The construction industry has been facing a sharp increase in material costs, driven by supply chain disruptions, inflation and global demand.
Industry reports suggest that construction costs have risen by approximately 15-20% since 2020- largely due to rising costs of certain materials and the pandemic causing supply chain disruptions. For construction firms, this presents a major challenge- projects are becoming more expensive to complete, profit margins are tightening, and cash flow is harder to manage.
The Impact of Rising Costs
- Higher Project Expenses: Steel, timber, concrete and other essential materials have seen significant price hikes, making project budgeting more complex. In addition to this, recent changes in building regulations have also influenced construction costs. A push for more sustainable and energy-efficient buildings has led to stricter material regulations, which in turn hike up initial costs. However, the long-term benefits such as lower energy costs and increased building longevity could offset the higher price- making it a worthwhile investment.
- Delayed Timelines: Contractors struggling to source materials at reasonable prices often face project delay. This can result on contractual penalties, strained client relationships and lost opportunities for future projects. Delays are further exacerbated by supply chain issues, which can push projects back by weeks or even months. As lead times increase, construction companies have to pay additional labour costs and can lead to reputational damage within the industry.
- Tighter Margins: With costs rising, construction firms either absorb expenses or pass them onto clients, which can lead to reduced profitability if not managed effectively. Many firms find themselves lowering their profit margins to stay competitive or increasing prices and potentially losing out on contracts. In an industry where margins are already be thin, these rising costs can lead to significant financial strain, making long-term sustainability a challenge.
- Cash Flow Strain: Upfront costs can put a significant strain on working capital, limiting investment opportunities in new projects or equipment. Without proper financial planning or funding solutions, businesses may find themselves uncapable to take on new contracts or expand operations. Delays in payments from clients further intensifies cash flow issues- creating high financial strain.
How to Stay Ahead
✔ Strategic Supplier Partnerships
Locking in long-term agreements with suppliers can provide stability against fluctuating prices and better negotiation power. Bulk purchasing agreements and early payment incentives can also help to secure better pricing and mitigate cost volatility.
✔ Smart Project Planning
Adjusting project timelines to purchase materials when prices dip can help manage expenses. Keeping a close eye on the market trends and utilizing predictive analytics and procurement software can provide data-driven insights to optimize purchasing decisions and minimize financial risks.
✔ Flexible Finance Options
Using finance can be a great way to help construction businesses to spread the cost of materials and prevent cash flow issues.
- Asset Finance: This can help businesses to acquire essential equipment without large upfront costs and allow the investment to be spread over time, preserving cash flow whilst still upgrading machinery.
- Business Loans: Business loans offer immediate finance support to cover rising material costs or unforeseen circumstances. This ensures that construction firms can keep projects moving even when cash flow is tight.
- Invoice Finance: Construction businesses often face long payment terms. Invoice finance allows businesses to unlock cash tied up in unpaid invoices, providing immediate working capital to reinvest in ongoing and future projects without waiting for payments.
- Refinancing: If a business owns machinery or vehicles outright, refinancing them can free up capital to reinvest in materials, labour or other expenses.
At Moorgate Finance, we specialize in providing flexible, industry-specific financial solutions that help construction businesses manage rising material costs and maintain their cash flow. Whether you need asset finance, a business loan or invoice finance, we are here to find the right solution for your business.
Get in touch by clicking Apply Now or give us a call on 01908 92 62 62.