What does a fast food restaurant and a construction firm have in common?

Answer: How they manage risk.

Companies like KFC, The Coca-Cola Company, McDonald's and Starbucks buy huge amounts of raw materials (chicken, coffee, sugar, wheat, beef, etc.).

The problem is that commodity prices change all the time.

For example:

• A bad harvest in Brazil can make coffee beans way more expensive overnight.

• A bird flu outbreak can skyrocket the price of chicken.

• A surge in oil prices makes everything from transport to packaging more expensive.

But when you go to KFC in Nairobi, a Streetwise meal is always the same price. How?

The solution is what we call a ‘futures contract’, and it is one of the most fascinating ways in which businesses manage risk.

A futures contract is an agreement where two parties lock in a price today for something that will be delivered in the future.

So KFC can pre-buy their chicken months or years in advance at a fixed price, avoiding price swings.

For Example:

• KFC thinks chicken prices will rise in the next 6 months.

• They sign a futures contract today to buy 1,000 tons of chicken at $2.50 per pound in 6 months.

• If the price of chicken jumps to $3.50 per pound, KFC still pays only $2.50, saving millions.

This is the essence of what we call 'futures trading'. And it is vital for stabilizing costs while letting them keep menu prices steady.

The same logic applies beyond fast food.

RELEVANCE OF FUTURES TRADING IN ENGINEERING AND CONSTRUCTION

In industries like construction, price volatility isn’t just an inconvenience.

Material costs can make or break multi-million-dollar projects.

Prices of steel, cement, copper, and timber fluctuate due to supply chain disruptions, geopolitical events, and market demand. A contractor bidding on a fixed-price project today has no guarantee that material costs won’t skyrocket six months from now.

This is where futures trading becomes critical.

By purchasing commodity futures, construction firms lock in prices for essential materials before they rise.

For example, if a developer expects steel prices to jump from $700/ton to $900/ton, they can buy steel futures at $700/ton now, securing stable costs for future projects.

This helps maintain profit margins and prevents sudden cost overruns.

Beyond raw materials, large infrastructure firms also hedge against currency fluctuations and interest rate changes.

A company building roads in Africa but securing financing in U.S. dollars might use currency futures to protect against forex volatility.

Similarly, contractors use interest rate swaps to stabilize borrowing costs on billion-dollar projects (An interest rate swap is when two parties exchange loan interest rates. One pays a fixed rate, the other pays a floating rate, to manage borrowing costs.)

In construction, risk and capital are managed through four key financial mechanisms, much like futures in traditional markets:

1. Construction Material Futures (Commodity Hedging)

2. Fixed-Price & Cost-Plus Contracts (Risk Shifting)

3. Project Financing & Financial Engineering

4. Alternative: Private Construction Funds & Infrastructure Investment

Let’s talk about each in detail.

1. CONSTRUCTION MATERIAL FUTURES (COMMODITY HEDGING)

Just like KFC locked in chicken prices in advance, construction firms hedge against fluctuating material costs:

• Steel, cement, copper, aluminum and timber prices can swing wildly due to global demand, supply chain issues, or geopolitical events.

• Large contractors hedge by using futures contracts on commodities exchanges to lock in prices months or years in advance.

For Example:

• A developer plans a high-rise project in 12 months.

• They expect steel prices to rise due to increased demand in China.

• They buy steel futures now at $700 per ton.

• If steel prices jump to $900 per ton, they still pay only $700, saving millions.

This is why some construction firms own trading desks similar to investment banks. They hedge materials just like an investment bank would hedge currency risk.

Even though futures trading can help control prices, it's important to know the risks:

• Small price changes can mean big losses, not just small ones. You could lose more money than you put in.

• Things like wars or storms can make prices jump around suddenly. It's hard to know which way prices will go.

• Futures trading is tricky and needs you to know a lot. You can make mistakes if you don't understand it well.

• If you guess the future price wrong, you lose money. Prices might not do what you think they will.

2. FIXED-PRICE & COST-PLUS CONTRACTS (RISK SHIFTING)

Construction contracts themselves act as financial risk-management tools:

Fixed-Price Contracts (Lump Sum)

• The contractor bears all risk (if materials get expensive, their profit shrinks).

• Often used for government and commercial projects.

Cost-Plus Contracts (Pass-Through Costs)

• The client bears the risk, paying actual material costs + a fixed margin.

• Often used in custom builds where material costs are uncertain.

High-level firms negotiate contracts strategically to shift risk to suppliers or clients, much like how hedge funds shift risk using derivatives (derivatives are financial tools that allow people to trade risk, or to speculate on the future value of assets, without necessarily owning the assets themselves).

3. PROJECT FINANCING & FINANCIAL ENGINEERING

Big construction projects are financial puzzles requiring advanced financial instruments:

• Interest Rate Swaps: Lock in borrowing costs to protect against rising rates.

• Currency Hedging: If a project is in Kenya but funded in USD, firms hedge currency risks.

• Performance Bonds & Insurance: Guarantee contractors don’t default on delivery.

For Example:

• A firm wins a $500M road contract in an emerging market.

• They hedge local currency risk, secure fixed-interest loans, and pre-buy asphalt futures to stabilize costs.

At the highest level, engineering firms aren’t just builders, they are financial operators.

The most successful ones think like investment banks.

4. ALTERNATIVE: PRIVATE CONSTRUCTION FUNDS & INFRASTRUCTURE INVESTMENT

Some firms skip projects entirely and move into owning infrastructure.

For Example:

• Instead of just building highways, a firm raises a $5B private fund to own toll roads.

• They use financial models to predict cash flow and secure institutional funding (pension funds, hedge funds).

This is how companies like Bechtel Corporation , VINCI Construction , and ACS become multi-billion-dollar giants.

They move from contractors → investors → financial players.

FINAL THOUGHT

Futures markets are why you can buy a $1 Coke every day for years, even though sugar, aluminum, and oil prices are changing constantly. This is one of the fundamental mechanics of capitalism.

And at the highest level, construction is not just engineering, it’s finance. The firms that master this game stop working for money and start making money work for them.