FHB Logo Facebook LinkedIn Email Pinterest Twitter Instagram Plus Icon Close Icon Navigation Search Icon Navigation Search Icon Arrow Down Icon Video Guide Icon Article Guide Icon Modal Close Icon Guide Search Icon Skip to content
Subscribe

In every issue you'll find...

  • Expert insights on techniques and principles
  • Unbiased tool reviews
  • Step-by-step details to master the job
  • Field-tested advice and know-how
Subscribe Now!
Subscribe
  • How-To
  • Design
  • Tools & Materials
  • Videos
  • Blogs
  • Forum
  • Magazine
  • Members
  • FHB House
  • Podcast
  • Join
  • Log In
Subscribe
Building Business

Two Economic Factors Affecting Your Construction Business

Using these two economic factors to price your work will help you not only keep profits in your business, but also increase the value of your services to your clients.

By Shawn Van Dyke

Construction pricing can be a difficult thing to master. Developing a pricing strategy for your construction business is both an art and a science.

The science part is knowing the numbers of your business, and the art is selling the value of your work to your customers.

COST-BASED PRICING

Construction is a cost-based business. You have to know all your costs, both direct and indirect, and apply a markup that not only covers your expenses (overhead) but also leaves you with a sustainable profit.

See this post on determining your price.

But knowing all your costs and applying an appropriate markup will not alleviate the pressure on your business caused by inflation.

THE SCIENCE – THE COST of INFLATION

Inflation is:

a general increase in prices and fall in the purchasing value of money.

If you don’t account for inflation in your pricing strategy, then you’ll be getting less for the amount of money you spend over time.

This ‘cost increase’ not only applies to the products and materials you purchase and sell to your clients, but also the cost of the labor for your employees.

According to the the Bureau of Labor Statistics, the inflation rate for 2016 was 1.3%*.

*Rates of inflation are calculated using the current Consumer Price Index published monthly by the Bureau of Labor Statistics (see the Historical Inflation Rates: 1914-2017 published here.)

There are two ways you can calculate the effect of inflation on your construction business.

Effect of Inflation #1:

If you spent $100 on a product or service in 2015, that same product or service will cost you $101.30 in 2016 (an increase cost of 1.3%).

COST x INFLATION RATE = $100 x 1.013 = $101.30

Effect of Inflation #2:

If you allocated $100 for a product or service in 2015, you would only be able to purchase 98.7% of the product or service in 2016 (a decrease of the purchasing power of money by 1.3%)

HOW INFLATION AFFECTS YOUR CONSTRUCTION BUSINESS

According to Dr. Matt Harris, Assistant Professor of Economics – University of Tennessee:

“Most economists contend that slow, steady inflation is good for the economy. They key word being slow, meaning that prices are relatively stable. However, rapid inflation and deflation are generally considered destabilizing to economies.”

Although inflation can be slow over time (which is good according to Dr. Harris), if you do not account for the rate of inflation in your pricing strategy, then this can be bad for your construction business.

The decrease in profits, cash flow, or spending power might not seem like that big of a deal in any given year, but it adds up over time.

If you are like many construction professionals, you find it difficult to raise your prices on a regular basis. You might fear that you will lose existing customers with a price increase, or that you will have trouble acquiring new customers with higher prices.

But inflation is happening whether you like it or not. If you don’t account for it year after year, you won’t survive.

Here’s an example of the real cost of inflation over the last 5 years (2012 to 2016).

Inflation Rates

According the the table above, a business that had a Total Revenue of $500,000 in 2011, would have an equivalent Total Revenue of $467,806.95 in 2011 dollars by the end of 2016.

That’s a decrease of $32,193.05 in purchasing power (or 6.58%).

Simply put:

If you don’t adjust your prices for inflation over time, you will have less money to operate your business for both the purchasing of products and services and also expenses and profit.

When was the last time you increased your labor rate?

THE ART – PRICING YOUR VALUE

Another economic factor that you should consider when developing your pricing strategy is the amount of money your ideal clients have to spend year after year.

According to the United States Census Bureau:

Median household income in the United States in 2016 was $59,039, an increase in real terms of 3.2 percent from the 2015 median income of $57,230. This is the second consecutive annual increase in median household income.

This is great news for the overall economy.

More people have more money than they did two years ago.

But the median means that 50% of the population falls below this point in the curve and 50% of the population falls above this point on the curve.

Median is the middle, not the average.

Median is the middle not the average

This is not a good indicator for what is actually happening within those two hemispheres of the economy.

The mean household income is a better indication of the market activity for construction business owners.

Specifically, residential construction business owners should take note of the upper 80% of Household Incomes (the 4th Quintile on the table below).

