As a result of globalization processes, in the field of construction we increasingly find inputs and services that are valued in other currencies. A correct financial strategy allows access to these goods, keeping under control the risks associated with the foreign exchange market.
When planning a building, it is very common to find that some of the inputs or services that we would like to use either in construction or in its equipment, are quoted in currencies other than ours (MXN), which are sometimes subject to unforeseen and untimely variations in their quotation and that, over the lifetime of the project, can yield considerable amounts, unbalancing our budget. That is why many Clients abandon the idea of using imported products and limit themselves to acquiring the inputs offered by the country, even if they are not necessarily the most suitable. While this may be good for the national economy, it may not be so good for your building; however there are some strategies that can be used to shield against the impact of exchange rate fluctuations. Let’s look at some of them:
1.- Buy everything in Pesos
The most obvious solution, but one that should not be overlooked. If the volume of purchase represents a bargaining advantage with the supplier, you can try to modify the sales conditions to establish a definitive price in pesos.
2.- Establish a fixed exchange rate
Similar to the previous one, but sometimes easier to negotiate, is to agree with the supplier in advance; a fixed exchange rate for a specific project. It is important that this is reflected in the respective contract or purchase order.
3.- Separate labor from inputs
Many times suppliers present budgets in other currencies and include under the same denomination national inputs or labor that they will spend in pesos. In these cases, it should be negotiated that those expenses that are made in national currency, are separated from the costs of the equipment or import inputs and two separate contracts are made.
4.- Create a reserve of the currency(s) that will be required
If we already know that, according to our planning, we are going to require in the future to make an expense in another currency, we can prepare ourselves by buying that currency at its current value, to have the certainty that fluctuations will not affect us in the future, thus shielding our budget. Also, since this strategy does not require that the purchase be made in a single installment, but can be done gradually, the additional benefit of “Dollar Cost Averaging”; is obtained; a system recommended by experts to mitigate the volatility of investments in financial markets.
5.- Buy import inputs as soon as the amount is available
This option works well for the acquisition of inputs such as equipment or materials for immediate placement, but in the medium and long term it has two significant disadvantages, and that is that it requires knowing exactly the specifications and quantities of what is to be acquired, sometimes years in advance of its assembly or placement, making changes that could occur on the fly difficult and on the other hand, it requires the physical space where to house these purchases or even, if the time is very long, foresee the maintenance or obsolescence of the same.
Each of these strategies must be analyzed by the Construction Management in conjunction with its Client to determine the best course of action in each case and for each supplier, thus having that for the same work it is common to adopt one or more of them.