How to manage rising construction costs

You don’t need to be Sherlock Holmes to deduce that the cost of building has risen markedly in the last couple of years. There’s no need to peer through your magnifying glass for clues — it’s clear that homeowners and property developers are paying more today for the same job than they did before face masks and hand sanitiser became a toolbox standard.

But what does deserve a closer look are some of the other factors putting pressure on the cost of building materials. Only then we can consider what we can do to help ease the situation.

Market conditions

Covid-19 has certainly thrown the world economy into a spin, yet, according to a McKinsey Global Survey, the pandemic now ranks as only the eighth most serious risk to domestic economic growth. What did the survey respondents feel is the most serious risk, by a significant margin? Geopolitical instability and/or conflicts.

Thanks, Mr. Putin. Thank you very much — not.

Inflation was the next biggest concern, followed by volatile energy prices, supply chain disruptions, rising interest rates, labour shortages and increased economic volatility. Then the pandemic.

Closer to home, I see local businesses struggle to provide their usual levels of service or maintain their production targets when staff are sick or isolating.

I see construction projects miss deadlines because materials are delayed through those same production shortages. And if the product does get manufactured, shipping timelines can further hinder a smooth-running supply chain.

I also see projects held up by delays in council consent processing (which, if I’m honest, is a little surprising).

All this time — waiting, waiting, waiting — costs money.

The solution

Wouldn’t it be nice to wind back the clock and return to 2019’s construction landscape, where a fixed-price contract with a 10% contingency offered plenty of certainty? Sadly, that ain’t going to happen and it’s not all Covid’s fault.

What, then, can you do to navigate the rising cost of materials?

1. Early procurement

This is probably the most obvious defence against rising prices — buy your materials before they cost more than today. Get in early! This assumes, of course, that you know what you need and how much you need, perhaps even before you need it.

2. Purchase and store

Just like a pre-populated online shopping trolley for the supermarket, you are bound to know which construction materials you purchase all the time. You could help ease price fluctuations by buying in bulk and storing it until it’s next needed on the job.

3. Off-site payments

Instead of storing the materials yourself, why not pay for them and have the supplier hang onto them (off the construction site) until you need them? This can also be an option when the homeowner wants to ‘reserve’ an important item (think unique tiles or feature timber or fashion fittings) so as not to miss out.

4. Risk sharing

Instead of the builder shouldering all the responsibility if price increases impact the project’s bottom line, an agreement can be reached between builder and homeowner before construction starts to “split the difference” on certain materials if costs go up. This could be especially useful for items experiencing the largest recent increases, such as structural steel, structural timber, and interior products.

5. Alternative products

We all have our preferred suppliers, our favourite products. But is there a more cost-effective alternative for this particular project? It can be beneficial to consider different products and alternative supply options.

6. Contingencies

Some people now believe it’s a brave builder who gives a fixed quote for a renovation or new build. And whilst the cumulative impact of cost increases across a project can be significant, there are ways to mitigate the potential risk. Rethinking the way contingencies are traditionally calculated is one of those ways. (It’s something quantity surveyors are skilled at).

7. Calculate fluctuations

I know a builder who, when faced with the task of calculating price fluctuations during a project, would rather do just about anything else instead! There are two ways to keep track of how far from the budget costs are creeping: the first is a Formula Method. Both parties need to agree to the formula, although there’s a risk that it then uses data that is already one month old. The second is called Evidence Adjustment, where tender prices are compared immediately against actual purchase prices and the difference is the fluctuation applied. The party paying for the increase still needs to pay it, but at least it’s an accurate figure. A quantity surveyor is perfectly positioned to calculate either method for busy builders.

8. Fine-tune contracts

Do your current contracts allow for risk minimisation? Do you have clauses to help spread the responsibility of shouldering unanticipated cost increases for materials? Or has your documentation failed to keep up with the changes the pandemic and Putin have delivered us? Your contracts need to reflect and cope with, the construction landscape we find ourselves in.

Yes, prices for materials are rising. But engaging a quantity surveyor to help you proactively manage the impact of those increases is a smart solution. After all, you want the project finished — on budget — with no hassles, right?

James Cameron is a professional quantity surveyor, licensed building practitioner (carpentry, Site 3) and director of Property Values Ltd.

021 288 1311

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