t be borne solely by the contractor. A competitive bid can still incorporate margins for mid-project price rises, providing these are clearly identified and charged at cost.
Margins of error
Costs need to be constantly adjusted to reflect every change in the price of goods or services, or else a company may see its profit margin gradually being eaten away. This can spell trouble further down the line, with less capital available for future projects. A firm could theoretically get trapped in a downward spiral of ever-smaller jobs as its cash flow diminishes. The right construction management software can make the job of maintaining and bolstering margins far easier - although effective construction cost planning at the contract negotiation stage remains crucial.
A tender subject
It’s vitally important to keep a close eye on regular expenditures and identify any areas where prices are rising disproportionately. From sky-rocketing telecommunications charges through to higher hourly subcontractor rates, always look for a better deal by negotiating or re-tendering for services. Existing suppliers sometimes attempt to raise prices in the hope their customers won’t notice. The right construction management software provides for the effective monitoring of prices from orders through to invoices thereby eliminating this problem.
Very important indeed
As well as ensuring that your company has sufficient cash reserves to pay its bills at any given time, construction management software can also be used to manage variations throughout the lifecycle of a building project. Comprehensive documentation can provide detailed records of when a variation was originally agreed, how it was subsequently completed and how it was billed. In the event of dispute, accurate records are key to a satisfactory financial settlement.
Takeaways:
So, to stay efficient in the construction industry, make sure you do the following:
- Anticipate any price increases as the economy recovers and build them into your tender.
- Keep on top of your costs and margins with construction management software.
- Carefully monitor prices from orders through to invoicing.
- Take variations into account when construction cost planning and carefully record them to avoid disputes later on.
