Navigating Volatility: Mitigating Financial Risk Amid Fluctuating Supply Chain Costs

Navigating Volatility: Mitigating Financial Risk Amid Fluctuating Supply Chain Costs

May 18, 2023

Ever since COVID-19 disrupted the global economy, the construction industry has been grappling with the volatility of supply chains. Persistent challenges, such as inflation, high input costs, and rising interest rates, prevent prices for essential equipment and materials from stabilizing. These issues pose significant threats to small businesses and independent subcontractors.

So, how can construction professionals offset supply chain issues in these uncertain times? The following strategies may aid in mitigating financial risks and maintaining profitability.

Leveraging automation to ride the volatility

Managing highly unstable supply chains is an arduous task for humans. However, tech solutions can automate essential tasks, helping address issues relating to equipment, material shortages, labor challenges, and project delays. Various software solutions are tailored to help construction companies manage their budgets effectively.

Embracing Building Information Modeling (BIM)

Building Information Modeling (BIM) is an indispensable tool for construction professionals. It provides real-time data on costs and material availability, aiding in strategically purchasing materials at their lowest prices. Furthermore, it allows you to monitor expenses throughout the project life cycle, from design to construction to cleanup.

BIM is also instrumental in reducing rework costs, which can inflate project expenses by up to 20%. These costs stem from delivery delays, material deficiencies, equipment failures, safety hazards, and avoidable errors. Through 3D building models, BIM identifies potential conflicts before construction begins, saving valuable resources.

Maximizing the benefits of the Internet of Things

The Internet of Things (IoT), an interconnected network of software solutions that exchange information, can track fluctuating costs of materials, labor, and other factors impacting a project’s budget. This data facilitates more accurate financial risk assessments. IoT-connected sensors and actuators aid in tracking project expenses, including monitoring employees’ health and equipment condition. Protecting your assets is crucial in this unstable economy. If replacing labor or equipment isn’t feasible, implementing IoT becomes a necessity.

Adopting Blockchain Technology

In online financial transactions, blockchain technology is crucial. Synchronizing data from various networks into a unified format facilitates transparent transactions between companies. This technology streamlines contract negotiations, eliminating the need for intermediaries and extensive paperwork, thereby simplifying transactions and reducing financial risk.

Diversifying Suppliers and Stockpiling Materials

In volatile times, depending solely on one supplier for construction materials is risky. Engaging multiple reliable suppliers safeguards against acute price hikes or shipment delays from a single source. This strategy also enables stockpiling materials in anticipation of future shortages. Notably, this approach is gaining traction among retail and manufacturing professionals who utilize warehouse space for raw material storage.

Opting for Equipment Rental

Consider renting instead of buying equipment. While subcontractors may prefer ownership, renting offers numerous financial benefits–it eliminates maintenance costs, provides access to the latest technology, and requires payment only for the equipment used.
Renting is a short-term commitment that shields you from equipment value depreciation and sudden price fluctuations. It offers financial flexibility, which is particularly beneficial when operating on a tight budget.

Performing Regular Risk Assessments

In the face of ongoing material shortages in the construction industry, project delays are almost inevitable. Regular risk assessments help identify your business’s strengths and weaknesses, minimizing the impact of future shortages. Therefore, consider conducting these assessments frequently, especially before major projects or significant business changes.

Analyzing Contracts Thoroughly

From a liability standpoint, contract analysis is vital in supply chain management. It’s essential to account for potential material shortages, shipment delays, and other supply chain inefficiencies when accepting contracts. A comprehensive review process should include a detailed risk assessment, a clear outline of potential delays, and contingency plans.

Strengthen Communications

Communication can make or break a construction project. If you want to mitigate financial risk, you must keep your lines of communication open. Delays and cancellations can happen at a moment’s notice, leading to further financial stress for yourself, your employees, and your clients. If all parties are on the same page, you can execute an effective contingency plan.

It would be best always to share your emergency protocols with clients — they need to know your plan A, B, and C. This knowledge will provide reassurance that they made the right subcontractor choice to help them weather the storm. The economy might look different, but fundamental business practices remain the same. Communication is more important than ever during stressful times.

Keep Growing Despite Supply Chain Costs

Growing your business as an independent contractor or subcontractor is challenging enough without economic restraints like fluctuating supply chain costs. Times are tough right now, but you can keep growing your business despite supply chain issues by practicing these various risk mitigation strategies.

This article is a guest post by Rose Morrison.

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