In our global economy, the price of a specific material or service often fluctuates for weeks, months, or even years. Of course, the construction industry is no exception to the varying cost and prices of the basic materials needed in the projects.
In today’s trend, there has been a rise in building construction projects worldwide, from real estate, commercial to public roads and government infrastructure. As a result, the trend in demand is steadily going up for project owners or clients looking for construction services that will aid them in undertaking the project. Yes, the movement may seem promising to many general contractors and subcontractors – more construction projects available means more contracts and more sources of business to them. But this scenario also causes the rise in construction costs through inflation.
We are now seeing a significant increase in construction costs – direct, indirect, and even overhead costs. If you have a construction business, you will often have the chance to work on big projects where construction timelines usually last up to a few years. In that case, this can seriously affect the budget allocations that you and your team have settled during the pre-construction stage. Of course, you can not pass all the costs to the clients. Some must be absorbed by the contractor – resulting in lower profits and significant losses.
Thus, all parties need to understand what causes the inflation in construction costs to allocate budgets accordingly. This article will tackle these construction costs and how contractors can manage these increases through a few easy and effective strategies.
What Causes the Increase in Construction Costs?
For this section, we will be focusing on what construction costs are and what causes them to increase in prices.
Construction costs are those costs required to spend to be able to execute and finish the project successfully. These are two categories of construction costs: namely direct costs and indirect costs.
Direct costs, also known as variable costs, refer to the expenses that directly contribute to the production phase of the construction. These are the materials, labor, or equipment that are essential to keep the project on time. These items are the ones that are directly affected by inflation.
From lumber to steel, the prices of these materials are soaring high nowadays. With tons of constructions projects demanding these materials, it has lead to a material shortage. Manufacturers have a hard time sustaining production, which causes price inflations. Some reports claim that most construction materials have increased by around 10% in two to three months alone.
Additional reasons for the frequently fluctuating increases are raw material production, supply lead times, and transportation costs.
Among the materials affected by these are:
- Timber and Wood Products
- Steel Bars and Frames
- Cement and Concrete
- Roof Trusses and Tiles
- Drywall and Gypsum Boards
- HVAC, Plumbing and Electrical Pipes, Wirings and Fixtures
- Paints, Sealants, and Other Finishing Materials
With the recent increase in labor rates, more and more workers are threatening to resign as they are overwhelmed with workloads. They aim to look for a fulfilling job that can correctly compensate with the amount of work, resulting in employers keeping up with the wage demands.
Unfortunately, the demand for construction workers has also increased following the demand for construction services. Thus, contractors are striving hard to keep their employees happy and satisfied. Of course, by doing so, you can be sure that your workers will be able to provide top-quality craft in your project.
Most general contractors often choose to rent out the equipment needed on-site rather than buy and own them. Some activities are done quickly by using the equipment that can help you hit your construction milestones. However, as with the materials, the demand for the equipment rises, resulting in rental fees also increasing.
Indirect costs, also known as fixed costs, affect the company, not the construction of the building itself. These usually include a manager’s salary, an employee’s salary, accounting and marketing expenses, and operational costs.
Several factors cause the increase in indirect costs. Same with the previous example, in present times, the United States is experiencing a worker crisis with many employees quitting to look for better career growth opportunities. With no new employees lining up to fill the job openings. These lead to an increase in salaries and benefits as well as to improve the workplace environment.
Effects of the Surge in Construction Costs
If you are planning to take on a project or are currently in the middle of the project, these additional costs play a big part in your project scope, budget, and timelines.
Project Owners and Customers
In most cases, project owners and customers carry the burden of some of these additional costs. This scenario is actual, especially if there are any owner-supplied materials required in the specifications.
General Contractors and Sub Contractors
For contractors, the prices and total costs set in the terms and conditions of the contract are binding. That is why you have to thoroughly evaluate all your quantities and unit prices to move forward with your project. It is essential to start the construction immediately once the owner has given you a signal to avoid lowering your profit margins.
However, increasing construction costs are not reasons to hold all your projects. These can result in more losses due to wasted time, effort, and money than increased costs. Contractors have devised ways and strategies to keep the project on track and within its allotted budget.
7 Strategies to Help You Cope with the Additional Construction Costs
Price inflations are unpredictable. There is no guarantee that the prices will drop or hold steady for three to six months. We have listed seven strategies to help you sustain your business amidst the steadily rising increase in construction costs.
1. Balance Your Overall Project Cost and Budget Allocations
Reviewing your overall budget costs is a great way to plan out any possible contingency plans. This strategy is viable through the team efforts of everyone involved, from the owner, design team, and the construction team. There can be alternative designs or workflow strategies that can help keep the budget within its limits.
2. Look for Alternative Materials
There are always alternative materials that are readily available that can serve the purpose of the original materials. These are lower in price items, with near or exact specifications but with different designs or manufacturers. Keep in mind that when choosing an alternative, make sure that the quality is still good to avoid placing substandard materials in your project.
3. Utilize Digital Technologies
The use of construction management software is a great way to keep every in one place. Utilizing software can help give all parties a better understanding of the project and plan out every design and construction aspect. This practice also ensures open communication and collaborative teamwork to ensure that everyone is on the same page. It also encourages the team to hear any suggestions that can be of advantage.
4. Thorough Planning during the Pre-Construction Stage
The planning stages during the pre-construction is a crucial part of the construction timeline. Here, you should plan out the entire project scope and identify any problems that may arise. In this stage, it is vital to review the plans thoroughly to avoid any possible change orders that can incur additional costs.
5. Reduce Project Duration without Compromising Quality
As we have discussed earlier, time plays an essential factor in the material and bid prices. As we have no clue about the construction trends, we must keep the project on track or even finish it before the deadline.
Using construction scheduling software can give you a clear overview of the project timeline and milestones. You can plan and strategize your workflow processes accordingly.
6. Apply Lean Construction Principles
In a nutshell, Lean Construction aims to simplify workflow by eliminating all unnecessary processes and steps. This principle involves regular coordination meetings to devise a standard operating procedure to increase project productivity and reduce cost.
Lean construction is about continuously improving the operational processes. Your experiences in the previous projects help you shape your management style by using the problems you have encountered and the learnings and solutions that come with them.
7. Be Flexible and Easy to Adapt
Lastly, the construction industry is well-known for being susceptible to problems and delays during the building phase. Thus, being flexible and easy to adapt in your workplace is another crucial skill every construction manager or contractor should have. This skill helps you avoid panicking at first sight of the problem and instead find ways to study and solve the problem immediately.
There are no textbook solutions to real-life problems, especially during construction. It is essential to have a clear mind and a good amount of resourcefulness to help keep your project smooth-sailing.
The construction industry is highly susceptible to price inflations. With the sudden increase in construction projects worldwide, many factors affect the construction costs and project budgets. However, these are not reasons to put your projects on hold and stop taking new projects. Instead, by following these strategies, you can easily continue with your construction business without the fear of going bust.