The Impact of Inflation on Construction Engineering Projects

It is all over the news! Inflation has heavily hit construction engineering projects and is keeping project owners up at night!  They have a good reason to feel anxious. It seems that inflation is conjuring a perfect storm to make life really difficult for contractors and project owners.

Construction engineering projects are one of the main sources of economic growth in the country raising revenue and job opportunities for skilled and unskilled individuals.  However, how can contractors and engineering project managers get around inflation, price increase in construction materials and equipment, diesel fuel and track transport of freight?

Most importantly, is the current economic climate making it difficult enough for construction engineering projects to move forward?  And how is inflation impacting the decisions that owners of construction engineering projects need to make to deliver quality projects on time and on budget?

Is the risk too high to start a new construction engineering project? Is there a better way?

We will discuss:

• Impact of inflation on budgeting construction engineering projects
• How inflation impacts long-term construction engineering projects. “Shall I delay that Project?”
• The risk level that inflation poses for engineering project management in the industrial construction

But first…What does inflation mean?

Inflation is typically a measure of the rate of increase in prices over a period of time – it is measuring the rate at which one’s purchasing power decreases over time. In simple terms, Inflation is the increase in the cost of living.

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”.
Ronald Reagan, 40^th American President.

As Inflation Rises, How Will This Affect Construction Engineering Projects?

It’s no secret that the rising costs and shortages of building materials in recent months, supply-chain slowdowns, and higher labour costs are rippling across construction sites, forcing construction engineering projects to factor in higher costs. After all, building materials impact 35% to 60% of overall construction cost!

The cost of constructions materials over the lifetime of a project can fluctuate dramatically due to inflation, precipitating cost increases. The capricious inflation in the prices of cement, steel reinforcement, plumbing works, etc…can bring a project to a sharp halt….that is, if you have not planned for inflation risk within your budget! For instance, just consider the implications of the increase in structural steel, up by 62% year on year.

When formulating the best price on a contract, construction engineering projects need to mitigate the risk of volatile inflation meaning that tender rates could be higher. This is especially true for large projects, complex projects and long contracts. Similarly, increased energy costs and supply chain delays also add to the mix with long delivery periods bringing collateral costs e.g. scaffolding staying up longer. To put it into perspective, on a £15m project over a 3-year period, a 1% error in the estimated annual inflation could equate to ~£450k of unallocated risk.

Furthermore, the inflation indexes can vary between those produced by the Royal Institution of Chartered Surveyors and those produced by the Office for National Statistics.  As Paul Chapman,  Academy Director for the UK Government’s Major Project Leadership Academy puts it,  “…there is more than one ‘inflation shopping’ choice to be made on an infrastructure project” (read the article in full here).

But who or what is to blame for this cost escalation and slowdown in the supply chain? The COVID pandemic? The vessel that blocked the Suez Canal in summer 2021? The war in Ukraine?

I’m a Construction Engineering Project Manager… Get Me Out of Here!!

Firstly, not only material prices but also labour costs are affected by inflation.  People-based programs can help Get You Out of Here! The current inflationary environment is forcing companies to look closely at the careers of their employees and not just their hourly wages. Companies that share knowledge and develop the skills and careers of their employees are more likely to retain their workforce and therefore staff up projects quickly with retained expertise and best practices.

Secondly, with the rise of technology, projects can now latch onto digital transformations and new capabilities to help avoid project overruns, deliver accurate estimates, manage safety issues and optimize document collaboration.

Thus, despite inflation, projects are delivered most cost-effectively.

Key Takeaways

Remember that this historic moment is just that: a moment! Neglecting the inflation rate when budgeting for construction engineering projects will lead to cost overruns. Furthermore, it is essential to consider inflation rates for the duration of the project. Ensure that the budgeting model for all your construction engineering projects incorporates an estimate of the changing behaviour of construction materials and machinery due to inflation.

It seems like this estimating process is only part of the answer. At Revolution Projects we think that construction engineering projects need lean and flexible models regarding design, timing and cost-sharing to move projects through without major supply chain challenges or unexpected costs.

Now, more than ever, construction engineering projects need to closely monitor their materials delivery schedules, fluctuating inflation rates and overall project costs. Communication and cooperation between contractors and project owners will, once again, help to reduce the damage. Let’s exchange some ideas for your next project!

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This blog is based on our own client experiences. Written by Emile Malaney. 14/04/2022.