Five Ways to Manage Volatile Material Costs in Your Construction Business

The construction industry today is facing a constant challenge in the form of unpredictable material costs. Global political events and tensions in 2019 have created a climate of uncertainty. Any change – from sanctions on oil-producing countries or tariffs on specific goods – can create a ripple effect across the supply chain and result in a spike in material costs.

If you’re running a business as a contractor in the industry, you’ll be keenly aware of how sudden price changes can be bad for profitability. When is it the right time to buy steel, and from which supplier? Should you begin to change your approach to writing contingencies into your project bids? Here are five ways to stay on top of the constantly evolving game.

Identify key materials

While you can implement measures to maximize cost-effectiveness with every material used in your construction projects, in practice, this may take too much effort. You can get significant results by merely focusing your strategy on key materials instead. For instance, materials such as cement, lumber, steel, and diesel fuel have exhibited significant variance in price over the years. Concentrate your efforts on these materials to achieve the most impact.

Track and analyze data

Knowing which raw materials will drive your business success, it’s vital to track pricing data constantly. Monitor trends across industries to anticipate any potential supply chain disruptions or increases in tariffs. Compiling these data points and putting together a team skilled in data analysis and negotiation will help you develop reasonably accurate supply and demand forecasts, and implement risk mitigation strategies to hedge against unexpected price increases. You can also identify opportunities to justify higher prices, such as switching to sustainably sourced materials for which clients are willing to pay more.

Manage your inventory

One way to take advantage of a forecast increase in material price is to stockpile. This involves buying a bulk amount of the material ahead of time; you’re betting that the current price will turn out to be lower than its price at the time of need, such as at the start of a project, for example. But stockpiling can create problems related to accurate bookkeeping and warehouse management. Developing a standard system of inventory management and costing will simplify your accounting tasks and help you keep track of margin efficiencies.

Negotiate shorter contracts

Raw material costs are dynamically related to the workings of the supply chain. Your suppliers might not be able to make price adjustments in response to market stimuli until a few months after a given event. Instead of annual, fixed-price contracts, a shorter negotiation cycle can help you maintain flexibility, stay on top of the latest trends, and respond accordingly by working out the best available deals with your suppliers.

Value engineering

Your skill and experience as a contractor can contribute significantly to overall cost-effectiveness at every project. In your site design, value engineering can maximize your margins with careful consideration of each area’s function; you can identify lower-priced alternative materials that deliver the same function at a lower cost, possibly with improved life-cycle or maintenance, and less environmental impact.

Staying competitive in the construction industry is a challenge that continues to be complicated by the many uncertain factors in the global economy. While material price fluctuations are beyond your control, you can take these and other vital steps to stay ahead and prepare yourself for any changes and continue to operate profitably.