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By Ed Zarenski
Special to Ontario Construction News
If your company revenues are increasing at a rate of 7% per year at a time when construction inflation is 5%, your business volume is increasing only 2% per year. If you hire support staff to support 7% growth in revenues, you would be grossly over-staffed.
Inflation adds nothing to business volume. If you do not factor inflation into your growth projections, you are not forecasting growth properly. Spending is revenue. Volume is spending (revenue) minus inflation.
If a contractor is building houses that last year cost $250,000 to build a 2,500 sq. ft. house, but this year it cost $275,000 to build the same house on the lot next door, the volume did not change. Both sets of dollars represent the cost of the same house, but the most recent house cost 10% more due to inflation. It does not take any more workers to build the house this year than it did last year. Inflation changed the dollars of revenue that changed hands, but inflation added nothing to business volume.
Volume is measuring the amount of work completed, not the cost of the work completed. This compares the number of jobs added to the amount of work added. Adjusting for inflation removes the variable of cost.
Construction economist Ed Zarenski publishes the Construction Analytics Blog at https://edzarenski.com.