Smooth Out the Boom-and-Bust Cycle for Your Construction Business

As an executive in the construction industry, you’re used to the boom-and-bust cycle, but the current climate is harder to categorize. Despite record-high inflation rates, a tight labor market, and sharp interest rate increases, the short-term forecast for the construction industry appears sunny. However, industry observers warn 2023 could be very different. So how can contractors hone their approach to build and sustain their own inflation-proof boom?

Rising inflation means higher material costs

The construction industry faces compounding pressures that drive material costs ever higher. Scarcity and supply chain delays prompted by the pandemic remain, boosting prices by double digits every month during 2021. Increased construction demand fueled by the Infrastructure Investment & Jobs Act puts further pressure on material availability and prompts the inevitable price hikes. Now, rising inflation further aggravates the market — building materials prices are up 8% so far in 2022. While there may be little you can do to directly lower costs, you can work strategically to minimize the impact on your business.

Increased visibility can help combat the impact of rising costs. However, cost visibility requires integration between the financial and operations sides of your construction business. Accumulating costs in one application, purchasing materials in another, scheduling projects in a third, tracking change orders and billing in other disconnected applications creates data silos.  Silos can blind your organization, preventing you from making fully informed decisions during times of uncertainty.

An integrated, Next-Generation construction ERP solution allows you to gain greater visibility into material costs to help identify problematic projects, subcontractors, vendors, or processes. Armed with this insight, you can take action, such as renegotiating contracts with customers and vendors, making proactive adjustments to billing, or resequencing scheduling to use materials and equipment you may already have.

For example, we’re seeing contractors leverage Next-Gen construction ERP to obtain accurate production-related data they’re using to improve cost center management and directly boost the bottom line. It’s time to ask yourself: does your construction business have the visibility you need to navigate inflation — how about a recession?

Worker shortages means you’re paying premium wages

According to an analysis from the Associated General Contractors of America, average hourly earnings in construction increased 3.2% over the year to $30.73. In May, the Department of Labor reported that construction job openings were the highest in 19 years. The shortage of skilled (and unskilled) workers means it’s more difficult to find and retain workers — forcing many companies to pay premium wages in order to attract new talent from a limited pool.

When staffing up becomes challenging and more costly, it makes sense to invest in the tools and technologies that help increase productivity and maximize your human resource potential. Empowering field staff with self-service access to daily project status reports, for example, eliminates status calls and inquiries back to the office, saving considerable time. Similarly, automated work-in-progress reports can cut days of manual calculations and physical paperwork, allowing staff to focus on outputting quality projects on time and under budget.

Contractors that implement integrated, cloud-based construction business management solutions gain real efficiencies that accelerate workflows and eliminate manual processing steps, in the field and the office. As a result, these firms allow existing staff to be more productive, focusing on mission-critical activities, and can even minimize the need to hire additional staff. Companies leveraging modern construction ERP software technology are also better positioned to attract and retain new staff  – particularly “digitally-native” folks who crave a dynamically connected workplace – over less sophisticated competitors.

One Minneapolis contractor is an excellent example of the benefits of a Next-Generation construction ERP application. They have lowered their employee turnover rate, are effectively attracting new talent, and have cut their payroll processing time from days to minutes. Check in with your existing setup: Is your construction business making optimal use of its talent and recruitment position?

Increasing interest squeezes cash flows

As interest rates rise, construction projects become more expensive. For builders working in the residential market, higher rates can translate into less homebuyers and slowing development.  For contractors in general, lines of credit, leases — and money overall — are getting more expensive. It’s a reality that can cut your borrowing power and your bottom line.

When money becomes more expensive to access, it becomes even more imperative to have a tight and accurate handle on your cash flow. For construction businesses, strategies to optimize cash flow can include speeding the invoicing cycle, issuing and accepting electronic payments, streamlining bank reconciliation, accurately projecting future cash flow and adjusting budgets accordingly, and negotiating with vendors to spread out costs into installments.

A modern, ERP software for construction management can help you optimize cash flow by providing access to real-time data and forward-looking insights necessary to make strategic cash management decisions. For example, this contractor gained real-time access to data which led to the successful integration and profitability of three significant acquisitions. Now is the right moment to reduce the pressure of inflation and rising interest rates before the squeeze gets tighter.

Connected construction fuels the boom

Contractors who can hammer out a sustainable strategy have one piece of the puzzle. Those that have the industry-specific technology to support such a strategy will be able to compete effectively in a marketplace continually characterized by faster and faster change. Deloitte refers to this concept as connected construction. It requires “bringing assets, people, processes, and job sites onto one platform — making everyone and everything work smarter — to reduce downtime, optimize asset utilization and efficiency, and gain greater visibility into operations.”

Technology, specifically a Next-Generation construction ERP application, is the foundation for such connectivity. At Net at Work, we work with construction leaders who are ready to build the future, providing the expertise, processes and tools that unleash the power of your contracting business. Learn how you can equip your contracting company to build your own boom by signing up for this complimentary webinar today.