There can be no doubt that the volatility in inflation rates over the past couple of years has affected businesses across the nation and beyond and the construction industry is certainly no exception. With the disruption to supply chain caused by the pandemic still being felt, the energy crisis caused by the war in the Ukraine has increased the financial pressure the construction industry was already facing.
Significant increases in material costs, skyrocketing fuel costs and the need to pay more for labour; all of these inflationary factors contribute towards the challenges that the construction industry faces and have resulted in a significant number of insolvencies in the sector during the last 18 months.
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Labour cost increases
Staffing costs make up a major part of the costs of a construction project and as the cost of living rises, so too does the cost of labour as contractors and skilled tradespeople seek higher remuneration for their work.
Additionally, the availability of skilled labourers has also been on the decline, intensified through Brexit. This means construction companies are either having to pay more for a skilled workforce or use less experienced labourers. The downside of using a workforce which is not as highly trained is that it can lead to delays in projects or result in quality issues, both of which could result in additional costs to put things right, or loss of income from delayed projects.
Material costs and supply chain issues
While the costs of construction materials do not make up part of the basket of goods used to calculate the Consumer Price Index (CPI), this does not mean that they have not become more expensive. In fact, many construction materials have seen significant price increases.
Some of these increases in cost are related to the challenges present in the supply chain. The Covid-19 pandemic disrupted the global supply chain, and the effects are still being felt. The delays caused in delivery and the shortage of some materials both contribute to the rate of inflation affecting construction.
Larger construction companies could have the option to stockpile materials for upcoming projects, something smaller developers may not be able to do, either because they do not have the space or the available funds needed to buy a large amount of materials upfront.
Stockpiling, while potentially useful for the company that is able to do so, obviously reduces the stock available in the marketplace, which can cause the cost of the remaining stock to increase further.
Equipment and fuel costs
The effects the ongoing conflict in the Ukraine has had on energy and fuel prices is another area that has a significant impact on the construction industry as the vast majority the heavy equipment used in construction runs on diesel. Any price increases in fuel therefore significantly affect the overall costs associate with the use of this vital equipment.
How construction companies can guard against inflation
While sudden rises in inflation can cause financial problems for property developers and their contractors, there are things that can be done to safeguard against them. Introducing safeguards may require systemic changes within the construction industry itself, such as an increased re-use of materials or on-site manufacture through methods such as 3D printing. Other measures will be down to the individual company.
One way safeguards could be put in place may be by factoring in possible delivery and supply issues earlier in the planning process. This can help mitigate delays to projects and thereby reduces the associated costs. As mentioned above, some companies may be able to stockpile materials, while others might need to evaluate their procurement processes more carefully to ensure the materials are available when they are needed.
Another way companies could guard against inflation is by making adjustments to their bidding process, factoring the effects of possible increased costs in materials and labour into their budget from the beginning.
Building resilience into the planning process is vital, especially as unpredictable events – such as war or a pandemic – can have such a significant impact on the cost and availability of materials, fuel and labour.
How AWH can help
We have worked alongside numerous developers over the years, and our Building Project Management team has extensive experience in assisting the budget and cost control elements of projects of all sizes.
Speak to a member of our team on 0800 071 5517 or email firstname.lastname@example.org to discuss your upcoming projects and find out how we can support you.