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Markets With Rapid Price Growth in 2016 Cost of Construction, Legal and Transportation Services to Rise

Businesses must be vigilant of changing market conditions to achieve cost savings, accommodate for cost increases and plan efficiently. This rings true particularly for buyers of legal, transportation and construction services, which are displaying rapid price growth. IBISWorld has identified several markets within these sectors in which prices are forecast to grow more rapidly than the national inflation rate in 2016. To soften the blow of price increases, procurement professionals can leverage their knowledge of key market characteristics to minimize costs and win strategic deals.

Construction Services

Chart 1 Plaster Prices IBISWorldThe construction sector is poised for strong growth in 2016. With an improving economic outlook and more available cash on hand, businesses will continue their expansion plans, thereby bolstering overall construction activity. Swelling demand for new health care and educational facilities, offices, hotels and retail stores is projected to strengthen construction activity in the commercial building market. As a result of this surge in demand, prices for a number of construction services are projected to increase rapidly. For example, the price of plastering and drywall services, which are widely used in commercial and construction projects, is forecast to jump 7.7 percent in 2016. Similarly, prices for painting services and landscape architecture and design services are anticipated to increase 5.9 percent and 3.4 percent, respectively. In addition to skyrocketing demand, higher prices for raw inputs such as gypsum building materials, coatings and paint will further propel price growth for construction services as suppliers seek to compensate for heightened purchase costs.

While buyers cannot completely avoid future price hikes, they can reevaluate their purchasing strategies to maximize cost savings. In fragmented markets with high competition, buyers can pit suppliers against one another by sourcing multiple bids, including blind bids, to elicit more competitive prices. In order to lock in lower prices, buyers should consider purchasing these services sooner rather than later or entering into contract agreements.

Legal Services

Chart 2 Corporate Profit IBISWorldRegardless of their core business, most companies need legal counsel. In fact, IBISWorld estimates that 66.1 percent of revenue generated by industries in the legal service sector is derived from business and corporate clients. Legal markets expected to exhibit the highest price increases in 2016 include immigration law, criminal law and employment law.

A strengthening economy has given way to rising corporate profit and expanding business activity, lifting demand and prices for these services. For example, prices for immigration law services are forecast to rise 3.7 percent in 2016 on the back of steady immigration into the United States and employers increasingly recruiting talent from overseas. The average price of criminal law services is also projected to rise in 2016.

The increasing rate of cyber crime and the continued susceptibility to crime such as fraud will pressure prices upward at an estimated rate of 3.3 percent. Furthermore, the price of employment law services is forecast to rise 3.2 percent in 2016 as the number of employee lawsuits rises and pushes demand for these services upward. Nevertheless, buyers can leverage low market share concentration in the aforementioned markets to facilitate price competition between suppliers during the negotiation process and enhance buyers’ chances of obtaining a favorable deal.

To avoid the risks associated with hefty legal costs, arbitration clauses have become a staple of conducting business for many companies. Unfortunately for buyers, with businesses increasingly turning toward arbitration, the price of alternative dispute resolution (ADR) services is forecast to rise 3 percent in 2016. However, buyers should be aware that the Consumer Financial Protection Bureau is considering putting forth regulation that bars the use of arbitration for class action disputes and requires that companies disclose the arbitration claims and compensation or other award issued. If such regulations were implemented, demand for ADR services may fall and result in tempered price growth. Buyers with an ongoing need for these services should consider establishing a professional relationship with an ADR firm to secure favorable pricing terms and rates in the future.

Transportation Services

Prices are forecast to rise rapidly for various transportation and logistics services, which are essential for buyers in various manufacturing industries. As consumers loosen up their purse strings and spend more, the volume of goods that need to be transported will increase in step. Rising consumer spending will also encourage businesses to produce more goods, further bolstering transportation activity.

Given that fuel makes up a large operating cost for suppliers, an anticipated upswing in fuel prices will result in higher fuel surcharges as suppliers seek to maintain healthy bottom lines. Transportation services that are projected to display strong price growth in 2016 include air cargo transportation services, rail cargo transportation services and deep-sea cargo transportation services. IBISWorld estimates that prices for these services will trend upward anywhere between 3 percent and 4 percent. Although buyers will ultimately pay higher prices, they can limit the negative impact by entering into contractual agreements now rather than waiting. In addition to guaranteeing shippers a spot at a locked-in price, these contract agreements can help improve the reliability and timeliness of shipments.

Purchasing in the New Year

Businesses should resolve to be more knowledgeable about the markets in which they will be purchasing and more strategic with their procurement techniques to effectively brace for price hikes. Using strategies like purchasing services sooner rather than later or engaging in supply agreements to lock in favorable rates can shield buyers from the brunt of the damage. Armed with key pricing insight, buyers can gain the upper hand in negotiations.

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