Overcoming construction inflation: How to beat rising construction costs

We all deal with it these days: inflation. With pricey food costs at the grocery store and expensive fees at the gas pump, Americans face rising costs in every direction.

Construction is no exception.

The biggest hike came between August 2020 and August 2021 when the cost of material inputs for nonresidential construction rose by more than 20%, according to the Bureau of Labor Statistics. Unfortunately, inflation has stuck around today. It doesn’t help that supply chain delays and labor shortages put projects on hold or extend budgets beyond capacity.

Builders have reason to be wary.

We’re here to guide you through construction inflation and equip you with the knowledge you need to face these tricky supply and demand cycles with confidence and clarity.

What is inflation?

Inflation is what happens when consumers experience a loss of purchasing power over time. Essentially, it means your dollar won’t go as far tomorrow as it did today. Although inflation is a measure of purchasing power, it’s usually understood as the change in prices for goods and services. (Like abnormally expensive lumber). 

In the U.S., there are two main ways to measure inflation: the Consumer Price Index, which measures the costs of things consumers purchase out of pocket, and the Personal Consumption Expenditures Index, which measures what people consume, even things they don’t pay for directly (like health care).

The Federal Reserve’s job is to monitor prices and keep them from increasing too rapidly. The goal is a 2% annual increase, and a little bit of consumer price inflation is typically seen as a positive in a changing economy. However, several factors have impacted America’s current economic circumstances, and you – and your wallet – are likely feeling the effects.

What causes inflation?

Many factors contribute to the current inflation situation in America. First, supply chain and production problems keep goods in short supply. This pushes up prices, putting businesses – and builders like you – in a position where they must raise prices to make up for inadequate supply. Companies may also choose to charge more because they realize they can raise prices and improve profits amid global inflation.

Supply chain and labor shortages are due, in part, to the coronavirus pandemic, which caused factories to shut down and demand to slow. Now, as the entire world attempts to bounce back economically, we shoulder these skyrocketing costs.

The current state of construction inflation

Unfortunately, inflation isn’t easing up just yet – supply chains are still backed up, and interest rates are still high. The Associated Builders and Contractors reports that building material costs have increased by 37.7% since 2020. Since 2022, lumber has come down in price by 12.3%, while concrete products have increased by 14.8%.

Builders still face significant labor shortages, too. While there’s not a shortage of projects, there’s an increasing challenge to find qualified workers to complete these jobs. On top of that, construction equipment prices are up by 12.2% since 2022.

How is inflation impacting construction?

With the unfavorable construction market update, it’s a good time to reevaluate your processes for construction cost management. Increased costs, delays and financial challenges with projects can lead to unhappy clients. Inflation is impacting all areas of construction – here are some processes to reconsider.

Estimates and bids: 

Reevaluating construction cost reduction processes involves ensuring that the initial estimates and final bids for a project consider current inflation rates. Be sure to account for all increases in material and labor costs. When completing your construction forecasting, knowing the inflation for costs of materials like lumber, steel or concrete is crucial to avoiding budget overruns. Verify these numbers again to submit an accurate formal bid.

Getting jobs:

Understanding the impact of inflation on construction costs can help in strategizing and acquiring projects that align with the current economic environment. Focusing on residential construction projects that allow for flexibility in the budget – like custom home building or high-end renovations – can help with client satisfaction. To win those jobs, consider looking into an email marketing tool to expand your reach in the market.

Budgeting:

The budget is not set in stone. You must reevaluate and reconsider your prices as the market fluctuates. For residential construction, this might involve incorporating a contingency fund in the budget to address any unexpected cost increases. Planning ahead by adding in this contingency fund will save your bottom line – so you won’t get left paying a hefty bill.

Growing a business:

Staying informed of construction industry trends will help you plan for setbacks. You know that you’re nothing without your workforce. We suggest putting specific focus on your employees by finding and retaining reliable, skilled workers to help you complete your projects on time.

Other strategies for maintaining the steady growth of business include negotiating long-term contracts with suppliers, diversifying into areas less affected by inflation and mitigating construction risks.

11 tips for beating rising construction costs and inflation

The impacts of inflation might include steep material costs, tighter client budgets, longer lead times, backlogged projects or higher wages for labor.

So … how can you work through these roadblocks and still get the job done and make money?

1. Communicate on every level

Just like you, your clients are impacted by inflation. Everyone is feeling overwhelmed. Everyone needs to get creative with their budgets. Everyone is in it together.

Communicate with your clients so you’re on the same page and can execute your shared vision with a budget that’s rooted in the reality of the moment. Using Buildertrend, you can connect directly with clients through features like Messages and the Customer Portal to keep them in the loop.

Similarly, maintain clear and constant communication with your managers and subcontractors to mitigate as many headaches as possible. Delays in shipments, cost changes or fluctuating project timelines need to be clearly documented and shared among all stakeholders.

