Inflation – 2022 And Beyond
Have you ever come home from work to discover that your spouse has redecorated the living room? It’s the same space you’ve been sitting in for 20 years, but somehow it feels strange. Welcome to 2022.
Redecorated By Inflation
We have had no experience with real inflation in this country in the past 40 years. In 2022, however, as you return to the office after the holidays and resume business, you will be operating in an economic environment that feels as strange as your new living room.
• Materials like lumber, steel, and concrete that we took for granted as plentiful are no longer being delivered to the job site on time.
• In April 2020, lumber cost $278 per 1,000 board feet. By April 2021 lumber was priced at $1,309 per 1,000 board feet, dropped to $482 by July, and bounced back to $825 by October.
• Between March 2020 and July 2021, steel prices were up over 200% and traders don’t see it easing until well into 2022.
• China currently produces an estimated 2.2 billion metric tons of cement, over half of the world’s supply. India is the world’s second largest producer of cement at 340 million metric tons while the U.S. produces only 90 million metric tons annually. The top exporters of cement are Vietnam, Turkey, and Thailand while the U.S. is the top importer of cement. While worldwide demand for cement continues to increase, supply has been flat and deliveries interrupted, so prices have just about doubled in 10 years.
• Diesel fuel, pumped for $2.43/gallon in November of 2020, brought $3.73/gallon as of November 2021. This 53% increase is rampant inflation, pure and simple, and has nothing to do with temporary supply chain snags.
Welcome to 2022. It feels unfamiliar since it’s been redecorated by inflation.
Feeling Comfortable Yet?
You finally figure, if the new living room decor makes everyone happy you can probably get used to it as long as it doesn’t cost an arm and a leg. The above list is only a sample of the inflation that is now gripping the construction industry. You could probably give me a lot more examples of current cost inflation in your business and your home life. When it comes to doing business in 2022, redecorated by inflation, we will get used to it, but only if we can arbitrage the inflation by passing these cost increases on to our customers.
Home builders who build to sell, for example, are less impacted by materials inflation because they pass the cost increases immediately on to the home buyer. The $300,000 house becomes a $400,000 house and as long as demand remains robust the buyer picks up the tab.
Contractors, on the other hand, finds themselves in a bind when inflation flares. Costs go up rapidly, but the selling price is fixed by contract. If inflation persists and a job takes a year or two to complete, we contractors can find ourselves getting uncomfortable the longer we’re forced to do business in this unfamiliar economy. Our redecorated living room is suddenly costing us a bunch of money. It’s ceasing to feel charming and certainly won’t feel comfortable when the bills come in.
Sell the House?
Let’s not overreact. Selling the family home is probably an overreaction. Even though continued rampant inflation in 2022 could be a death blow to contractors, closing the doors and going home is probably not the solution. Permit me to suggest three strategic contracting maneuvers that will help us get a little more comfortable while riding out what will undoubtedly be a “sticky” 2022 inflationary period.
• Where possible, execute “futures” contracts with vendors for the purchase of all materials and commodities in 2022. Continuing to buy on the spot market will kill our bottom line.
• Protect our companies by negotiating cost inflation clauses in new contracts. Owners will resist, but we have little choice but to insist. Agreeing to fixed price contracts without recognition of this new inflationary environment could be suicide.
• We can’t be reluctant to “do less business” in 2022, because downsizing is one of the few defensive tools we have in these circumstances. I know that “top line growth” has always been a strong motivator in our industry, but we have never done business with this level of inflation raging. More fixed price low-bid contracts will only lead to more losses in 2022. Doing less is a viable strategy in this market.
Don’t miss our thoughts on the “2022 supply chain” next week.
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For deeper look into inflation and the construction business, read more here: https://simplarfoundation.org/?s=inflation
For a broader view on managing organizational change to help navigate the coming inflationary period, click here: https://simplarfoundation.org/?s=organizational+change
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