Most construction companies and businesses are apprehensive about dealing with inflation, increased construction costs, and economic difficulties that are anticipated to persist for the foreseeable future as the result of increasing interest rates. The Consumer Price Index (CPI), the most comprehensive indicator of inflation available, shows a rise of 7.9% in the previous year, making it the highest level in the last forty years. The Federal Reserve has been raising interest rates this year in an effort to curb inflation, which has also had quite an impact on all businesses. The following are a few difficulties that increasing interest rates have brought about for the building and construction industry.
Difficulties with the Supply Chain and Rising Building Material Prices
The increase in interest rates can help to some degree with inflation management, but it can also make supply chain problems worse and raise the cost of building materials. The overall cost of construction projects will increase due to these higher interest rates, which will have a direct impact on the market for building materials. Since the pandemic and up until now, prices for building supplies like lumber, steel, concrete, and oriented strand boards (OSB) have steadily increased due to the increasing cost of construction.
Add to that the inability of a lot of building material suppliers to meet the high demand in the market due to their scarce supply, and it becomes a big problem. A significant number of new residences that were under construction have been put on hold and are still pending as a result of increasing building material prices and builders needing extra time for the supplies to be delivered. Construction companies will need to change project pricing and reallocate resources in order to fight the rising expenses that are brought on by the increase in interest rates.
Impacted Cash Flow
Because construction businesses sometimes have minimal working capital, they are not able to manage their cash flow when interest rates increase. Since the additional funds required for contingencies and loan repayments simply are not available, construction companies are forced to either delay payments or self-fund. Neither of these scenarios are ideal for any business.
The best thing you can do to handle this situation is to be stringent when it comes to collecting payments from clients. Make sure that the invoices are issued as quickly as possible and received on time and remember to follow up with clients when a payment is overdue. You might also want to consider revisiting any prolonged payment schedules that you agreed upon before to re-evaluate and see if it is still possible now, given your current situation. If you cannot afford to buy the 966H Cat wheel loader you need to start working you won’t be able to finish the project in time.
Increased interest rates may also influence how you deal with suppliers. Instead of depending on volatile prices to secure the best deal possible, it would be better for you to set prices for purchasing raw materials when they are still fairly low. Agree to a fixed amount with a distributor.