Although the construction industry is booming, the market is haunted by the specter of inflation to an extent mostly unknown in the rest of the economy. As a result, companies that provide building contractors with materials are under pressure to keep their B2B customers accurately informed of developments and, ideally, to help them do the same for the consumers they work for.
In June 2021, the price of construction materials was 20.2% higher than it was in June 2020, according to the US Bureau of Labor Statistics. In contrast, the broad Consumer Price Index rose 5.4% in the same time span.
“But the inflation of building-material prices isn’t spread evenly, a fact that may gloss over the crisis builders and consumers are facing,” says Dmitry Voronenko, CEO and co-founder of TurnKey Lender, a provider of financing software that operates in 50 countries worldwide.
For example, the cost of refrigerators and other big appliances remained about the same for the 12 months through June this year. Plumbing fixtures? They were up about 3% in that time span, and still comfortably below the broad CPI’s one-year rate of change.
But the cost of other materials needed for construction projects is, pardon the pun, through the roof. A crate of nails is 13.4% more expensive. A load of sheet metal is up 21.2%. A spool of power cable costs 41.8% more now than it did a year ago.
And these costs are nothing next to the inflated price tags on must-haves like softwood lumber (up 125.3%) and plywood (a stunning 207.1% higher).
“The immediate causes of this surge in prices are well known,” says Voronenko. “First, starting in the early months of the pandemic, furloughed workers commenced picking building-supply stores clean for their DIY projects.” Then, he adds, “beginning last fall, construction companies shot into action to meet spiking consumer demand for new homes.”
But builders were grappling with inflation well before the lockdown. Pre-pandemic inflationary factors include a trade war with China, a spate of natural disasters, and — by August 2019 — the busiest home-remodeling market since the great recession more than 10 years prior.
And inflation doesn’t only make costs higher. It can also skewer calculations around profitability in a business environment marked by some of the worst inflationary conditions in four decades.
Writing in the Journal of the Construction Division in 1982 — when the rate of inflation was 6.2% compared to the average yearly inflation rate of 2.69% ever since — the late George Stukhart, then a professor of civil engineering at Texas A&M University describes inflation as “a chronic problem whose effects permeate the entire construction industry.”
Stukhart further explains that “Owners are not only paying for the increased costs of facilities and capital, but also for premiums on construction prices because of the uncertainties of inflation and its side effects.”
Meanwhile, adds Stukhart, “Contractors are faced with severe uncertainty in bidding and financing work on projects” while “productivity is affected because contractors can not accurately forecast long-term returns on their investments and are required to divert necessary capital to meet resource costs.”
How to be a beacon in the dark.
So how can construction-materials suppliers help contractors plan for these effects and work to reduce the risks they entail? There are three main ways, all of them linked to education and communication.
- Help your customers understand that today’s high building-supply prices are offset by historically low interest rates. The target federal funds rate, as set by the US Federal Reserve System, is between 0 and 0.25, where it has stayed for well over a year. In plain terms, the higher cost of building is mitigated by low interest rates — in fact, they may be the main thing keeping the current construction boom alive and well. Putting the word out about that by means of available communication channels is an excellent idea.
- Encourage relevant information flow. While builders know what they’re dealing with: a volatile materials market that can change — and certainly has changed — from one day to the next. In turn, builders are doing a good job of keeping their customers informed about potential supply-chain bottlenecks that can result in significant delays. As a construction-materials supplier, you can help them continue this work even more effectively, by sharing with them your understanding of niche-market dynamics and developments.
- You’re in an excellent position to help your customers become more knowledgeable about “materials risk.” This involves defining volatile pricing — like, say, a 5% rise within 30 days — identifying specific material categories that may be at risk for significant volatility, and possibly offering “at-risk” materials at fixed prices for specific periods of time, or encouraging customers with storage capacity to pre-order materials.
Fortunately, the financing software can help with client communications.
“The integrations with email and SMS providers Unified Lending Management software has, allows our clients to do a lot more than just send out reminders and account-specific updates,” says TurnKey Lender’s Voronenko. “While those things are vital, we provide almost infinite flexibility around messaging.”
In other words, the software building-supply providers already use to manage their financing can serve as a communications hub, especially around finance-linked issues such as materials-price volatility, marketplace dynamics, and the interplay of niche-market inflation and low prevailing interest rates.
The outcome? “Better direct communication between your turnkey financing program and your customers leading to better relationships, and outcomes that benefit from active and ongoing risk mitigation,” says Voronenko. “Being proactive around communications is never a bad idea, but in this market, it’s a must.”
The development of embedded finance technology allows businesses to provide their highest quality goods or services to clients who can’t afford to pay for them in one payment without outsourcing financing to a traditional lender. Keeping control over the consumer data and all the steps of the client’s lifecycle allows construction companies to build better relations with their customers, boost their revenue thanks to the flexible credit product settings, and flatten revenue curves with installments on the deferred income coming in throughout the year.
TurnKey Lender provides construction companies with end-to-end automation for every step of in-house consumer finance. The intelligent award-winning software powered by proprietary AI digitizes processes from application processing and automated credit decisioning, to servicing, collection, and reporting without increasing the business’ overhead. Take a free, no-obligation demo to learn how TurnKey Lender can help you optimize your company’s financing infrastructure.