How Inflation is Impacting Construction

How Inflation is Impacting Construction

7 minute read

Why prices for materials and services are going up.

Many of us have probably noticed the stretch rising prices for everyday essentials is placing on your budget right now.

This jump in costs isn’t just impacting families – inflation also presents a significant challenge for the construction industry. Rising prices affect materials, hiring rates for machinery, consultation fees and more. That can mean delays, increased construction costs and lower profit margins overall.

Let’s break down how inflation works, how it’s hitting the construction industry, and what businesses can do to address the resulting problems.

How does inflation work?

‘Inflation’ means an average increase in the price of goods and services over time, and is tied in with the overall performance of the economy.

This tends to go hand in hand with a drop in the value of currency, so essentially: money is worth a little less, so things cost more. With pay rates remaining generally fixed, however, this results in budgets needing to stretch that bit further.

Inflation typically happens naturally over time – for example, a loaf of bread in 1970 costing around 20c compared to roughly $3 today – but different economic factors can cause jumps like the one we’re experiencing currently.

How is inflation affecting the construction industry?

Just like the cost of everyday items, inflation affects various construction materials.

The Australian Financial Review recently reported that total construction sector inflation will likely hit 9.5% up to June 2022, and 6% over the year to December.

These rises will impact labour markets, RBA interest rate rises and supply chains – in fact, the current shortage of materials has already seen a 3.8% increase in construction costs.

Unfortunately, small firms working on fixed prices are usually hit hardest during inflation, often losing business due to being unable to cover the extra materials costs. This encourages small firms to work on flexible prices, and results in a reluctance to take on new work because of the risks.

 

Prices of construction materials

With materials making up anywhere from 35% to 60% of overall construction costs, price rises can have a big impact on a project’s bottom line.

As inflation and these costs continue to rise over time it rolls on to both existing projects and bids; profit margins of existing works go down, and the price of bids will go up. Delays or long delivery of materials further increase the extra cost too.

 

Other everyday construction prices

Beyond materials, inflation also increases the costs of other inputs that keep a project running, like fuel, equipment and tech.

This can lead to cash flow management issues, declines in the volume of sales, drawn out production timelines and other disruptive road-blocks to how things would otherwise operate.

What can businesses do to address inflation?

While there’s not much construction businesses can do to avoid the effects of inflation on the industry, there are some steps that can be taken to prepare as well as possible.

 

  • Review your project budgets

Keep an eye on pricing and consider how further inflation might affect the final costs of ongoing projects. Remember that price rises can affect materials, labour and other operations inputs, and be realistic about the increased costs when you make the necessary adjustments to bids, or by adding extra contingencies to mitigate any uncertainties.

 

  • Consider your supply chain

On top of materials becoming more expensive, they’re also more difficult to secure. Take another look at any completion timelines for current projects and new bits and adjust accordingly.

 

  • Review your material procurement

its also worth revisiting how resilient your supply chain is to both price increases and delays – would it be of benefit to your business to stockpile certain essential materials now? Weigh budget and schedule against the extra costs of storage and security, and plan accordingly.

 

  • Revisit your insurance policies

Higher material and labour prices will be reflected in your projects’ final costs. Since losses will also lead to more expensive rebuilds, it’s a good idea to review your insurance amount to minimise any risk of being underinsured. Speak to your broker or advisor for help assessing your policy.

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