How to Mitigate the Impact of Inflation on Construction Industry?

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According to the latest U.S. Consumer Price Index report, inflation rate in the United States has reached a 40-year high. This will affect all the business sectors, including the construction industry, highlighting the importance of mitigating inflation.

Inflation cannot be entirely controlled, but certain measures can be taken to lessen its severity. For instance, accelerate the schedule, adjust bids, amend the budget, use alternative construction materials, implement lean construction practices, etc.

If the negative effects of inflation on the construction industry are reduced, the project's profitability is kept at a satisfactory level, jobs are kept open for laborers as the construction process continues, and the shrinkage of the entire economy of the country or region is reduced.

How to Mitigate Impacts of Inflation on the Construction Industry?

Accelerate Schedules

If a contractor has an upcoming project, they should reach out to the required people and architects, engineers, subcontractors, and suppliers to set up a plan as soon as possible.

Project management software can be used to help communicate with project partners, share and alter information quickly, and store necessary documents. If schedules are accelerated, all construction-related activities are executed quickly, like ordering construction materials in advance before prices go higher.

Adjust Bids

Estimate quantities accurately when preparing the bid. The use of site surveying technologies may help contractors in this regard. Moreover, contractors should use the anticipated input price that is expected when the project begins, not when the bid is being prepared.

Potential clients in the bid should be informed that projects based on more accurate bids are less likely to go over schedule and over budget.

Introduce Non-monetary Value

Instead of focusing on the lowest bid, bring non-monetary value to the table beyond prices. For instance, lean into experience, quality, and speed which are important for clients.

Amend Budgets

Project and projected costs must be reviewed weekly to ensure the project stays on budget. If contractors do not control and monitor their costs, they will struggle to run the business profitably.

Necessary adjustments must be made as soon as a potential issue is observed. Owners and developers are urged to consider escalation contingencies of 10% to 15% per year because of larger budget buffers for cost overruns.

Nonetheless, contractors alone cannot cover inflation risks during periods of high or uncertain inflation on large or complex projects and long contracts. In this case, the risk of inflation should be shared with other parties under contract conditions. 

Explore Unconventional or Alternative Materials

The material price hike due to inflation is not uniform for all materials. Some materials see greater price hikes than others. Alternative construction materials can provide the same strength and design with less expensive materials.

For instance, timbercrete, ashcrete, and hempcrete can be used at a lower price than ready-mixed concrete. And prefabricated wall panels and framing systems in wood-framed projects can limit material waste.

Construction Methods

Construction companies that use modern methods like building the entire components of the structure in a factory are less affected by inflation. This is because all the components are transported from one place. Hence, the transportation cost is cut considerably.

However, traditional construction methods need different subcontractors and may require different construction materials from different parts of the country that are vulnerable to inflation.

Implement Lean Construction

Implementation of lean construction practices can keep construction costs low. A contractor with lean construction techniques specializes in optimizing projects for efficiency and reducing waste throughout each stage of construction.

Purchase Materials Ahead of Time

Order important construction materials in advance and try to fix prices to avoid a future price rise and mitigate inflation.

The cost of storing materials is likely to be much less than that of building materials months from now.

They should also expect different pricing and may want to consider building more flexibly in regards to design, timing, or cost-sharing.

Removal of Tariffs

Parties involved in construction industries should convey the importance of removing tariffs through their regional representatives to legislators. Eliminating or lessening tariffs and quotas on imported products and materials by government officials like federal trade policy officials in the United States is a good strategy to reduce the impact of inflation. 

Importing construction materials at a competitive price will significantly reduce the price of construction materials. This will help many construction material users who are in short supply to avoid shutdowns and layoffs.

It is beneficial to remove unnecessary regulations, policies, and enforcement actions that may unnecessarily increase costs and slow down importations, domestic production, transport, and delivery of raw materials, components, and finished goods. 

FAQs

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