2. Reevaluate how you price your services

As scary as it can be to up your prices, desperate times call for desperate measures. Those who want to work with you will understand, and your team will be better equipped to serve more people and take on more projects if you can put some costs back on your clients.

As with any pricing decision, you’ll need to establish your overhead costs and desired pay. That overhead cost is where you’ll see an increase due to inflation, and you can review those numbers alongside your billable hours and profit margins to set your rates. Divide your total expenses – salary, overhead and profit margins – by the amount of time you intend to work to develop a new price for your services.

3. Diversify, diversify, diversify

Are you finding it impossible to source materials? Are your construction workers in high demand to fit your timeline? Does it all just feel impossible? While you’re riding this inflation wave, consider diversifying your clientele and your offerings. 

Instead of taking on as many building projects this quarter, can you offer consulting work to DIYers? Could you consider a few additional larger gigs with different types of clients while you wait for the housing market to level out? Whether it’s commercial building, remodeling or special projects, you may want to consider trying something new during this time.

4. Consider group buying to gain more control of your materials

We all need a little extra help managing things these days. When you work with other builders (even those you might consider to be competition), you can share resources, solve problems and exchange ideas.

CBUSA is the leading group purchasing organization and construction networking group in the U.S. With their help, you can work with a local chapter to save on material purchases by buying supplies together – and far in advance – and avoid the volatility of the market. You’ll keep your projects on track, experience major savings and have a network of fellow builders to depend on.

5. Monitor local and global market impacts when tracking your budget

If you want to stay ahead of market and supply chain delays, you’ll want to stay up to date on the news. Monitor local and international current events and understand how they impact the global market. You can stay alert and track the impact that gas prices and trade policies have on your business.

If you can identify major trends – or can work with partners who specialize in the global market – you’ll be better off when it comes to setting and tracking budgets, procuring materials and working with your clients.

6. Prioritize early planning and payment

The sooner you can approve designs, secure rates and hire subs, the better your costs will be. Prioritize early planning, onboarding and paying your partners in a timely manner to best streamline the estimating process, material purchasing, and ultimately, your entire project.

We know it’s helpful to have time to make big decisions. However, if you and your client can agree on how to proceed, it’s best to be prepared with funds on hand. The sooner you can approve, hire and collaborate with subs who can get you what you need – the better.

7. Utilize warehouse storage to stock up on materials

Most builders have a few main goals in mind with every project: Avoid exceeding the target costs, stick to the schedule and make the client happy with as few hiccups as possible. But inflation throws a wrench in all of that.

Another way to ensure you have materials when you need them (and without overpaying) is to secure your materials at decent prices, take advantage of warehouse storage and ensure you have them ready when the time comes.

Don’t buy out the market, but you can be strategic with your material purchases. If there are select items you use constantly or might have trouble procuring at a later date, consider buying a larger stock than you normally would. Just make sure you have the storage space and clientele to use it.

8. Strengthen your financial management processes

Uncertain financial events can be an opportunity for strengthening and revisiting your financial management processes. By using the financial tools in Buildertrend, you’re uniquely positioned for greater financial success.

Take a further look at cost codes, QuickBooks integration, Work In Progress reporting and transparent invoicing so you can take your financial management to the next level.

9. Create a hiring funnel to avoid labor shortages

Hiring, managing and retaining employees is a feat for anyone. As current financial limitations and unprecedented labor shortages sweep the industry, it’s smart to have a plan in place when it comes to taking care of your people.

The business landscape we see today is going to inform how the economy works for years to come, so quick fixes won’t solve the problem of labor shortages. Intentional and long-term solutions are what builders need to find and cultivate the talent that’ll get the job done.

Check out Buildertrend’s series on scaling your business, including how to use Breakthrough Academy’s hiring funnel strategy to find and hire construction workers in a labor shortage.

10. Develop a marketing plan for your construction company

In the past, you might’ve had no trouble at all finding and securing leads or jobs, but in 2023, nothing comes quite that easily. In our fiscal climate, it may be time to think more deeply about your company’s marketing plan.

Whether it’s hiring a small team to help market your company or getting creative with in-house skills, you’ll need to develop a marketing budget, set objectives, analyze what you already know and get to strategizing.

We’ve outlined how to get started in developing a marketing plan for your construction company, so you can turn leads into sales ASAP.

11. Invest in construction management software

All in all, you need a streamlined way to manage, track, budget, scale and communicate within your construction business.

Buildertrend gives you better financial control, features that help increase your profits, access to an industry-leading customer service team that’s always by your side and sales software that will launch your business to new heights – even with inflation.

Get ahead of inflation in the construction industry

The labor shortages and price hikes aren’t going away overnight – we anticipate them to stick around well into 2024. Let Buildertrend help you improve your financial situation and stay ahead of the curve.

Check out Buildertrend’s suite of financial tools and schedule a demo today!

Construction inflation FAQs

Get answers to the most common construction inflation questions.