Our latest Surety Corner from FCA Insurance's Matt Manol examines interest rates and the Canadian construction industry.
October 6, 2022
The September Bank of Canada press release goes on to state: “Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further…Council remains resolute in its commitment to price stability and will continue to take action as required to achieve the two per cent inflation target.”
This is why it is particularly concerning to see habitual operating line of credit usage by a general contractor, especially in a high interest rate environment. General contractors may not have the same project costs to finance as frequently as subtrades, but the margins they achieve typically reflect that. A reliance on operating debt to pay subtrades in a high interest rate time period may erode the margins a general contractor expected to enjoy at the time of bidding a job.
“Over the last few years, the general rule for contingencies to be included in development proformas is approximately five per cent of the project cost to complete. In an environment with rising interest rates, supply challenges, and construction cost escalation, this level of contingency may no longer be sufficient, especially on longer duration highrise condominium projects.
“Needless to say, being profitable and building up your company’s finances is always the best way to hedge against inflation and rising interest rates.”“For contractors that currently have any variable interest debt of consequence, we would recommend taking the extra effort now to forecast the impact of future rate hikes on their cashflows and get a plan in place now for how they will manage it into the future.
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