How contractors can overcome inflation and rising construction costs

Vijay Singh | March 23, 2023

Construction companies in both developed and emerging economies are experiencing price increases of over close to 20%. Other than increasing material prices, workforce shortages are a significant driving factor which is likely to keep construction inflation at higher-than-normal levels. Managing costs, removing waste, and increasing productivity should be top priorities for organisations wanting to overcome rising costs due to construction inflation.

So what can we do to survive when construction costs are higher than ever?
As inflation continues to affect the construction industry worldwide, we must find ways to counteract it or risk losing our already slim profit margins.

Try these seven strategies to minimise the effect of construction inflation and rising costs on your organisation.

1. Prioritise value over competition

Emphasising value over competition is essential, as prioritising bidding price over value can lead to greater expenses in the long run, particularly during times of high inflation and market volatility. The conventional procurement approach sets trade partners and contractors in opposition to one another, resulting in seemingly attractive bids that are more likely to result in costly change orders. To avoid this, a lean partnership model should be adopted, prioritising the value offered by each stakeholder instead of fostering bidding competition.

2. Emphasise transparent communication

Highlighting effective communication is vital, as the objective is not to eliminate cost and scheduling risks altogether, as it is almost impractical. The aim is to control those risks by prioritising communication from the initial stage and maintaining it consistently throughout the project’s duration. Communication should occur at all levels, with contractors informing about any modifications in costs and deadlines, managers disclosing restrictions and complications, and construction executives demonstrating a clear and open communication culture to establish the standard from the outset.

3. Pay attention to market impacts

Logistical bottlenecks and price escalation are two of the biggest factors affecting your ability to deliver projects on time and on budget. Understanding why they happen is the key to success. This means monitoring inflation and domestic supply issues closely to mitigate rising costs. You need to gather economic data to make accurate predictions and determine your next best step. Watch out for events that can impact the costs and availability of labour, materials, and shipping to plan ahead instead of being surprised by rising prices.

4. Adopt target value delivery

Target value delivery (TVD) is a methodology that provides teams with greater adaptability to promptly and efficiently address issues. However, how can this assist in lessening the impact of inflation and disruptions in the supply chain?

Consider a situation where the producer of a product necessary for your project is experiencing a delay in acquiring the raw materials they require, either due to elevated costs or a snag in the supply chain. As a result of this delay, they charge you more than the agreed amount.

This scenario places your project’s timeline and target cost in jeopardy. Nevertheless, the TVD process enables your team to swiftly discover an alternative product that arrives quicker, costs less, and still maintains the quality of your project.

Releasing funds for materials at an early stage is an effective approach to tackle inflated costs. Nonetheless, several construction executives and project managers are apprehensive about overspending due to unforeseen supply alterations and, therefore, hesitate to disburse funds for pre-purchasing materials.

5. Release funds for materials early

Releasing funds to vendors early allows them to get you the right materials at the right time, resulting in a lower risk of paying more lat

Additionally, collaborating with trade partners during the pre-construction phase can instil confidence and enhance the accuracy of cost estimation. This early design certainty enables the adoption of other techniques, such as modular construction, with greater ease.

6. But not too early

We discussed how buying materials early can help minimise higher costs due to construction inflation, but it is possible to release funds too early. So how do you distinguish between what can wait and what to order and pay for immediately?

You need to determine need-by dates for on-site materials. One way to do this is by implementing a commodity tracking log that every project stakeholder can access. This can also give you insights into what might impact the delivery of your materials.

These logs can help you identify what materials you need, when you need them, and how many you need to better understand what you should order early and what can wait.

7. Implement construction management software

You can also overcome rising costs due to construction inflation by introducing construction management software to your team. This allows you to streamline processes and weed out inefficiencies to cut down on costs without affecting the build quality of your projects.

Construction management software can help you eliminate miscommunications that lead to cost overruns and delays, compare estimated vs. actual costs in real time, optimise your use of resources, and more—all of which can help you stay profitable during times of high construction inflation.

Learn how Bettamint can help your organisation succeed during times of inflated construction costs: See our construction workforce management software in action with free personalised demo.