The construction industry faces a significant challenge in the form of inflation, which triggers a surge in the costs of building materials, machinery hire rates, consultation fees, and other inputs. This, in turn, can lead to project delays, increased construction expenses, and a reduction in profit margins.
Unlike some challenges, inflation impacts not only the construction business but also clients and employees. When a contractor raises prices or extends project timelines, the burden often shifts to the client.
Inflation, in simple terms, is the average increase in the prices of goods and services within an economy over time. It also results in the devaluation of the currency used in that economy. To illustrate, if a hammer cost $10 two years ago, it might cost $12 today, not due to any change in the hammer’s nature but because of inflation and currency devaluation.
Inflation causes a rise in the cost of various construction materials, impacting both ongoing projects and bids. Profit margins decrease for existing projects, and bid prices go up. Delays in material delivery add extra costs, leading to disparities between initial and final project costs.
The cost of construction materials constitutes a significant portion (35-60%) of the overall construction cost. Figure-1 illustrates a conceptual model of the factors influencing building material costs. Positive cost deviations indicate cost overruns, a common issue linked to inflation.
Inflation extends its influence to other construction inputs such as fuel, equipment, and technology. For example, the surge in fuel prices from $3.01 in 2021 to around $5/gallon in 2022 in the United States increases transportation and machinery rental costs. Manufacturers of construction equipment often raise prices due to increased raw material costs and production delays caused by inflation.
Sales teams may benefit from inflation only when project prices rise without a reduction in the number of clients. Skilled laborers, however, face challenges as their salary increase rate doesn’t align with currency devaluation or increases in essential goods’ prices. This can lead to demands for higher salaries and improved working conditions.
Supply chain partners often transfer the burden of inflation to contractors, straining long-term relationships. This can have cascading effects on cash flow management, sales volume, and production timelines in the construction industry.
Small firms operating on fixed prices may struggle during inflation, risking the loss of business as they cannot cover additional material costs. Site accessibility becomes a significant concern for small companies operating outside cities, making them vulnerable in the construction process hierarchy.
Companies employing modern construction methods can order materials well in advance, while those using traditional methods face limitations due to storage space shortages. With the need for 340,000 homes in the U.K., any construction plan delays could lead to a housing crisis. Careful planning of future bids and construction methods is crucial for contractors to prevent cost overruns due to inflation and maintain reasonable profit margins.