Contractors face the challenge of managing the effects of continuous inflation growth on their business. Australia’s recent Producer Price Indexes show a 5.2% increase in the past twelve months. Inflation erodes the purchasing power of construction businesses, leading to higher costs for materials, labour, and financing, thereby reducing profit margins.
Construction cost inflation can disrupt project budgets, timelines, and overall profitability. When the prices of materials surge, contractors must contend with higher costs for steel, lumber, concrete, and other essential supplies.
Labour shortages and increased wages further contribute to the upward pressure on construction expenses. These factors can lead to unanticipated budget overruns, delayed completion dates, and potential client dissatisfaction.
In critical times like this, contractors must explore strategies to mitigate the impact of construction inflation. Implementing the correct practices can help contractors maximise cost efficiency and ensure project profitability.
Mitigating Construction Cost Inflation
During this challenging time, construction companies should focus on three key principles in mitigating the impacts of inflation. These are supporting the supply chain, reducing costs, and maximising productivity.
Supporting the Supply Chain
Any action taken to foster strong relationships, enhance collaboration, and ensure the efficient flow of goods and services is referred to as supporting the supply chain.
It involves actively engaging with suppliers, subcontractors, manufacturers, distributors, and other stakeholders involved in procuring and delivering materials, components, and services.
Working as a team is imperative at times like this. Project managers must ensure that every member is on the same page. When they do, contractors experience an incredible support network throughout the project.
When each pillar of the supply chain is well supported, it can award invaluable benefits during high building cost inflation, preventing common issues like delays in deliverables and cost overruns.
Additionally, supporting the supply chain can lead to the following advantages:
- Stable Pricing Agreements
- Timely Deliveries
- Wide Sourcing Options
- Proactive Cost Management
- Effective, Collaborative Planning
- Competitive Edge
Even without high inflation, reducing costs is always in the best interest of construction companies. Implementing strategies to reduce expenses is at the core of ensuring profitability, especially during an inflationary period.
To reduce costs, contractors should assess if they are optimising the following areas of their operations:
Maximising productivity is a priority during inflation as it can lead to a more effective workflow and shorter project durations. Companies should always give employees the opportunity to improve both their hard and soft skills, allowing them to provide value in numerous aspects of operations.
Introducing new practices and techniques is only half the battle. Managers must also ensure that members are on the same page and can implement them in their work. Employees can become more effective in prompt deliverables and active communication when consistently given support, coaching, and training.
Best Practices to Manage Construction Inflation
With the three key ideas in mind, you can effectively implement and use the following best practices for managing the effects of inflation:
· Encouraging Communication
Increasing construction costs heightens the need for effective communication. Members should be able to freely express their concerns, give updates, and suggest solutions to perform their jobs optimally.
Suppose a subcontractor cannot accomplish the job before the target date. The sooner the subcontractor communicates this to the project manager, the more time you have to come up with solutions to prevent project delays.
Managers must foster an environment where members can freely communicate. This can help maximise productivity, reduce project duration, and empower members to bring more value to projects.
You can achieve active communication in your team by creating clear communication channels, observing regular site visits and progress meetings, and utilising technological tools to streamline communication.
· Finding Expert Partners
Keeping up with construction escalation costs and market changes is key to success during inflation. Understanding how economic situations affect supply and your existing projects can help with impactful decision-making.
However, most project owners and managers will not always have the resources or expertise to analyse economic data to develop insights on how to proceed with projects. This is why it’s important to find expert partners to help you make quicker and more informed decisions.
Expert suppliers, contractors, or consulting firms can explain the current situation, how it will affect your projects, and what you should do now to control costs and keep your project progressing smoothly.
· Using Construction Software
As operations need to be sharper and more optimal, construction software becomes even more advantageous for companies. The right software streamlines numerous aspects of construction, providing incredible value to projects.
Construction software assists in creating more accurate estimations and takeoffs, which is fundamental in reducing materials costs. It can also simplify accounting, document management, and payroll distribution, potentially decreasing administrative costs.
Besides these, construction software can provide project owners and managers with many advantages, such as improved project management, enhanced communication and collaboration, more effective resource allocation, and data-driven decision-making.
· Proactive Risk Management
Project owners and managers need to invest more resources in creating risk management plans. Being proactive in the face of challenges is an excellent way to diminish the impact of potential issues.
Inflation makes common problems have a greater impact on the project’s success. Delays can lead to significantly higher costs and diminished profits. Construction companies can prevent this by identifying risks early, developing cost containment strategies, incorporating contractual protections, and implementing contingency plans.
By taking a proactive risk management approach, you can better prepare for inflation-related challenges, make informed decisions, and mitigate construction inflation’s financial and operational impacts.
Gear Up Your Company Against the Effects of Inflation
Inflation is a reoccurring problem in construction. Even with concerningly high price surges, construction companies can ensure profitability by integrating the three key points: supporting the supply chain, reducing costs, and maximising productivity, in creating new strategies.
Enhance your operations in today’s construction cost inflation. Adopt the best industry practices. With this, you can protect and maximise your company’s bottom line and continue to provide incredible value to your clients.
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