In the ever-evolving construction industry landscape, understanding how Forex fluctuations impact international projects has become paramount.
As construction companies grapple with the challenges posed by foreign exchange rate changes, it’s crucial to comprehend the intricacies of what is Forex, the largest financial market in the world, and how its fluctuations can disrupt project timelines, budgets, and supply chains.
What is Forex?
Forex, short for foreign exchange market, is a prevalent term that refers to the largest financial market in the world.
Foreign exchange or Forex risk refers to the change in value or fluctuations of two currencies that affect an investment value. There are two common types of risks that construction companies face: transaction risk and translation risk.
Transaction risk occurs when a payment is to be received in foreign currency and translation risk occurs when a company has liabilities and assets in a foreign currency. Forex fluctuations can result in a significant loss or gain on payments, assets and liabilities.
How the Construction Industry is Affected
Here is how fluctuations affect construction:
It may cause delays, producing potential problems for subcontractors, including overruns, arbitration, disputes, abandonment and litigation. Forex fluctuations can cause budget issues for the construction company, especially if prices on imported materials become too high.
Already, inflation is dictating prices across the globe. Any fluctuations mean it could cause indefinite delays to projects. Although some currencies maintain a value by being pegged to the US dollar, some smaller currencies are subject to the free-floating exchange rate detected by macroeconomic factors.
Managing Currency Fluctuations Risk
There’s no simple solution to stopping the risks associated with fluctuating currency rates, but there are some strategies that construction companies could employ.
When creating the budget, don’t depend solely on the current exchange rate when pricing. You can research to find the highest possible exchange rate. Have a baseline rate that includes upper and lower boundaries.
Have a contract that states clearly the possibilities of price changes due to the exchange rate risks. In a written agreement, it should be noted that the construction company can present a claim if the exchange rates increase. The procurement team must go for the most favourable currency to ensure quote fluctuations are handled. They can use the most stable currency in the market.
This is an option construction companies pay for. They hedge the fund through finance institutions by buying spot contracts. These contracts protect the company against any changes and fluctuations in exchange rates.