Price Indexing Can Fight Future Inflationary Hits
It’s hard enough for building service contractors to survive month-to-month during a time of recession. Smart contractors are finding ways to stay out of the red, and are using negotiation techniques such as agreeing to price cuts if customers will pay on the first of the month instead of the last of the month.
But with predictions of a slow economic recovery, BSCs also need to be planning to ensure their future viability. While the economy is still in a deflationary, recessionary cycle, BSCs should be looking ahead to what many economists predict will be an era of inflation.
“I do think that there’s a pretty good consensus that the only question is: inflation by how much?” says Vince Elliott, industry consultant and president of Elliott Affiliates Ltd. in Baltimore. “And some have said we’re going to have double-digit inflation.”
The influx of stimulus cash into the economy may mean that the value of the dollar will decline — and for BSCs, that means contracts may not be worth as much in a year or two as they are right now. To avoid losing money, Elliott suggests indexing contracts, or tying prices to an appropriate price index.
Contractors typically get an automatic 3 percent increase annually. With inflation rates currently low, a 3 percent increase is good for BSCs, says Elliott. But if inflation reaches 10 percent, for example, 3 percent won’t cut it. Elliott suggests a percentage variable based on inflation, using the consumer price index (CPI) or another index. With the inflation rate currently between 1 and 2 percent, it’s an opportunistic time to approach customers with a proposal.
“Buyers are going to say, ‘This is pretty good,’” Elliott says.
If inflation hits 10 percent or 12 percent, he adds, the price adjustment is automatic.
“It’s not a negotiation or a conversation; the BSC’s sitting in a pretty good spot,” he says. “So this may be the time to introduce this type of thing, when the buyer perception will be they’re getting a better deal.”
Jim Sutton, president of Better Business Cleaning in Erie, Colo., says his company has been using the consumer price index to determine contractual increases for years. Though the CPI averages a little over 3 percent per year, it can fluctuate; last summer it was above 5 percent, and now it has settled to around 1.5 percent.
“When we do the bill for the anniversary date, in the invoice past the anniversary date, we send along a letter showing them where we indexed from,” Sutton says. “They’re set for it, they know it’s going to happen and it’s not a surprise.”
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