Historical Household Incomes

According to the Tax Policy Center, the mean (average) household income for the upper 80% went from $80,080 in 2011 to $92,031 in 2015.

These households saw a 15% increase in income during those 5 years.

Theoretically, this higher income bracket is the target market for many construction companies.

When you combine the fact that mean household income has risen during the last several years with the slow rate of inflation, the net effect was that this target market had more money to spend in 2015 than it did 5 years prior.

Dr. Harris explains how inflation can be a net positive for your customers:

“Most consumers are net debtors (i.e., they owe money on houses, cars) and a little bit of inflation means that those balances are less in real terms each year, meaning consumers’ balance sheets improve over time.”

When higher income households have more money to spend they buy higher end projects.  Higher end clients with higher end projects value higher end services.

If you focus on selling your value and not your price, you can increase your prices to the high end market because they will expect a higher level of service.

This is the art of selling your value.

Increasing your technical skills as tradesperson and your customer service as a business owner will increase your reputation. If you want to develop your business and increase your profits, you need to use these two economic factors to your benefit.

Keeping your pricing on pace with inflation and offering high value services that match your clients’ abilities to pay, will ensure you can focus on growing your construction business.

And yes, you have to grow. If you don’t, then inflation will eat away at your business, one small bite at a time.

…

Thanks for taking the time to read this article. I really appreciate and value your time. Please leave a comment below and let me know if you agree, disagree, or have any questions about this topic.


Follow me on Instagram @shawnvandyke, LinkedIn, Facebook, or shawnvandyke.com to learn more about how to streamline your construction business.

Sign up for eletters today and get the latest how-to from Fine Homebuilding, plus special offers.

Signing you up...

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
See all newsletters
See all newsletters
×

Get home building tips, offers, and expert advice in your inbox

Signing you up...

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
See all newsletters
See all newsletters

New Feature

Fine Homebuilding Forums

Ask questions, offer advice, and share your work

View Comments

  1. frbruceb | Oct 05, 2017 01:35am | #1

    Thanks for the article Shawn. I think spending time on how one determines their value to the customer is a useful exercise, particularly in that it forces reflection on where we want to position ourselves on that spectrum. One comment regarding your reference to the stats issued by the Tax Policy Center. You make mention of the mean household income, but you state the dollar value of the upper limit. Keep the articles coming.

  2. shawnvandyke | Oct 06, 2017 05:32pm | #2

    @frbruceb - Good catch. I corrected the error. Interestingly the upper limit of the 80% increased 10.5% during that time where the mean of the 80% increased by 15% (now corrected in the article). That's even better news for those businesses targeting this market.
    Thanks for the feedback. Glad to know someone is reading my stuff.

Log in or create an account to post a comment.

Sign up Log in

Become a member and get full access to FineHomebuilding.com

More Building Business

View All
  • Healthy Cash-Flow Management
  • Tools for Managing Home-Building Financials
  • How to Hire and Retain Good Tradespeople
  • A Better Way to Budget in Residential Construction
View All

Up Next

Video Shorts

Featured Story

Vent Your Rainscreen for Longevity

Ben Bogie overviews how Cor-A-Vent Rainscreen Siding Vent is integrated into a high-performance wall assembly to promote airflow and drying.

Featured Video

A Modern California Home Wrapped in Rockwool Insulation for Energy Efficiency and Fire Resistance

The designer and builder of the 2018 Fine Homebuilding House detail why they chose mineral-wool batts and high-density boards for all of their insulation needs.

Related Stories

  • Podcast 533: Missing-Middle Housing, Collateral Damage From Demo, and Midwest BS Symposium
  • Podcast 533: Member’s only Aftershow — Training for Tradework
  • Insulating a Roof: Getting Higher R-Value
  • Podcast 532: PRO TALK With Engineer Stephen MacDougall

Discussion Forum

Recent Posts and Replies

  • |
  • |
  • |
  • |
  • |
  • |
View More Create Post

Highlights

Fine Homebuilding All Access
Fine Homebuilding Podcast
Tool Tech
Plus, get an extra 20% off with code GIFT20

"I have learned so much thanks to the searchable articles on the FHB website. I can confidently say that I expect to be a life-long subscriber." - M.K.

Get home building tips, offers, and expert advice in your inbox

Signing you up...

