Impact of Inflation on the Construction Sector

July 15, 2022

From supply chain shortages to increased costs in essential materials and skilled labor, construction companies are feeling the negative effects of inflation. Initially, COVID-19 took the front runner for increases in pricing and supply chain disruptions across the nation and globe, but new challenges have arisen which continue to place pressure on prices of lumber, steel, gas, and other crucial materials to construction projects.

The construction sector has felt the burden of attempting to keep up with an increase of government-led infrastructure projects.  Yet, the available workforce for these projects continues to shrink as workers retire or switch to other trade professions which offer more competitive salaries and stronger job security.

The skyrocketing costs of essential materials caused most construction companies to absorb the increase in costs and decrease in margins. As of 2021, there has been a 66% increase in the price of fabricated steel, a jump of over 500% in the price of oriented strand board (OSB) – a critical wood product essential to the stability of building structures – along with gasoline prices being up by 49.6%. Not only do contractors have to use fuel to haul materials to a construction site, but essential equipment such as bulldozers, cranes, and backhoes all require fuel, specifically diesel to operate.  Diesel prices have been rising significantly in the last few months and has been trading at a 14-year high as a result.

It is estimated that construction bid prices are to rise an additional 8.5% this year in the UK, from the previous increase of 6% in 2021. This affects the competitiveness of a contractor’s bidding process to secure new jobs and generate income. In addition to bid prices increasing, labor costs are also increasing. Wages account for over 50% of a construction project and the continue increase of wages has a substantial effect on profitability.

Contractors can attempt to calculate inflation into their bids; however, there can be damaging effects if inflation continues to rise past their estimates. Contractors operating on a fixed price contract will have significant impacts on their budgets, which could ultimately force them out of business.

How we can address inflation:

  • Review project budgets against current pricing: Contractors should consider inflation rates for materials and labor and be realistic when submitting bids. Contractors should also add contingencies into pricing models to account for future price increases.
  • Discuss risk sharing with stakeholders: Contractors should follow an approach being utilized in Latin America which creates an open flow of conversation between project owners and contractors. Discussing the potential challenges due to inflation can be done through agreements or contractual conditions for both new and existing contracts.
  • Consider supply chain challenges: Completion timelines for both new and existing projects may need to be altered due to the difficult nature of securing construction materials.
  • Reassess material procurement procedures: Reassessing materials on hand and stock piling common materials may be beneficial to budgeting in the future and combating against supply chain delays.
  • Revisit insurance policies: The increase in prices for materials and labor is reflected in the final cost of a project. The inflation of labor and materials may require additional insurance to minimize the risk of being underinsured. Policy limits can be discussed with your construction insurance broker or advisor.

If you have question or concerns regarding how inflation is affecting the construction sector, please contact the qualified attorneys at Rock Fusco & Connelly. Information provided by Michael Alberico of Assurance, A Marsh & McLennan Agency, LLC.