Price Indices

Worried about construction cost inflation? These 7 strategies will put you back in control.

Ask project owners what keeps them up at night, and they’re likely to talk about construction cost inflation. They have a good reason to feel anxious.

Between August 2020 and August 2021, the cost of material inputs for nonresidential construction rose by more than 20% (Figure 1). Meanwhile, lead times for those material inputs continue to grow as the manufacturing sector struggles to keep up with demand. These factors put immense pressure on project teams expected to move fast without overspending.

AGC producer price indexes (PPIs)

Figure 1

For the latest producer price indexes, visit www.agc.org or www.bls.gov/ppi.

There’s no single reason for this rapid cost escalation and supply chain slowdown. The pandemic carries its share of blame, of course; in its first months, manufacturers had no choice but to close their doors or operate at reduced capacity, snarling the global supply chain. Then came the extreme weather that struck Texas in early 2021, forcing major plastics manufacturers to halt production while, at the same time, triggering a surge in demand for the plastic products needed to repair a state’s worth of burst lines. By March 2021, this situation in Texas pushed the cost of PVC 270% higher than the previous spring. Other unpredictable developments, like the shipping vessel that caused a very literal bottleneck in the Suez Canal, added to this confluence of issues, and the construction marketplace hasn’t recovered. 

This situation has put immense downward pressure on project delivery teams. Because of a slump in new and pre-pandemic construction projects, contractors are facing enormous industry competition. As Figure 1 shows, this competition has widened the gap between rising input costs and flat project bid prices. Project owners are benefitting from this disparity for now, but that’s not a sustainable situation. As construction opportunities gradually return to pre-pandemic levels, competition between contractors will taper, giving them room to raise their bid prices and share more of their escalating project costs with owners.

So what’s a project owner to do? Some are relying on the estimating process for a solution, but accurate estimating is only part of the answer. To minimize the impacts of construction escalation and long lead times, delivery teams need flexible, end-to-end strategies that are designed to move projects through preconstruction, construction, and operation without significant delays or surprise costs. 

To help you and your project team achieve this aim, here are seven strategies covering the culture and composition of your project team, as well as the practical tools that this team will need to successfully deliver your project under today’s circumstances.

Partnership Inflation Mitigation Strategies

Team-based strategies to minimize the impacts of construction inflation and long lead times

1. Seek out partners who understand local and global market impacts

“Know thy enemy”: that ancient wisdom holds true today. If construction price escalation and logistical bottlenecks are the “enemy” of on-time, on-budget project delivery, then understanding them is the key to success. That means closely monitoring the economic situation on both a micro level, in terms of domestic supply issues and their potential impact on your project, and on a macro or global scale. It means harnessing the triple forces of experience, expertise and analytical skill to gather the right economic data, use that data to make accurate predictions, and turn those predictions into concrete next steps and strategies.

Many project owners don’t have the resources for this level of market analysis and insight. Construction spending data is easy to find but hard to translate into meaningful insights—especially given how quickly the real-time context is shifting. For example, you might find a data point about the current cost and availability of stainless steel, but what’s the full picture? Does that data take into account the local market dynamics that are specific to your project? What does it tell you about how those costs are likely to trend over time?

A strategic partnership is the key to answering these questions, and more. Look for project partners or consulting firms who are sophisticated enough to understand market price indexes in a nuanced and contextualized way. The right partner can explain what’s happening right now, what’s likely to happen in the future, and what adjustments are necessary to control your costs and keep your project moving smoothly forward.

2. Eliminate procurement roadblocks

If you’re a project owner from the design-bid-build tradition, you may think of your procurement team as a failsafe against overspending. After all, since their mandate is to seek competitive estimates for every construction package and piece of equipment, you can’t lose, right? But by prioritizing bidding price over value, this traditional procurement model is likely to cost you more in the long run, particularly in today’s volatile market. That’s because it positions contractors and trade partners against each other in a no-win race for the bottom, resulting in bids that might look attractive but that leave you vulnerable to costly change orders down the road. 

Shifting to a lean partnership approach that prioritizes value over competition will do far more to protect your bottom line. Instead of defaulting to a competitive stance of mistrust and blame when challenges arise, a value-driven project team will work together to find solutions. When it comes to developing cost-saving strategies in the face of construction escalation and long lead times, this focus on collaboration is absolutely essential.

One of the best ways to accelerate this shift from procurement-heavy processes to lean partnerships is to partner with a construction manager. An experienced construction manager often has access to cost-saving opportunities that aren’t otherwise possible, such as buying materials in bulk from multiple suppliers across the country and sharing those savings with the project owner. These are the opportunities that could make or break your project, particularly when price escalation is such an acute issue.

3. Integrate trades early, and pay them quickly

The sooner you’re able to approve design packages and lock in prices, the better your costs. But many project owners fear that downstream changes could mean overspending in the long run, so they hesitate to approve designs early and release the funds necessary to pre-purchase materials. Better to wait for design certainty—or so the thinking often goes.

But there’s a better way. By selecting key trade partners as a first priority and integrating their specialized knowledge into the preconstruction effort, teams can build certainty into the project’s plan early in the delivery process. This strategy improves the accuracy and transparency of the estimating process and reduces the risk of costly surprises in the field once construction begins. Early design certainty also positions project owners to take full advantage of prefabrication, preassembly, modularization and offsite fabrication—another useful strategy for controlling costs and managing today’s long lead times. 

