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What Does the Future Hold?

As we head towards the last quarter of 2021, many business owners are taking a close look at their 2021 budgets and how actual results compare. Many are also beginning to focus on planning for 2022.  The uncertainty relating to the pandemic has made budgeting especially difficult over the last 18 months and that uncertainty continues. One thing that most can agree on is that costs are rising and will continue to rise.

Last week, The Kiplinger Letter provided updates on business costs for the next year. Major takeaways from their forecast are an expected inflation for all of 2021 of 5.5% to be followed by a rise of 3% in 2022. A rising mortgage rate with 30-year rates expected to climb to 3.8% (no anticipated change in the bank prime rate of 3.25%).  A continuing tight labor market will result in average pay hikes of 3.5% and health insurance costs are anticipated to increase 7%.

Energy

All three energy sectors are predicted to rise, with the effect of the pandemic on the global economy still having a large impact on the rates of increase. Kiplinger reports that gas and diesel prices are expected to be 5% to 10% higher in 2022 compared to 2021. In August, the Associated Builders and Contractors (ABC) analysis of the U.S. Bureau of Labor Statistic’s Producer Price Index reported substantial year-over-year price increases for energy: “the price of natural gas is up 146.7%, while crude petroleum and unprocessed energy materials prices are up 102.9% and 93.8%, respectively.”

Materials

Price increases are also forecasted for materials. Businesses need to be diligent when engaging with new clients or when bidding on new work, especially those in the AEC industry. Construction input prices were 23.1% higher in 2021 than 2020.

On the Bright Side

The Associated Builders and Contractors reported that the Construction Backlog Indicator for June 2021 rose to 8.5 months.  “One can only conclude that the economy will continue to run hot into 2022 despite the malign impacts of the delta variant, producing both hefty advances in gross domestic product and unusually elevated inflation,” said Anirban Basu, the Chief Economist at ABC. 

Watch Your Top and Bottom Line

Effects of the pandemic continue to challenge business owners. While the continuing demand should provide for ample opportunities for work, the cost pressures make the focus on bidding and pricing more important than ever. The demand to complete construction projects may leave less time to focus on the business side of your business.

WM WISDOM:

Continual review of the following is important for financial success on projects:

–Job profitability analysis

–Budgeting and forecasting

–Work-in-progress schedules

–Indirect job cost allocation

–Contract modification(s) to reduce risk such as an escalation clause or change clause.

As always, if you have questions or need assistance regarding this or any other topic, please contact us at any time.

DISCLAIMER: The WM Update, WM Wednesday Wisdom, WM Daily Update COVID-19, COVID-19 Business Resources, COVID-19 Client News Alerts and other related communications are intended to provide general information, including information regarding legislative COVID-19 relief measures, as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.

To learn more about The Kiplinger Letter, click here.