Over the past three years, few industries have experienced as much volatility as construction. Constantly changing costs of steel, drywall, lumber, insulation, and other building supplies make it difficult to keep margins in check. Shortages and supply chain issues complicate matters further. In addition, changes in the labor market and New York regulations add new layers of challenges.
However, the effects of inflation are especially problematic. The costs of building materials outpaced the rate of inflation. The U.S. Bureau of Labor Statistics reported that construction input prices are up 24% in 2022, with steel prices up 112%.
However, smart firms are buttoning up their procedures in ways that allow them to operate more efficiently and profitably. While contractors can’t control world events that affect rising costs, they can refine in-house practices to improve margins. In this article, Metro shares strategies that help contractors and developers improve margins.
Sharpen Procurement Practices
For decades, building materials have been plentiful and affordable. As a result, procurement processes took a back seat to just getting the job done. Sometimes just ordering supplies was enough. But in today’s economic environment, it’s wise for contractors and developers to reassess their procurement practices in ways that protect margins.
Enhanced procurement starts with transparency. Reduce mistakes by ensuring all stakeholders have easy access to relevant documentation and information. Enable team members to identify potential issues earlier by keeping the lines of communication open with suppliers. Share deadlines, issues, and concerns with your vendors and suppliers to allow them to make recommendations that might eliminate problems or increase margins.
Because transparency is more important than ever, it’s a great time for contractors to develop better supplier relationships. When contractors and developers share expectations with vendors, it empowers suppliers to meet (or exceed) those benchmarks. It’s also smart for firms to keep track of vendor performance to ensure it aligns with contracts and delivery times. Keep a supplier delivery log to make sure your vendors are delivering on time.
Focus On Supplier Relationships
Don’t underestimate the power of a good vendor relationship. Alliances with vendors and distributors allow contractors and developers to find new ways to offset the rising cost of doing business. So, find strong partners and remember that switching vendors may slow down the procurement process.
To create stronger relationships, start by creating preferential associations with suppliers that understand construction, products, performance, and value. Vendors and distributors with knowledgeable staff can help contractors determine material requirements, evaluate product performance, and establish competitive pricing.
Loyalty and repeat business are essential parts of a good supplier relationship, so resist the impulse to switch vendors on a whim or simply to get a lower price. Staying loyal to a few good suppliers like Metro reaps a host of benefits, including:
- Knowledgeable sales team who knows your business
- On-time delivery, every time
- Preferred access to inventory, reducing the effects of shortages
- Alerts on future price increases, so contractors can determine the best time to purchase materials
- Ability to make recommendations on alternate materials (value engineering.)
Value Engineering
Value engineering is a way for contractors or developers to work with distributors to identify alternate materials or systems that can be used to maintain value without sacrificing performance and aesthetics. For example, Metro often recommends replacing high-cost processes and supplies with alternatives that meet or exceed existing criteria by using other materials while keeping the investment the same or less.
The concept was developed as a way for owners, engineers, architects, and contractors to get more for the money without sacrificing quality. Usually, this concept is calculated as the ratio of functionality to cost.
When Metro works with firms interested in value engineering strategies, we kick off the process by asking the following questions.
- Which product or revenue stream can be enhanced with value engineering? Where do you want to start?
- How can the delivery be improved? More efficient procurement? Timely deliveries? Improved performance or aesthetics?
- Which benefits are most meaningful for this project? Availability? Different product options? Ease and speed of installation? Performance? Value or costs?
In the world of contracting and construction, replacing one process or supply with alternatives can be a smart way to deliver the same function while using other materials to improve performance, functionality, aesthetics, or price.
Focused Improvements Reap Big Rewards
Fighting the rising costs of doing business in today’s volatile market isn’t easy. Implementing improvements takes time, focus, and real effort. But the ideas in this article are proven methodologies that lower costs and enhance profitability.
Now is the time to change and improve so your organization can reach its full potential and enhance profitability, thereby countering the negative impact of rising costs. Contact us today to find out how we can help your business.
