The Cost of Inflation in Construction


The Cost of Inflation in Construction

Since 2022 inflation has been driving up costs for just about everything, from bread to gasoline to construction costs and manufacturing. At just about every level, cost increases from 10 to 200 percent have been realized, sometimes adding three to four layers onto the original cost from the producer before reaching the final end user or customer. Construction in particular has been significantly hammered by inflation in multiple areas, depending on so many different supplies, skills, trades and products to complete a project. That cost increase ultimately has to get passed on to the commercial or industrial customer who may not be so willing to take on such increases if they can be delayed until the market is more reasonable.

How Can it Be Fixed?

The primary tool used by the government involves reducing the amount of currency in the market, thereby driving up the value of the dollar and reducing inflation’s effect. While easy to say, the implementation aspect is hard. It means increasing the cost of borrowing, making new money more expensive to obtain. Other methods involve reducing the number of income earners generating new value as well. That in turn results in job loss. The list goes on with a singular, common feature – pain. Most solutions for inflation tend to cause more loss, which is why inflation is often feared as a double-damage effect on an economy.

What Can Construction Do as a Solution?

One method of fighting inflation in the construction industry involves finding lower-cost substitutes for supplies and services used. However, this is a bit of a limited option; going too low ends up lowering the quality of the goods or services provided. Since the construction company is ultimately liable for the quality of the entire project delivery, there is a practical floor to how low quality can go before a discounted price isn’t worth taking. After all, the old saying of, “You get what you pay for,” really does apply in construction.

A second method involves financing the inflation as a delay tactic. The thinking here is to let someone else’s money take the hit of inflation through borrowing and, when times are better and currency valuation rises, the financing can be paid off with a lower cost. It is, in essence, gambling that the future will provide a better exchange for the borrower than the cost of the borrowing today. In many cases, this kind of financing out of inflation doesn’t work, and the cost of the construction ends up being far more.

A third method involves maximizing local resources, labor and equipment. While some construction companies insist on bringing all of their resources, cost-sensitive operations focus on finding the resources locally wherever the project happens to be. Again, there is a bit of gambling here; if the resources are not available locally, the company will still have to bring them in to complete the job. At short notice, that could drive the cost higher than if the elements were retained to begin with well in advance.

The Most Sensitive Construction Areas Hit

Among the areas hardest hit, raw material suppliers and equipment fleet managers have been seeing the most noticeable ongoing expense impacts. Fuel for vehicles erodes operating budgets mercilessly. Where construction involves a lot of transport, fuel costs are going to remain a challenge. 

Most construction requires raw materials for assembly and end product development. As raw materials go up, the cost of the project increases notably. Materials can reach as much as 60 percent of a construction project’s overall expense, so controlling procurement is essential to protect profit margins. Yet again, the quality issue ties the project’s hands from going too cheap on supplies.

Finally, labor will continue to be a pressure during periods where hiring is difficult. Combined with inflation, deficits in skilled labor and trades can easily drive up salary and wage costs on a project, even with outsourcing and contracting versus direct hires. 

Inflation Doesn’t Last Forever, Right?

Much of the expectation in the U.S. is that the current inflation levels will be temporary. However, Japan was a good example where long-lasting economic problems hampered multiple industries for a decade or longer. There’s no rule that says inflation can only last one or two years. Instead, monetary policy tends to be the primary response that makes a difference, reducing supply of currency and increasing economic buying power. 

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