To really benefit from this strategy of early team integration, project owners should be prepared to release funds to vendors promptly, which in turn will allow those vendors to procure the necessary materials at exactly the right time, lowering the risk of paying more by paying later. Blockchain technology could help with this in the near future; by eliminating much of the back-and-forth that can bog down payment processing systems, blockchain could soon make it easier to pay vendors quickly and securely. Until then, ensuring that you have the cash on hand to support fast and on-time material purchasing will make a big difference in your overall project spending. 

4. Communicate, communicate, communicate

This cannot be overstated. If your project partner promises to eliminate all cost and scheduling risks, beware—they are either naive, or they’re lying. But if they promise that they can successfully manage those risks by communicating about them early and often, you’re onto a winner. 

Communication is vital at all levels of the project team. Your construction manager should communicate about potential roadblocks and other challenges. Your contractors should communicate about cost changes and fluctuations in material delivery dates. But one of the most important communicators on a project team is you, the owner. By modeling an open and transparent culture of communication and trust, you have the power to set the right tone from day one. 

Inflation Mitigation Tools

Tool-based strategies to minimize the impacts of construction inflation and long lead times

1. Embrace target value delivery

When you adopt the best practices described above, you gain a whole new set of lean tools that will help your project move forward without moving into the red. Target Value Delivery (TVD) is a prime example.

Part tool, part mindset, TVD is lean delivery in action. It comes with one cardinal rule: as they move through design and construction phases, delivery teams must work together to ensure that they never exceed the target cost. If the project team overspends in one area, they must collaborate to find appropriate offsets elsewhere. To do that, project teams rely on a set of conditions of satisfaction, which give them the necessary criteria to differentiate must-have from nice-to-have design elements. In that way, they’re able to make strategic trade-offs and drive down project costs without sacrificing the quality of the final product. It’s a powerful system, and it delivers powerful results. 

How can TVD help with the specific challenges of construction cost escalation and long lead times? Simple: it gives project teams the flexibility they need to overcome complex problems, rapidly and effectively. Take, for example, a design that requires 20,000 square feet of insulated metal panels. Because of a snarled supply chain, the panel manufacturer is facing a twelve-week delay on the raw materials necessary to produce those panels—and they’re levying a significant cost premium as well, putting both the project’s schedule and its target cost in jeopardy. That’s where TVD kicks in. Working with the relevant trade partners, the integrated design team returns to their drawings and finds an alternative to the metal panels—one that will cost less, arrive sooner, and, most importantly, meet the project’s conditions of satisfaction. 

Perhaps the project team could have found this solution through more traditional methods, but without the principles of TVD to guide them, it would have taken much longer—and time, as we know, is money, especially as material input costs rise almost daily. TVD enables fast, dynamic decision-making, with all team members pulling in the same direction: towards a successful, on-budget delivery. 

2. Implement commodity tracking logs

Buying equipment and materials early can help to minimize the impact of runaway construction inflation, but how early is too early? And what can project teams do to distinguish critical-path materials that should be ordered and paid for right away from those that can wait? 

To answer these questions with confidence, project teams need shared access to a centralized commodity tracking log. It’s a tool that helps teams identify on-site “need dates” for materials, and it gives teams a platform for understanding how current marketplace dynamics might impact the manufacturing and delivery of those materials. In other words, it’s an effective way to answer the all-important “what,” “when,” and “how much” questions, helping project teams speed up their decision-making and get the materials they need, exactly when they need them.

3. Consider leveraging warehouse storage

Historically, project teams have avoided strategies that require double-handling construction materials. Why pay for offsite storage when you could simply receive all construction materials directly from the manufacturer, just in time? 

In an era of supply chain predictability and stable material prices, that question made sense. Unfortunately, we all know that era is over—at least for now. And so a new question emerges: why risk exceeding your target cost and/or overrunning your schedule, when you could lock in your material orders before prices climb further and ensure that they’re on-hand exactly when you need them? 

To pull this off, you might take advantage of a bonded warehouse located close to your foregin suppliers, allowing you to defer paying duties while accumulating your necessary materials. Or you might choose a local warehouse close to your jobsite, which can serve as a convenient staging or laydown area. To find the right solution for your particular scenario, consult with a project delivery expert who understands how to run a detailed cost/benefit analysis with today’s economic data in consideration. 

What’s next for construction cost escalation?

This disruptive moment, as history suggests, is likely just that: a moment. The supply chain will likely stabilize and construction volume will rebound to pre-pandemic levels—just as it did after a sharp spike in material costs in 2008.

But other challenges will remain. Material input prices are not going to fall to what they were before, which will challenge project owners and their contractors to find cost-sharing solutions that narrow the unsustainable gap between bid prices and material costs. 

And there’s another challenge coming: a slump in recruitment means that demand for craft labor will climb faster than supply, driving wages higher and significantly impacting project budgets. Sophisticated project teams will meet this challenge by embracing modular design strategies that enable parallel offsite construction, reducing the burden of costly on-site labor and accelerating overall project delivery. 

Most of all, the future will change how owner/client relationships operate, at least as far as the most innovative and resilient construction projects go. A growing number of project owners recognize that the traditional design-bid-build delivery model—built in a different era, to meet a different set of challenges—is failing them in today’s high-speed and extremely complex marketplace. In fact, when we surveyed 150 leaders from the cell and gene therapy industry last year, we discovered that less than a third rely on design-bid-build for capital project delivery. The majority are turning towards lean and flexible models that are better suited for today’s supply chain challenges and speed-to-market pressures. 

Are you looking for an analysis of the price indices and lead times that could affect your project? Reach out to the CRB team. We’ll work with you to understand the data and minimize its impact on your supply chain.

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