How Inflation Is Impacting the Construction Industry
Construction is one of the essential industries in America due to the need for building and maintaining infrastructure. The construction industry survived the height of the COVID-19 pandemic but is now facing another obstacle – rising construction inflation costs.
Inflation is currently at its highest rate in 40 years, which means costs are rising and buying power is falling. This past year, the consumer price index rose by 7% – the highest single-year increase since 1981.
This article will discuss why the construction industry is especially vulnerable to rising costs and how construction inflation has affected new infrastructure.
Inflation is not a new phenomenon. Companies have had to account for regular construction inflation for a long time to avoid cost overrun, which occurs when an unforeseen change in a project pushes the final project cost over the original budget.
While regular inflation is manageable, the recent surge in construction inflation costs has proved to be more threatening. The lasting effects of the COVID-19 pandemic have contributed to rising costs as the economy rebounds from supply shortages and government-mandated lockdowns. So, why is construction impacted differently than some other industries?
Construction relies on imported materials like insulation, cement, steel, and wood to keep the industry running. As much as 40% of the average American home is built from imported materials.
The reopening of the economy placed pressure on the global supply chain, which has struggled to meet demand. The import of construction materials slowed, but the demand remained high. As a result, 90% of builders dealt with delays and material shortages in 2021.
COVID-19 slowed material production further when factories were forced to close to avoid spreading the virus. As long as supply is low and demand is high, the cost for building materials will remain high.
Has the supply shortage had a significant effect on construction inflation costs? In the past, material costs have gradually increased each month due to inflation. More recently, prices for construction materials have increased at a higher rate due to supply chain issues and lack of labor.
In 2020, material costs increased by 23% – the fastest price increase for construction materials since the government started recording the data. The rate at which construction inflation increased was much higher than the typical inflation rate we have seen over the past few years, due to the unique combination of labor shortages, importation issues, and closed factories.
Construction companies are getting less for their money. The change in revenue for nonresidential buildings from February 2020 to July 2021 fell by -15%. Other nonbuilding infrastructure fell by -10%. Productivity, volume growth, and total construction jobs have all decreased since the start of the pandemic.
How to Manage Inflation Risks
While it is impossible to predict the future, contractors can take steps to minimize the risk of cost overrun like evaluating current costs, assessing the possibility of a price increase, and pre-ordering certain materials. Contractors may also look at past changes in material prices to determine which materials have the most volatile cost.
Risk management comes down to extensive planning and giving yourself enough wiggle room to adjust for unpredictable obstacles. Contractors can prepare for construction inflation by adding conditions to contracts that allow them to adjust prices as markets change and determine the timeline for ordering materials.
Improve Construction Safety with Interwest Safety Supply
Construction faces a significant obstacle in inflation, but as we’ve stated, it remains one of the most essential industries. The construction industry is responsible for building the nation’s infrastructure, including the highways and roads that we use to get to work, grocery stores, and hospitals.
At Interwest Safety Supply, we have provided essential construction safety equipment and signs to the highway construction industry for over 40 years. To view our inventory and learn about our services, visit our website or contact us today!