Inflation and Construction
March 31, 2023
The construction industry has historically operated on very thin margins, and the pervasive inflation being experienced across virtually every industry has led to many construction companies facing even tighter margins, or even losses. Prices for certain materials, like certain types of lumber, saw price spikes of as much as 500% at the height of the COVID-19 pandemic supply chain issues. And unfortunately, many materials and other construction costs continue to be affected by inflation despite the pandemic dying down. For example, as common construction equipment such as bulldozers and cranes run on gasoline, the construction industry continues to be impacted by the soaring prices of gasoline.
Furthermore, labour costs and labour shortages have been an ongoing issue for several years, but have been exacerbated by the recent inflation. Skilled workers in the construction field tend to be older and hovering around retirement age, which could mean the issue will be compounded in the coming years as they retire en masse. Younger construction workers tend toward working in the industry shorter term, eventually leaving for better pay and working conditions in other fields.
Governments and companies around the world are working on introducing measures to counteract the impact of inflation on individuals and businesses, but the effects of these measures will take time to be felt. In the meantime, construction companies need to take all of these issues into account to effectively create a buffer for their business against the risks involved in a shifting economy.
Cost Effective Measures for Mitigating the Effects of Inflation
- Typically when bidding on construction projects, there is a balance to strike between presenting a low cost and a wealth of experience to the client. In the current market where it may be increasingly difficult to undercut competitors’ pricing, focusing on the experience, quality, and speed with which the company can complete projects may be a better way to bring value to clients while still maintaining decently profitable margins.
- Inflation of the costs associated with materials and labour need to be accounted for through realistic assessments of current and future costs involved in a project. Contingency funds planned into pricing models can also help offset the risks involved in future price uncertainty.
- Timelines for construction projects have certainly been affected by inflation, and a realistic review of how long projects are taking to complete given the increased costs and supply chain issues is essential; new bids should take the longer timelines into account, and budget realistically for them.
- To combat ongoing or future supply chain issues, contractors and developers should consider weighing the benefits of stockpiling certain essential materials to have on hand against the increased costs of storage and security to house the materials.
- Alternative materials can be looked into where possible to provide a cost-effective alternative to traditional materials. For instance, ferrock or hempcrete could be used in place of premixed concrete to save costs, and they are generally more ecofriendly, as well.
- Lean construction practices are a must to keep costs down, ensuring that projects are planned to ensure the most efficient use of materials with little waste.
- Appealing to local and federal legislators about the impacts of tariffs on the import of construction materials should be looked into as well. Fluctuating tariffs and conflicting political priorities can cause not only confusion but increased timelines and costs for construction projects, and can even have a ripple effect on other industries.
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