The renowned economist Milton Friedman famously dubbed inflation as “taxation without legislation.” The title of this article is a tip of the cap to Friedman and his comment; but it’s also an attempt to shift your mindset in a way that encourages you to take some concrete steps on tax planning that will significantly shrink the impact inflation causes. There are any number of strategies one can employ, especially if you are a creative problem solver. What follows here are several ideas worth considering.
Strategies for managing inflation impacts
Make sure you have price escalation clauses in your contracts. Unless you have traditionally worked in a particularly volatile market, these types of clauses were not typically included in form contracts developed over the last 20 years. They simply weren’t as important as other elements of a negotiated contract, so they were either ignored or simply taken out to focus on higher priorities. With skyrocketing inflation, price escalation clauses are back with a vengeance. It’s a common mistake for companies to think their force majeure clauses—which made their own massive comeback during the pandemic—cover them for price escalations. They’re different clauses that serve different purposes though. Make sure you put these in your contract and evaluate them closely when they are in the agreement.
With skyrocketing inflation, price escalation clauses are back with a vengeance
Purchase and stockpile materials. This option is not for everyone because it requires an ability to tie up large sums of capital in inventory. It also necessitates having the facilities where you can store pre-purchased materials. The secret to making this strategy work is to utilize projections so you can strike the right balance between locking in prices without depriving the company of operating capital by overdoing it. It’s usually a good idea to be a little more conservative in terms of stockpiling. Don’t buy them if there is not a fair amount of certainty they will be needed.
Lock-in interest rates. If you have any variable rate loans, inflation can cause a large headache. When the money in your pocket today is not worth as much as it was yesterday, a change in interest rate and corresponding increase in a regular payment can be problematic. Move loans into fixed rate structures that are more predictable if that is possible.
Budgeting matters. When inflation sets in, it’s time to analyze your budget. If you don’t budget, you should start. Once you have a budget, it’s time to look at it objectively and differentiate between what you need and what you want. Things that fall in that second bucket may have to postponed. Be disciplined and apply this plan across the board.
On a micro level, consider whether you really need the second foreman on the job or whether the carrying cost of the big change order is something you can handle. These things can always be discussed and negotiated, but having a handle on the big picture is important to making those talks successful.
On a macro level, growth plans may need to be put on hold.
Focus on people. As the old saying goes, “Necessity is the mother of invention.” Use the circumstances to shift your focus to things that are more inflation proof. This comes in many forms, but it often involves people. For example, invest in training your staff rather than adding to your hard assets, such as equipment. Providing training and experience will make people more efficient. Your dollars go further when that happens. For similar reasons, this is also a good time to make sure your people, including anyone you might hire, are put in positions to sell, and use any special or particularly important skills they have to offer.
In summary, inflation is like a tax that can be planned around to some extent. While you can’t avoid it entirely, you can take steps to minimize its impact. Fortunately, inflation is also temporary like taxes. It will go up and come down over time, so do what you can to get through it and know that better times are ahead.
Josh Quinter is a commercial litigation attorney, with a focus on construction law. He is also a member of the Board of Directors and a department chair at his law firm, Offit Kurman. Active in a number of construction trade and business organizations, he presently serves as the president of the Mid-Atlantic Chapter of the Metal Building Contractors & Erectors Association (MBCEA), serves on the MBCEA national board and is the organization’s general counsel. Contact him at jquinter@offitkurman.com or for more information go to www.offitkurman.com/attorney/joshua-quinter.
