High inflation has left its mark on the construction industry in recent years, with rising borrowing costs and higher labor and material expenses affecting projects.[1] Specialty contractors are especially vulnerable due to fixed-price contracts, labor volatility, and material price spikes.
This article explores strategies to help contractors protect and rebuild eroded margins.
Understanding Margin Erosion
Like many other businesses, specialty contractors rely on gross and net margins to assess their financial health.
Gross margin is the revenue remaining after subtracting the cost of goods sold, while net margin is the revenue left after paying all expenses. Gross margins for specialty contractors are typically 15-30%, while net margins may only be 2-10% due to high project costs.[2]
Several factors can potentially erode margins over time, such as an equipment breakdown that creates expensive repairs and downtime.[3]
Other issues include labor shortages and wage inflation, volatility in material costs, higher fuel and logistics expenses, delayed payments, and cash flow strain.
Contracting Strategies to Help Protect Margins
There are various methods contractors can consider to help reduce margin erosion. One option is to incorporate a price escalation clause into a contract. These clauses may:
- Allow for reimbursement of any post-contract price increases,
- Provide compensation if prices exceed a predetermined percentage or dollar threshold, or
- Hold prices at a fixed amount for a specified period.[4]
Contractors should educate project owners about potential price volatility to help convince them of the need for such clauses.4
To help reduce the escalation risk, contractors could buy materials early or in bulk.4 Contractors may also consider shorter bid validity periods as well as contingency pricing, which is money set aside to cover unexpected costs during projects.[5]
In addition to smart contracting, optimizing field operations can further safeguard margins.
Operational Tactics for Margin Control
Tactics that can help contractors maintain their margins include job costing, which can provide a detailed view of labor, material, and equipment costs to help avoid overbudgeting.[6]
Projects can also benefit from prefabrication, in which building components are manufactured in a factory setting before being transported to the construction site, potentially shortening a project timeline by up to 50%.[7]
Contractors may even find benefits from analyzing whether to rent or buy equipment. There are potential tax advantages to both, with a possible depreciation deduction for buying and a business expense deduction for renting.[8]
Beyond field tactics, diligent financial management is crucial.
Financial Tools & Forecasting
Cash flow forecasting can help contractors identify shortfalls before they occur and take precautions to prevent them.[9]
Work-in-progress (WIP) schedules may also need adjustments due to inflation. When input costs rise faster than anticipated, margins recorded early in projects may not match the margins at the end.[10]
Instead of a static budget that can become quickly obsolete, contractors may benefit from rolling forecasts that continuously predict future outcomes, allowing finance teams to update projections monthly or quarterly.[11]
Financial dashboards can also alert contractors to potential problems.
Technology as a Margin Defender
For contractors seeking an edge against margin erosion, there are numerous technological options to consider.
Field-to-office tools are available to help improve communication between construction teams. AI systems can help streamline scheduling and resource allocation in large projects.[12] They can also anticipate risks such as delays or shortages by analyzing data from similar projects.12
In addition, mobile time tracking allows employees to check in and out on smartphones, potentially reducing errors from timecards and spreadsheets.6
Apps can also help contractors track material usage.
Leadership & Culture
To successfully maintain margins, contractors should strive to foster a culture of transparency, accountability, and financial awareness across all departments. A leadership team that encourages open communication between operations and finance is essential.
Providing project managers and superintendents with financial training helps empower them to identify risks early and make informed decisions that protect profitability.
Contractors should also align incentives with margin performance — not just production volume — to avoid scenarios where teams meet output goals at the expense of financial outcomes.
Conclusion
To help protect margins from the uncertainties of inflation, contractors should plan ahead and consider this article’s strategies prior to their projects. Taking a proactive, data-driven approach can help when dealing with economic uncertainties. Ultimately, combating margin erosion requires a coordinated effort—from negotiating smarter contracts to tightening cost control and fostering a finance-aware culture on every job. Remember that margins may be made in the field, but they are protected in the office.
[1]“Economic Outlook – The Impacts of Inflation and Interest Rates on the Construction Industry,” texasconstructionlawblog.com, March 10, 2025.
[2]“Gross Margin vs. Net Margin: Understanding Your Business’s Profitability,” vikingmergers.com, January 1, 2024.
[3]“4 Key Risks in Construction Projects and How to Mitigate Them,” learn.aiacontracts.com, September 14, 2023.
[4]“Managing Construction Cost Escalations Triggered by Tariffs and Market Volatility,” ncbarblog.com, June 10, 2025.
[5]“What is Construction Contingency?” procore.com, Updated December 10, 2024.
[6]“Job Costing and Time Tracking: The Perfect Combination for Contractors,” workmax.com, January 23, 2025.
[7]“What Is Prefabricated Construction? What Are Its Benefits?” motivewith.com, August 6, 2024.
[8]“How to Decide Between Renting and Buying Equipment,” fieldex.com, July 18, 2025.
[9]“Cash Flow Management in Construction: Everything You Need to Know,” builder.com, May 22, 2025.
[10]“The Effect of Inflation on Profit Margins within the Construction Industry,” cmicglobal.com, 2025.
[11]“Rolling Forecasts: A Guide vs. Traditional Budgeting,” mosaic.tech, Updated September 27, 2024.
[12]“How to Use AI in Construction: 15 Examples & Benefits,” openasset.com, December 6, 2024.