The last two years of record-high inflation have significantly impacted bridge maintenance and construction businesses.
Even with the enormous infusion of cash from the recent infrastructure bill, many companies find it challenging to stay profitable because of rising costs.
This article will examine inflation’s effect on bridge-related businesses and what they can do to limit its impacts.
What is inflation?
Inflation is an increase in prices for goods and services over a period of time (usually month-over-month or year-over-year) in an economy. In addition to raising prices, it lowers the value of the currency used in that economy. In other words, as prices rise, the value of a dollar goes down. It can’t buy as much as it once did.
For example, let’s say that you purchased a tool three years ago for $10. When you order a replacement now, the exact same tool costs $12. The tool has not changed or been improved in any way, but it costs 20% more. Inflation and the dollar’s devaluation are the reasons that you now pay $2 more for the exact same item.
Inflation usually has a negative connotation because most people view it as the reason that they pay more for gas, milk, houses, travel, etc. But inflation isn’t good or bad. It’s a natural process that is an expected part of an economy.
In most cases, inflation is a sign of a sound economy. Prices rise because there’s a healthy and increasing demand for goods and services. Increasing demand for things usually happens because people and businesses have money to spend and want more things.
What’s different today is that the increased spending by people and businesses isn’t the result of normal increased demand. It partly comes from the COVID-19 pandemic and infrastructure spending, which has caused artificial inflation and raised it to unnatural and extreme levels.
The Federal Reserve aims for an annual inflation rate of 1.5% to 2.0%. This level of inflation supports healthy economic growth and helps prevent the need for drastic changes in business or consumer spending or government intervention in the economy.
As of 2022, inflation has exceeded the healthy 2% rate for well over a year. In many cases, it’s been the highest level of inflation for more than four decades. When there are extended periods of high inflation, it creates problems. For bridge construction businesses, inflation can lead to cash flow management issues, reduced levels of work, lower profit margins, longer building timelines, employee problems, and other business stressors.
How inflation impacts businesses in the bridge industry
Inflation affects every part of the bridge construction and maintenance sector. Over the last year, prices of most things that companies depend on have increased by almost 10% or more:
It’s challenging enough in regular times to complete bridge development and rehabilitation projects on time and within budget. Add the pressures of double-digit inflation, and it can seem impossible. Inflation impacts your business, employees, and clients.
- Clients: If you offset inflation by increasing your prices or extending your project timelines, it has a negative impact on your clients. They could look for other contractors who can work more efficiently and cost-effectively during this inflationary period.
- Sales team: Your salespeople could be adversely impacted if they cannot generate their usual level of sales activity. You may be required to up their salaries or commissions, which could further force you to increase your prices, or you could lose valued employees to competitors.
- Labor: Your workers are being squeezed by inflation. Their incomes are not rising at the same rate as their expenses for things like food and shelter. This could cause your employees to demand higher wages or seek work from a competitor who pays more.
- Supply chain partners: The companies in your supply chain are also impacted by inflation and passing higher costs on to you. This could force you to seek out new, untested suppliers.
- Business owners: Inflation could put the future of your business at risk. Unless you adapt to inflation, you could lose the company that you’ve worked hard to build.
These are just a few ways that inflation can impact all aspects of your business. It can also just keep piling on with higher raw material prices, supply chain issues, increased salaries, employment disruptions, etc.
How to limit the impact of inflation on your business
In the relatively long period of economic stability that we’ve just lived through, most business owners have gotten used to controlling all aspects of their business and the projects that they work on. Unfortunately, you can’t control inflation. It’s an economic issue and entirely out of your hands.
While you cannot wholly prevent inflation from affecting your business, you can take steps to reduce its impact. Here’s how.
- Be more diligent about how you track and control your costs. Many businesses in the bridge industry have gotten lax about watching expenses during the flush times that we recently lived through. If you don’t gain control over monitoring and controlling your costs, you will struggle to run your business profitably through this inflationary period. If you do one thing to limit the impact of inflation, watch how you spend money.
- Don’t bid away your margin. You can control how much you charge for your work. If you’re trying to compete on price alone, you’ll reduce your margins and put yourself in a difficult position if inflation continues while you work on projects. It could be a good time to reposition your business if you’re currently focused on cost alone. Maybe you could promote your company around an area of specialization or on the quality of your work to compete, rather than on price alone.
- Purchase materials ahead of time. Storing materials is usually a bad idea because it’s costly to warehouse them. If you want to limit inflation’s effect on your projects, though, purchase all the materials required for it at the start. Even if you can’t predict the price of steel in the future, you know its cost today. Buy what you think that you’ll need up front because it could be 10% or more expensive when it comes time to use it.
- Rethink your contracts. Add cost escalation clauses to all your agreements. These will enable you to share expenses with clients if they rise over a certain level because of inflation.
- Get creative about how you compensate employees. Is it absolutely necessary for you to pay your employees higher salaries? Many of them may appreciate less costly benefits, like more time off or scheduling flexibility.
- Maintain consistent cash flow. Controlling your cash flow is one of the best ways to limit the impact of inflation on your operations. Have processes in place to watch the flow of money into and out of your business. Doing so can help you quickly identify when you’re spending more than you’re bringing in and can prevent the cash drain that can result from inflation from going on too long.
Running a business in the bridge industry is challenging in normal times. Adding high inflation into the mix makes things worse. Taking the steps outlined in this article will help you succeed during this time of record-high inflation.