Despite the slow-down in growth of China’s construction industry, material prices are still at particularly high levels. The US construction market has buoyed in recent years, indicated by a number of US building and construction price indices. Whilst here in the UK related indices have remained roughly level, construction firms are still feeling the pinch at time where demand is flat and wages are steadily rising.
High prices can creep upon firms and set in quickly, as they have over the past five to ten years. Unfortunately for the construction industry, they appear set to stay at least for the short to medium term. So how can construction companies fight this continued squeeze on margins? Where are the possibilities for cut backs, efficiency improvements or extra savings?
- Futures and Forwards
Companies can lock in prices for materials now using futures or forwards contracts. These are simpler than they may sound and simply involve agreeing a price with a supplier for a future delivery of materials.
The contracts are an obligation for both parties to exchange the materials on a predetermined date in the future, at a predetermined price and in a predetermined quantity. Whilst futures contracts are standardised and traded on futures exchanges, forwards are traded ‘over the counter’. This means that no exchange is involved in the contract, it is simply between the two parties.
There are also contracts called ‘options’ that give the buyer the right but not the obligation to purchase a material or security at a certain price, in a certain quantity and on a certain date in the future. These are more expensive than futures and forwards but are a different type of hedge against price moves.
- Price Protection Contracts
Price protection contracts work in a slightly different way to forwards and futures. Instead of locking in a price for a date in the future, they can be used to protect both the buyer and seller from large movements in the materials price.
For example, if two parties agree to set the price of a certain material at £300 per metric ton with a price protection of 10%, both the buyer and seller are protected should the material price move up or down by 10% or more respectively. If material price shoots up to over £330, the buyer can purchase it for £330 per ton. Likewise, if the price falls to below £270 per ton, the seller has the right to sell at that lower price.
Certain clauses, such as a time span and a minimum and maximum price for the material are also agreed at the outset of the contract.
- Invest Early
Whilst high inventory costs are certainly undesirable, if a company’s storage facilities or site conditions allow then purchasing materials early can lock in lower rates. This move also protects a company from potential shortages in the supple of materials later on in the lifespan of a project or job.
Many companies, however, do not immediately have the capacity to store large amounts of materials. Selling off some of their fleet and opting to lease vehicles from sites such as www.UKForks.com could raise funds in the short term for investment in materials, whilst also freeing up space for its storage.
- Buy bulk
As any good shopper knows, buying in bulk can save significant amounts of money. A company can negotiate lower prices for bulk purchases of single materials, or a large order of different materials; something that is definitely worth bearing in mind.
Moreover, procuring large amounts of material from a single supplier can reduce transport costs – making buying in bulk a particularly economically sensible move.
- Good relationship with suppliers
Once a company has found reliable suppliers that offer great quality products and good value for money, it is important for them to establish and build a good relationship. This increases the chances of a continued good service, as well as the possibility for price freezes or even price reductions in the future.
Building a good relationship is simple, but must be done consistently and without fail. Without suppliers on board, you project is doomed to fail. Examples of how to build a good relationship include paying invoices in a timely fashion and turning up to meetings promptly, or even acts such as sending seasonal greeting cards.