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
See all newsletters
See all newsletters

Video

View All
  • Podcast 533: Member’s only Aftershow — Training for Tradework
  • Podcast 530: PRO TALK With Architecture Student Phillip Schladweiler
  • Podcast 529: Member’s-only Aftershow—How Good is Good Enough?
  • Podcast 528: PRO TALK With Construction Director Scott Fridrych
View All

Remodeling

View All Remodeling Articles
  • View of a living room and kitchen with large glass doors to the outside
    Editorial Note: Building New is Easy
  • Podcast 529: Member’s-only Aftershow—How Good is Good Enough?
    Podcast 529: Member’s-only Aftershow—How Good is Good Enough?
  • Podcast 528: PRO TALK With Construction Director Scott Fridrych
    Podcast 528: PRO TALK With Construction Director Scott Fridrych
  • Podcast 526: PRO TALK With Remodeling-Business Expert Victoria Downing
    Podcast 526: PRO TALK With Remodeling-Business Expert Victoria Downing
View All Remodeling Articles

BOOKS, DVDs, & MERCH

Shop the Store
  • 2023 Tool Guide
    Buy Now
  • 2022 Fine Homebuilding Archive
    Buy Now
  • Code Check Building 4th Edition
    Buy Now
  • Pretty Good House
    Buy Now
  • Shop the Store

Fine Homebuilding Magazine

  • Issue 313 - Feb/March 2023
    • Practical System for a Seismic Retrofit
    • Fine Homebuilding Issue #313 Online Highlights
    • Practical System for a Seismic Retrofit
  • Issue 312 - Dec 2022/Jan 2023
    • Tool Test: Cordless Tablesaws
    • Gray-Water System for a Sustainable Home
    • Insulate a Cape Roof to Avoid Ice Dams
  • Issue 311 - November 2022
    • 7 Steps to a Perfect Exterior Paint Job
    • Options for Smarter Home-Energy Tracking
    • The Fine Homebuilding Interview: James Metoyer
  • Issue 310 - October 2022
    • Choosing a Tile-Leveling System
    • Choosing Between HRVs and ERVs
    • Custom Built-in Cabinets Made Easy
  • Issue 309 - Aug/Sept 2022
    • 10 Steps to Install Crown Molding on Cabinets
    • How to Get Sturdy Walls Without OSB
    • Choosing the Right Construction Tape for the Job

Fine Homebuilding

Follow

  • twitter
  • facebook
  • instagram
  • pinterest

Newsletter

Get home building tips, offers, and expert advice in your inbox

Signing you up...

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
See all newsletters
See all newsletters

Membership & Magazine

  • Online Archive
  • Start Free Trial
  • Magazine Subscription
  • Magazine Renewal
  • Gift a Subscription
  • Customer Support
  • Privacy Preferences

Taunton Network

  • Green Building Advisor
  • Fine Woodworking
  • Fine Gardening
  • Threads
  • About
  • Contact
  • Advertise
  • Careers
  • Copyright
  • Terms of Use
  • Site Map
  • Do not sell or share my information
  • Privacy Policy
  • Accessibility
  • California Privacy Rights

© 2023 The Taunton Press, Inc. All rights reserved.

X
X
This is a dialog window which overlays the main content of the page. The modal window is a 'site map' of the most critical areas of the site. Pressing the Escape (ESC) button will close the modal and bring you back to where you were on the page.

Main Menu

  • How-To
  • Design
  • Tools & Materials
  • Video
  • Blogs
  • Forum
  • Reader Projects
  • Magazine
  • Members
  • FHB House

Podcasts

  • FHB Podcast
  • ProTalk

Webinars

  • Upcoming and On-Demand

Account

  • Log In
  • Join

Podcasts

  • FHB Podcast
  • ProTalk

Webinars

  • Upcoming and On-Demand

Popular Topics

  • Kitchens
  • Business
  • Bedrooms
  • Roofs
  • Architecture and Design
  • Green Building
  • Decks
  • Framing
  • Safety
  • Remodeling
  • Bathrooms
  • Windows
  • Tilework
  • Ceilings
  • HVAC

Magazine

  • Current Issue
  • Past Issues
  • Magazine Index
  • Subscribe
  • Online Archive
  • Author Guidelines

All Access

  • Member Home
  • Start Free Trial
  • Gift Membership

Shop the Store

  • Books
  • DVDs
  • Taunton Workshops

More

  • FHB Ambassadors
  • Reader Projects
  • Podcast
  • Customer Support

Account

  • Log In
  • Join

Newsletter

Get home building tips, offers, and expert advice in your inbox

Signing you up...

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
See all newsletters
See all newsletters

Follow

  • twitter
  • facebook
  • instagram
  • pinterest

Join All Access

Become a member and get instant access to thousands of videos, how-tos, tool reviews, and design features.

Start Your Free Trial

Subscribe

FHB Magazine

Start your subscription today and save up to 70%

Subscribe

We hope you’ve enjoyed your free articles. To keep reading, become a member today.

Get complete site access to expert advice, how-to videos, Code Check, and more, plus the print magazine.

Start your FREE trial

Already a member? Log in