How do you mitigate inflation risk in your construction business? That’s a hard question for contractors and construction companies to answer since inflation has affected all phases of the job. However, to lessen the impact of inflation on your business, there are several steps you can take and options you have for financing material costs and bidding on jobs.
Inflation and the Construction Industry
Inflation is a fact of life in all industries, but it’s hitting the construction industry hard. To see how inflation is affecting your construction business, just take a look at your job list. You will note that inflation has increased costs and may have forced other jobs to stall. With costs up, you may order fewer construction materials. Rising labor costs can also hinder progress on projects.
How Does Inflation Affect Construction Projects?
Let’s take a look at several ways the construction industry is affected by 40-year high inflation.
Increase in Price of Construction Materials
The challenge you face every day is finding construction materials that have not increased in price. It’s doubtful you can. Overall, inflation has hit lumber, concrete, tools, drywall, structural steel, paint, and so much more. If you don’t have the cash to cover these increases, inflation may force you to pause on jobs or avoid bidding on them in the first place. Unfortunately, those are simply the market conditions you find yourself in.
Surge in Fuel Costs
The surge in fuel costs has had an impact on every phase of construction, from paying more at the pump to fill your pick-up truck to paying more for deliveries of construction materials to the job site. If your jobs require shipments of materials from across the country or across the border, increased fuel costs may be passed along to you as inflation affects distributors and owners like never before. Supply and demand have been a major cause of higher fuel costs as consumers are traveling more, and industries that rely on over-the-road transportation have picked up.
Rising Labor Costs
With inflation at 40-year highs and labor shortages hitting construction trades quite severely, rising labor costs are a serious factor at most job sites. In many locations, workers are demanding more pay, and employers have no choice but to meet those demands in order to finish jobs on time. Inflation may subside, but rising labor costs could be slow to follow since the shortage of skilled workers is likely here to stay in the construction industry.
Supply Chain Issues
Supply chain issues nationwide and around the world have had a severe impact on many industries, including construction. Moreover, with shipments stalled and worker shortages in manufacturing, you can expect supply chain issues to persist well beyond 2022.
Higher Machinery Hire Rates
Inflation is a big factor when considering higher machinery hire rates. Construction equipment rental and leasing have experienced price increases due to the inflationary environment and other factors. This can lead to unplanned cost overruns if you need to bring in machinery for your construction contracts. Those higher rates can have a negative effect on the project’s budget as well.
Increase in Insurance Pricing
The inflation rate is being felt with the increase in insurance pricing too. Project-specific insurance coverage for property builders’ risk insurance, construction “all risks,” and third-party liability insurance are particularly susceptible to higher insurance premiums due to inflation. In addition, since insurance coverage may be tied to a project’s estimated contract value (ESV), if inflation means increases in material costs, labor, fuel and more, it will cost more to insure the ESV of that job.
Mitigating Inflation Risk in Construction Projects
There is not much you can do about the inflation rate, but you can take steps to lessen its impact on your construction business. Do what you can to maintain profitability and position yourself for more construction contracts. Here are several alternatives you can utilize.
Accelerating Project Schedule
If you can accelerate project schedules, it may help manage costs before inflation forces higher prices. It’s vital that everyone involved in the construction project be informed of the accelerated schedule, or you may encounter labor shortages and other complications.
Adjusting Bids
The inflation rate may cause contractors to adjust bids. If you have estimated high or low in the past to get the job, the effects of price increases may mean you need to be as accurate as possible with your bids for jobs going forward.
Communicate with Partners, Clients, and Other Stakeholders
Communication is key with partners, clients and other stakeholders in the construction jobs you are working. You need to communicate with all parties involved if you accelerate the project schedule or slow it down due to labor shortage or supply chain disruptions. For example, as you consider alternative materials in an attempt to counteract inflation, will your suppliers be able to fill the order? Does the client approve? Can your laborers work with those materials? These are questions that can be answered with clear and open communication.
Assess Potential Supply Chain Challenges
As you bid for construction jobs, be sure to assess potential supply chain challenges to determine which materials you may have to modify in order to get the job done on time. The supply chain disruptions are causing contractors to change deadlines and lengthen due dates. If you can’t get the supplies you need, what can you do to change course in the best interests of the work?
Apply Lean Construction Practices
You may keep costs lower if you apply lean construction practices. With lean construction, you plan and build in phases rather than work with a thorough plan from the start. Lean construction allows you to be more flexible with timelines and manage costs by being open to design changes before and during the project construction in response to how inflation is affecting project costs.
Consider Alternative Materials
Not all construction materials have been affected the same by inflation, so you can consider alternative materials to manage costs. For example, you might be able to save money and limit waste by switching to prefabricated wall panels. There are less-expensive options for ready-mix concrete, too, such as timbercrete or ashcrete.
Review Existing Insurance Policies
You don’t want the risk of inflation to overshadow other risks of your construction business. For example, you need certain insurance policies to protect your business from liability issues. You can review existing insurance policies for redundancy of coverage and the possibility that you can cut costs by reducing coverage or eliminating out-of-date policies.
Purchase Materials Early
Another way to mitigate inflation risk in construction projects is to buy construction materials early. You may be able to take advantage of prices before they go up even more due to inflation.
