In 2021, Australia faced the highest construction inflation in almost two decades. Several factors contributed to the hike. The rise in housing prices combined with government market stimulus led to a construction and renovation boom. In addition, the pandemic affected global supply chains while demand soared, adding pressure to material cost.
Some of these pressures will weaken this year, with most of the market expecting the construction boom to lose steam, but SMEs are still at risk. Many small construction businesses do not have the funding to weather the impact of inflation.
Individual tradies providing maintenance and renovation services can usually transfer rising costs to clients because demand for tradies is so high that increasing prices rarely translates into fewer jobs. However, small and medium businesses that are big enough to work on larger renovations and commercial projects usually require financing. Their banks often force them to work with maximum fixed-price contracts that define the maximum value a customer will pay for the job and limit the trader’s ability to renegotiate. More flexible lending by the financial industry would benefit small building companies greatly, but in the absence of regulatory change, businesses have to figure out how to protect themselves from inflation.
It’s critical to clearly understand and estimate the fixed, labour, and material costs and identify items with high price variation. These are the items you’ll need to track more closely and potentially renegotiate with your customers, so you may need to be more transparent about how much of the price relates to these highly variable items.
Most people understand the risks of construction work and are willing to share the pain when faced with a genuine claim of cost increase. But if the pricing process is obscure and the customer feels the claim is a way to increase margins or hide a miscalculation, the conversation becomes much more complicated. Transparency builds trust, and trust allows for a genuine partnership between the parties in which they agree some costs are not under anyone’s control.
You must back any price increase claims due to inflation by hard evidence as part of the trust process. Ideally, you will demonstrate the price change between the initial and the latest estimate.
Another protection against inflation is transitioning from a generalist business into a niche business where higher margins can be charged for specialist work. Small companies sometimes accept unduly low margin jobs to grow revenue and provide a sense of security. But low margin jobs quickly become no margin jobs in a high inflation environment, and the high volumes themselves impede looking for better work. Higher volumes are only good for business when the margins are fair, and you are working for clients who can afford the services they are buying.
Another structural protection against inflation is being genuinely customer-focused. Pricing projects correctly and being extremely transparent are two facets of focusing on the client. But a client-obsessed business is also honest about what customers need and delivers quality within the budget and timeframe agreed as much as possible.
Being upfront with customers might make you lose bad jobs, which saves time and generates work opportunities to deliver the right quality, price and timing. Having the customer’s interest at the centre also means going for the best solution even if it is not the most profitable. Your company’s reputation is one of your most valuable assets, and a good name will increase opportunities and margins in the long run.
If you run your business with these values, you not only will be protected against price variations. You will deal well with anything the market throws at you.
