The effects of inflation in the construction industry – how to protect your business
Construction companies have inevitably been hit by the impacts of rising inflation. The prices of materials have been increasing for a long time. The prices of timber, steel and many other construction materials have increased dramatically. These problems are caused by multiple concurrent events. First, the construction sector suffered from the impacts of the global COVID-19 pandemic. Then, Russia’s attack on Ukraine made the situation even worse. The availability of materials remains limited, which creates pressure for further price increases.
In addition to increased costs, the construction industry has suffered from a shortage of skilled labour for a long time now. The availability of labour is declining continuously due to factors such as retirement and career changes. The global pandemic and the war in Ukraine have created challenges related to the mobility of labour. Labour costs will also be increased further by inflation.
Losses are often borne by the contractor
The increased costs of construction materials and labour add up to significant pressure to increase prices. A further factor is the accelerating increase in the price of fuel, which affects not only the delivery costs of construction materials but also operating costs of the various machines used at construction sites.
In inflationary conditions, taking action to increase prices is not simple. Estimating future costs is challenging, especially in long projects, as costs may multiply during the course of the project. In addition, delays in supply chains can make it difficult to stay on schedule, leading to significant additional costs in the form of contract penalties, for example.
The risks associated with delayed or failed projects are usually borne by the contractor. That is why even small mistakes in pricing can cause significant financial damage. Indeed, over the past couple of years, many construction companies have experienced difficulties, and some have even gone out of business.
Some contractors are also finding it difficult to obtain financing from banks. The more inflation accelerates, the more cautious financing providers become.
5 ways to prepare for inflation
1. Anticipate inflation when budgeting your project
Think very carefully about the potential impacts of inflation on your project, and prepare for the worst. It may be a good idea to address uncertainties right from the bidding stage.
2. Discuss risk sharing with the parties involved
Openly discuss inflation and the potential challenges it creates with the various parties involved in the project. Risk sharing should be addressed in the terms of the agreement.
3. Take supply chain challenges into consideration in scheduling
Price is not the only challenge in the current circumstances. It is difficult to even ensure the availability of materials. That is why you should consider project schedules as realistically as possible and take proactive measures to prepare for delays.
4. Prepare for challenges related to deliveries
Rethink the way you work with your supply chain. For example, would it be prudent to accumulate commonly used materials in inventory when they are available? How would that influence schedules, for instance?
5. Review your insurance cover
The increased costs of materials and labour will inevitably be reflected in final project costs. Consequently, if mistakes happen, rectifying them is more expensive than before. With that in mind, you should make sure that your operations are not underinsured in the changed circumstances.