8 February 2023
The demand for construction workers remains high. So, too, does the price of doing business.
If you’re a contractor, it’s a good-news, bad-news scenario. The good news is the work is generally there for the taking. The bad news is a healthy profit margin might not be as inflation and other factors may eat into it.
The likely continued high cost of some building materials is a constant reminder of how important it is to be on your game when it comes to making money as a contractor.
What are some of the best ways to do that? Through knowledge and insight. That’s why we wrote this pricing guide for contractors. In it, we’ll briefly touch on certain rising material costs and why construction prices generally remain high, and we’ll look more closely at what you can do to help work around them.
Here we go.
Several factors have contributed to the increase in the cost of materials over the last few years. They range from the obvious to the not-so-obvious:
Getting your hands on the materials and supplies you need has been an issue since late in 2020. There are several factors at play here. Among them are labor shortages, transportation challenges, and major global and weather events.
Labor shortages, in particular, cause delays and disruption at all levels of the supply chain — from collecting and processing materials to producing, manufacturing, and transporting them. As a result, prices jumped on key construction materials.
Doors. Cabinets. Lumber. Carpeting. Granite. Ceramic fixtures. Building tools. You name it.
Even before the pandemic hit, tariffs on all types of homebuilding products from China were more than nine times higher in 2021 than in 2017 (before the tariffs were enacted). And from all countries, they were four times higher (during the same period).
When you add tariffs to the equation, increasing material costs and rising construction costs may follow.
Every year, the price of pretty much everything goes up — from a loaf of bread to a bucket of nails. It may not be much, but history has shown that general inflation usually leads to a small, but yearly, price hike of 1.5%-3%.
It’s a simple case of supply and demand. The demand for building materials (steel, concrete, wood, paint, siding, etc.) is there. However, the ability of material producers to keep up with demand is not. This oftenly drives up prices.
What does the Mississippi River have to do with the increased cost of building materials in the U.S.? Well, think about what could go wrong with a barge full of cement mixture on a low, drought-ridden river. It has a hard time going anywhere.
That’s the current state of the Mississippi River in many places. As sections of the river approach low water levels not seen in decades, it’s disrupting shipping and delaying the movement of building materials. That’s enough to drive up prices.
And it’s not just the Mississippi River. The Suez Canal bottleneck in 2021 saw similar problems and resulted in similar increases.
Fortunately, it’s not all doom and gloom for contractors dealing with increased material costs.
Although the prices of some building materials, such as concrete and gypsum continue to rise, costs for other types of materials, such as softwood lumber and steel have declined modestly. And the price of other materials have stabilized.
Still, the unpredictability can be challenging. Here are some ways to deal with those challenges:
Delays can be costly. The quicker you and your client can agree on how to proceed —– and the sooner you can approve, hire, and collaborate with subs who can deliver on the vision — the more likely you’ll be able to manage costs.
A good way to cover potential cost increases on building materials can be to increase your prices. It gives you wiggle room in the event the price of materials increases while you’re in the middle of a construction project.
Word of caution with this approach: Find the right balance. You don’t want to increase the price for your service so much that you lose bids. At the same time, you don’t want to reduce your price so low that if material costs rise unexpectedly you struggle to recover the lost difference. A finance professional can help you find the right balance.
This article also offers some good ideas on how to raise prices without losing customers.
Work with your attorney to consider including an escalation clause in your service contract which can make your client responsible for paying for building material cost increases, under certain conditions. If you include a clause like this in your contract, it’s a good idea to be upfront about it with your client. Explain how it generally works and why it can protect both of you.
For example, you might let your client know that instead of padding your bid to cover for any potential increases in material costs, you’d rather be upfront with them and charge them what’s fair today, but with the understanding that if costs increase, they may need to pick up the difference.
Your clients might appreciate the honesty and agree this clause is fair for both parties.
Having an open conversation about costs is usually the best policy when it comes to construction projects. The truth is: no one wants to see material prices go higher, but no one should be surprised if they do.
Letting your clients know everything you’re doing to control costs can go a long way toward taking the sting out of it if costs do increase. If you’re still worried about how that conversation might go, check out this article we wrote. It offers tips on how to talk to your clients and prospects about price hikes without losing them.
Time is money. That means if you can streamline an area of your operations, you may save on both.
For example, consider modular construction methods. The streamlined nature of this technique typically reduces labor costs and often leads to less wasted materials, which can at least offset some of the material cost increases you’re facing.
If you have storage space, you might consider stocking up on materials you know you’ll use for other projects down the road — especially if you think they’re a decent price now.
Paying for materials now at a bulk-discount rate, for example, could save you money down the road. Instead of paying for the items at a higher price later, you can dip into your supply and use what you need, paid for at today’s lower price.
Keeping track of current and future proposed tariffs is a great way to help you deal with rising material costs.
Monitor local and other current events. Understand how they impact the global market. Keep track of gas prices and trade policies. Then apply what you learn to your business.
You can do that by following tariffs on the World Trade Organization website or following supply chain news through the American Supply Association.
Other great sources include the National Association of Home Builders and Associated Builders and Contractors.
Get an affordable & customized policy in just minutes. So you can get back to what matters: Your business.Start Here>
As if dealing with high inflation and low margins isn’t enough, imagine having to deal with a third-party property damage lawsuit on top of it. Or stolen equipment — and the cost of replacing it. Or an employee getting hurt on the job and missing work.
Any one of these circumstances could be enough to derail the business you’ve worked so hard to establish. More than one of those events could be catastrophic to your business. That’s why having the right insurance coverage in place is critically important.
Let’s take a look at a few examples of insurance coverages we recommend for contractors:
General liability insurance can provide coverage against costs associated with third-party accidents, property damage, and bodily injury.
Workers’ compensation insurance may cover certain costs if your employees get hurt, injured, or sick while on the job.
Business personal property insurance typically covers the equipment, furniture, fixtures, and inventory that you own, use, or rent inside your workspace.
Inland marine insurance can provide coverage for tools that are damaged, lost, or stolen when in transit or on the jobsite.
It’s probably fair to say that on top of everything else you need to worry about these days, trying to understand insurance coverage is the one you prefer thinking about the least. So let us help you.
At Simply Business, we do what we do best — work with many leading national insurers — so that you can focus on what you do best — your job.
We’ll find coverages tailored to your business's specific needs at affordable prices, and we’ll communicate clearly and openly with you so that you understand what you’re getting, why you should consider getting it, and how much it will cost.
All you need to do is choose from one of two options that makes the process simple and easy:
High material costs and price fluctuations are constant challenges for any contractor.
And although you can’t control them, hopefully this article has given you fresh ideas on how to work around them.
At the end of the day, it mostly comes down to knowledge and communication.
Keep an eye on construction costs. Understand supply chain issues and material shortages. And very importantly, be upfront and open with your customers so they understand the challenges each of you face together.
If you do these things consistently, you’ll be better positioned to rise above the rising costs.
Best of luck!
I went to college to be an accountant and graduated with a degree in creative writing. Words won out over numbers, but barely. All credit goes to my parents. Had they talked about anything other than banking at the dinner table growing up—and had they never bribed me with Pop-Tarts to read books, play with my Matchbox cars and quietly exercise my imagination—who knows where my left and right brain would be today.
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
Simply Business1 Beacon Street, 15th FloorBoston, MA02108
*Harborway Insurance policies are underwritten by Spinnaker Insurance Company and reinsured by Munich Re, an A+ (Superior) rated insurance carrier by AM Best. Harborway Insurance is a brand name of Harborway Insurance Agency, LLC, a licensed insurance producer in all 50 states and the District of Columbia. California license #6004217.