Construction Challenges: Strategies for Builders Amid Supply Chain Disruptions and construction cost increases

 With disruptions in the supply chain caused by factors such as Covid-19, forest fires, strikes, and labor shortages, construction labor and material prices have witnessed a significant surge. This escalation is further fueled by the heightened building activity spurred by the HomeBuilder grant. Industry experts anticipate that these construction cost increases will persist until late 2022 before potentially stabilizing. The period from late 2020 to mid-2021 saw unprecedented spikes in the costs of raw materials like timber, plastics, and steel. Understanding the implications for overall construction cost increases is crucial, and builders need to consider strategic approaches to navigate this challenging landscape.

Impact on Builders:

The impact on builders will vary based on the project type, contract, and agreed-upon terms. Here are some scenarios:

Projects Dependent on Basic Materials:

Projects heavily reliant on basic materials with limited alternatives may experience rapid cost increases. Infrastructure projects, often dependent on specific materials like steel, fall into this category.

Collaborative Projects:

Collaborative projects that involve risk-sharing arrangements may provide some cushion against cost hikes, as clients share in the potential price increases.

Lump-Sum Contracts:

Builders with lump-sum contracts may find some protection, depending on when materials were procured and the timing of contract execution.

Besides cost increases, builders should also anticipate potential project delays due to extended lead times, adding complexity to projects with tight deadlines and exposing them to increased instability and inflation.

Strategies for Builders:

Navigating this global material price volatility requires careful consideration. Here are some tips for builders:

Appropriate Contract Selection:

Choose the most suitable contract type, whether fixed-price or cost-plus. Understanding market dynamics and risk tolerance is crucial in making the right choice for each project.

Understanding Contract Clauses:

Builders must comprehend how 'rise and fall' clauses in contracts operate to account for price fluctuations.

Active Review of Material Prices:

Regularly review the prices of building materials and incorporate any increases into contracts or tender prices.

Reduced Time Between Contract Signing and Commencement:

Consider reducing the time between contract signing and project commencement to ensure cost predictions remain valid.

Review of Investment Priorities:

Evaluate short and mid-term investment priorities to understand exposure to inflation risks.

Aligned Procurement Strategies:

Align procurement strategies with market conditions to maintain a competitive project position.

Proactive Communication:

Engage in proactive communication with the supply chain to grasp current limitations and anticipate potential delays and cost impacts on the project.

By adopting these strategies, builders can navigate the challenges posed by escalating construction cost increases effectively.