Goldenseal Estimating Software Topics-- Economic Cycle

Handling the Economic Cycle

How do I adjust prices for different economic conditions?

Contractors in any area will experience changes in costs as the local economy ebbs and flows. In fact, many "regional differences" are caused by different localities being in different phases of the boom/bust cycle.

Here's how to adjust Goldenseal estimating software at each stage of the economic cycle:

Recession

When the economy is "bottoming out", bidding will be extremely competitive, and profit margins are slim to nonexistent. They may even be negative if bidders are willing to lose money temporarily, to keep crews busy or to get future referrals.

Subcontractor bids will be low and competitive. Labor costs will typically be low, since the selection of employees is better and you can get the cream of the crop. Material prices will often drop, particularly for volatile materials such as plywood and copper.

You will need to be very careful about setting your margins for overhead, profit and contingencies during the "tough times".

If you are doing less work, you will have more time, and may be more efficient about project management. That may help you survive on a smaller percentage for overhead and contingencies. On the other hand, if you have large fixed costs, you may need to increase your overhead percentage, since there is smaller volume of income to cover it.

This is a good time to make extra effort to keep material costs updated frequently. There are often price drops, so you may be able to reduce your bid prices without suffering a loss of profit.

With luck you'll be able to drive a harder bargain for labor and subcontractors, and do OK despite the competitive conditions-- or at least establish good working relationships so you can survive the economic recovery.

ECONOMIC RECOVERY

When the economy is recovering, bidding becomes less competitive. Subcontractor and labor prices will start to rise as the demand for them rises.

Ironically, this is the easiest time to "lose your shirt", since you'll probably still be bidding "close to the bone ", and can get caught by the rise in prices that takes place between bidding and actual construction.

When the economy is improving, insist on firm bids from your subcontractors, and try to "lock in" material prices for future delivery. When estimating, add an inflation allowance to account for rising costs, and start increasing your percentages for overhead, profit and contingencies.

Boom times

When the economy is in "full steam" there is much less bidding competition, and more opportunity for fat profit margins.

On the other hand, good labor and subcontractors are hard to find, resulting in increased costs. There may also be dramatic price rises because of material shortages-- especially in volatile items such as copper, cedar and plywood. There may be dramatic price increases in materials with a fixed production capacity (for example, steel and concrete).

If material prices are changing rapidly, update material prices frequently. You may even want to make a last minute update of some materials right before you submit your bids.

You can definitely increase your profit percentage.

It's also a good idea to increase your overhead and contingency percentages during the good times, since you won't be able to hire such talented staff and your costs will go up. It's also very important to include an inflation allowance in all bids, and/or include an "escalator clause" in your contracts that allows you to increase prices if there are significant increases in the price of your supplies.

Falling economy

Weirdly enough, you will often make the most money when the economy is starting to slump.

You'll still be working on profitable contracts negotiated during the less competitive boom times, but material costs wil probably start to fall, better employees will be available, and subcontractors will be more competitive.

During a falling economy you can start to reduce your overhead and contingency percentages, use a smaller inflation allowance, and keep your eye out for good new employees!

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