With supply chain impacts from Covid-19, forest fires destroying resources, as well as strikes and labour shortages, prices for both construction labour and materials have soared significantly. Combining these factors with increased building activity due to the HomeBuilder grant, experts predict that this rise in costs will continue at least until late 2022 before they start levelling out. From late 2020 to mid-2021, the cost of raw materials such as timber, plastics and steel has surged to unprecedented levels. So, how does this impact overall construction costs and what can you do?
How does this impact builders?
The overall and potential cost impact will be unique to each project as it will depend on the type of contract you have, and any specific terms and conditions agreed upon. Some examples of project types/scenarios and the possible impacts of increased materials and labour costs are listed below:
- Projects that have high exposures to basic materials and lack alternative products – These projects are likely to see costs pass quickly through the supply chain. Infrastructure projects are good examples as they are typically dependent on only steel with no other alternative.
- Collaborative projects – These types of projects have some level of risk-sharing which helps cushion the cost increase from a builder perspective as your clients will be exposed to some degree of that price hike.
- Lump-sum contracts – Having this arrangement in place provides some element of protection to a builder but this can also depend on when materials were procured, and the timeline of contracts being signed and executed.
Besides increases in project costs, builders can also expect potential project delays due to longer lead-in times. Extended lead-in times add complexity to projects running on tight deadlines and will likely expose the project to more instability and inflation.
What can you do?
The reality is that this global material price volatility presents contractors with cost escalation issues. Building costs across Australia are expected to continue rising also due to the potential of material shortages, shipping cost increases and delays inf imported goods and equipment. To successfully navigate the situation, builders will need to find the right balance between strong demand from customers, spikes in building costs and interruptions to the global supply chain.
Our construction cost consultants at Accent Estimating have prepared some tips and tricks to assist with tackling this industry-wide issue:
- Builders should always consider the most appropriate contract to use. Both fixed-price or cost-plus contracts have their pros and cons. If your predicted material costs in your fixed price contract were spot on or better yet, lower than anticipated, you would have made a much larger profit than a cost-plus contract. However, if your predictions take the wrong swing, you will be reducing your overall bottom line, or possibly losing money. Understanding the market and your risk appetite is key in ensuring you get the right contract for the right project.
- Understand your contract. Builders need to ensure they understand how the ‘rise and fall’ clauses in building contracts work to account for price fluctuations.
- Contractors should actively review the price of all building materials and factor any increases into the contract or tender price.
- Builders should consider reducing the time between signing the contract and commencing work to ensure predictions and assumptions of cost remain valid and applicable throughout the project’s life.
- Short and mid-term investment priorities should be reviewed and evaluated to understand potential exposure to inflation risks.
- Procurement strategies should be aligned to market climates to ensure a competitive position of the project is maintained.
- Builders should undertake proactive communication with the supply chain to understand current limitations and the potential impact of delays and costs effects to the project.
Worried about the impacts of material cost increases?
As experts in estimating services in Melbourne, Accent Estimating is available to discuss all your construction cost concerns and create comprehensive project cost estimations for all aspects of construction projects, regardless of market conditions. Our experienced team provides reliable support to builders and contractors for accurate cost estimates to help streamline your project.
We are uniquely positioned to provide high-quality services across Australia including Sydney, Melbourne, Perth and Brisbane. Get in touch with us via our contact form or give us a call on 0413 953 869 to address all your cost concerns!