How to manage construction cost inflation
The inflation crisis
It probably won’t come as a surprise that inflation is affecting the cost of building projects in the UK. As I write this article, inflation in the UK has hit 9% per annum. You may be shocked to hear, however, that inflation will have a significant impact on future building projects, particularly if your construction business is booked up into next year.
Price rises have hit the construction sector hard. In May 2022, Builders Merchant News reported significant inflation on building materials during the previous 12 months. Heavy Building Materials, for example, saw price increases of 17.4% between the first quarter of 2021 and the first quarter of 2022. Timber and Joinery products increased in price by 21.4% over the same period. UK-based building firms have felt the affects of these price increases, with 98% of builders having experienced material cost increases, according to the Federation of Master Builders (FMB)’s “State of the Trade Survey Q1 2022.”
Pricing up future projects using today’s prices is likely to lead to under-quoting your costs. This applies to subcontract labour and plant hire, as well as building materials. You can be fairly sure that the resources will cost more when the project begins in several months’ time. Moreover, the prices will continue to increase while the project progresses, so resources such as plastering and decorating, used towards the end of a project – will see the full affect of inflation. What makes this situation more difficult for the builder is that the client may expect anticipate price rises and may be reluctant to spend more.
It seems unlikely that the market will change anytime soon. In their article, Builders Merchant News stated, “there’s an expectation that market conditions will become increasingly more difficult as prices continue to rise and consumer spend is stretched further and further.”
3 simple steps to stay on top of inflation
What can you do to get ahead of inflation? Take a look at our 3-part plan for tackling inflation on building projects:
1. Don’t miss anything out of your estimates. “Look after the pennies and the pounds will look after themselves,” or so the saying goes. Ensure your estimate includes everything, down to the last nail, brick tie and gutter clip! Don’t forget to add on a percentage to cover wastage, your business overheads and - it goes without saying - a profit margin. Remembering everything might sound like a challenge but estimating software, which does most of the thinking for you, makes it easy.
2. Use project start-date prices in your quotes. Unless the project starts this month, don’t estimate with today’s prices. Estimating with inflated, project start-date prices, is straightforward if you use estimating software with built-in inflation calculators. With virtually no effort on your part, the software will estimate the inflation on every single resource by the time you need to order it. Using inflated costs in your estimates could make the difference between turning a decent profit or not.
3. Have an honest conversation with your client about costs. Factoring in inflation will increase the overall cost of your quote. It’s a good idea to speak openly to your client about building material price increases. It may be helpful to highlight the fact that quotes from other builders may seem cheaper, but simply aren’t realistic. A professional, detailed quotation, produced by estimating software such as EstimatorXpress, will help support the conversation. If you still feel awkward, bear in mind that the client wants the work done during this period of high inflation. It’s not your job to subsidise the work; the client should pay the full cost! If you want to achieve financial stability, join the 83% of building firms who are passing on price rises to the customer (See the FMB’s “State of the Trade Survey Q1 2022”.)
As I’ve touched on already, estimating software will help you make light work of all three steps of the plan. Tailor-made estimating software like BuildingWorks, EstimatorXpress or Take-off & Estimate Kit, will calculate every last material, labour and resource, for every task in the project. These software tools automatically add wastage to the material quantities and prompt you to include a markup for overheads, profit and inflation. On top of that, the software will produce a business-winning customer quotation.
Use a free trial to sense check your quotes
All this talk of inflation may leave you feeling concerned that jobs you’ve already priced up may have been priced too low. If you are worried, why not trial an estimating software package and use it to calculate the inflated, project start-date price? Here’s what you need to do:
1. Download a free trial. We’d recommend a 14-day free trial of HBXL’s software EstimatorXpress or Take-off & Estimate Kit. They don’t take any card details so there’s nothing to lose! In addition to downloading the trial, you could book an online demo to see the software in action. Alternatively, check out their how-to videos to get you on your way.
2. Price up using today’s prices. Using the software, work through a project you’ve recently estimated, using today’s prices. Check for differences between your material prices and the prices in the software’s price book. As HBXL Building Software update their prices every month, they’re bang up to date. Are your prices?
3. Add the markup for inflation and profit. Put the job start date into the software’s build programme (if the start date isn’t confirmed, give your best guess). Using the built-in inflation tool, the software will calculate the likely cost of the project at the time the work is going to being undertaken. Type in the profit markup you’re aiming for. How are the costs looking now? Is the project viable?
A final word of advice. Brace yourself for the software’s estimate to be more expensive than your original quote. Many builders find this is the case. It highlights where they’ve been going wrong – using old prices, missing out resources, not allowing for overheads, wastage and – of course – inflation. It’s a warning that you need to estimate differently. If you join the thousands of builders using estimating software, you can be confident that you’re pricing right and preparing for inflation at the outset of every project. And that means making the profit you deserve for your efforts.