The COVID-19 pandemic wreaked havoc on just about every business in nearly every industry, and construction is no exception. While demand for housing remains high, costs to build are high as well — and rising.
The sustained hyperinflation of equipment, labor, and materials reduces profit margins for all parties involved. These reduced margins, in turn, can lead to project delays, contract cancellations, and contractor defaults.
Unfortunately, it appears that rising construction costs will not be falling anytime soon. Labor shortages are expected to continue well into 2023. And while some materials are showing a modest cost decrease, such as lumber and plywood, others will likely stay high or increase, such as cement and concrete.
Are you prepared to weather the storm?
How Are Rising Costs Affecting Construction Companies?
In order to plan for the future, you need a good understanding of the effect of inflation on construction projects and how rising prices are affecting the way things get built.
Many companies in the construction space find themselves strapped for cash now and again. Since construction contracts often span several years, they cannot always account for the ripple effect of inflation. The difference between a five-year job initially costing $10 million and then rising to $13 million three years into the project can be one of solvency vs. insolvency for a company with little available capital on hand. This is true for seasoned companies as well as startups, as this elevated level of sustained inflation and supply chain disruption does not discriminate.
This affects companies that specialize in government bids as well. Most government contracts require bonding, which is based on a contractor’s financials. Higher commercial construction costs cut into margins, reducing available working capital and lowering the amounts that sureties are willing to guarantee. These lower bond amounts, in turn, can hinder contractors from securing the amounts they need to cover project costs. The problem is made worse by the fact that most government contracts are bid several years from actual groundbreaking. The prices that shaped the bid however-many months or years ago no longer apply.
How to Combat Rising Construction Costs
So the construction industry faces a number of challenges due to hyperinflation and persistent supply chain issues. What can be done? Let’s look at how to control rising commercial construction costs in an effort to maintain healthy profit margins.
- Pay over time with equipment financing.
Similar to a home mortgage or a car loan, equipment financing is a specialized loan made by a third-party lender to finance construction equipment. Just like any loan, equipment financing involves a credit check, and the buyer repays the balance over a period of time with a set amount of interest.
One key benefit of equipment financing is its ability to shield buyers from the immediate impacts of inflation. Though the price of a piece of equipment might be higher, the buyer’s monthly payment will likely remain manageable, leaving liquid capital available for other business needs.
Utilizing a lender like PEAC Solutions can help. Our simple 10-minute online application process can lead to pre-approval within just two hours, and our competitive rates put more money in your pocket. With terms from 12-63 months, you can design a payment plan that fits your budget.
- Consider working capital loans.
Working capital can be a construction company’s best defense against inflation and supply chain challenges. However, many contractors suffer from a lack of sufficient working capital, which can make it difficult to purchase equipment and supplies or pay labor costs.
A working capital loan is designed to help a business meet its day-to-day operating needs for a defined length of time. These infusions of cash can allow a company to augment or preserve its working capital, which can be beneficial when bonding is required for larger projects. Additionally, working capital loans can help businesses to meet day-to-day obligations like supplies or payroll.
Working capital loans are available for up to $250,000 on an application-only basis, with competitive interest rates and up to 24-month loan terms. Options for daily, weekly, or monthly payments allow for flexibility in how the loan is repaid.
Are you ready to weather the storm of rising construction costs and explore your funding options with PEAC?
PEAC Solutions is a DBA of Marlin Leasing Corporation. Equipment financing is provided by Marlin Leasing Corporation. Working capital loans are originated by WebBank.