Controlling Cost Creep Amid Construction Industry Challenges

Most construction companies are familiar with scope creep and know how to adapt their internal strategies to minimize the effects of a project that has evolved beyond the original agreement. However,

Construction companies must evaluate each bid carefully to ensure that they can do the work properly and complete the project within budget. Otherwise, construction firms riskisk damage to their brand, bottom line and their ability to land future projects.

Retaining Talent Isn’t Going Away

While the construction industry has been dealing with labor shortages and the aging out of key positions like Senior Estimators and Project Managers, a recent study by the Home Builders Institute shows that the talent wars are going to get worse before they get better. According to the study, the construction industry needs over 2 million more workers over the next three years to keep up with demand1.

The Great Resignation — the burnout phenomena that has prompted workers across all industries to quit their jobs — has impacted the construction industry as well. Construction companies have long relied on crews remaining loyal, but top talent seeking a better work-life balance and compensation now know what markets will value their skills more and are leaving. Additionally, mandates from the Occupational Safety and Health Administration (OSHA) regarding COVID-19 requirements are also putting a strain on resources for larger organizations and talent is leaving for smaller firms with more flexibility.

Before bidding on a project, construction companies must expand their partnerships to ensure their network of top talent and subs have the ability to perform the work required — or risk becoming the source of a project’s creep. Now is also the right time to review your recruiting strategies and communicate the benefits of working for your firm instead of a competitor.

Materials Stuck in the Supply Chain

Even if you are fortunate enough to employ a solid crew vested in sticking with you, you cannot put them to work if the raw materials you need are stuck in transit. The continued breaks in the supply chain mean that construction companies are paying more for materials — or more for warehousing materials once they are received.. According to a recent article by the Associated General Contractors, material prices have jumped 21.1 percent in 12 months, out-pacing what firms can charge to complete the project (12.6 percent)2. To stay competitive, contractors are not passing on these increases to the buyers, so contractors are seeing less profit.

To help mitigate supply chain challenges, contractors must understand the entire scope of the supply chain to develop strategies for maintaining a proper inventory of materials. Experienced risk management is also needed to ensure that a firm is not taking on too much risk and financing aspects of the project beyond the scope of your agreement. Supply chain managers and construction leaders should be prepared to have clear communication with general contractors, subs and project owners on the evolving environment to set expectations and create strategies for negotiating cost increases.

The Impact of Inflation

When contractors have to pay more for materials and labor, a higher rate of inflation is the result, and it is impacting the industry in every sector. It should come as no surprise that the stock of single-family housing under construction increased 1.4 percent to a rate of 726,000 units in October of 2021, the highest since May 2007. Multi-family homes under construction rose to the highest level in more than 47 years3. Contractors must remain hyper-aware of how capital is deployed to ensure they have funding for crews and materials without taking on too much debt and impacting their ability to grow when present challenges ease. Various economic pundits see the supply chain constraints easing toward the end of 2022 and then inflation could decrease as well. Until then, you must have a solid strategy for setting your company up for success.

How DHG can help

As labor and supply chain challenges continue to expand and evolve, look to the professionals at DHG to help develop proactive strategies to keep your organization on pace. By working with consultants across the construction industry, our tax, advisory and assurance professionals understand the nuances of your business and  will provide the guidance and strategies to help achieve your goals.

 

References:

1 https://hbi.org/wp-content/uploads/HBI_Fall_Construction_Labor_Market_Report.pdf

2 https://www.agc.org/continued-increases-construction-materials-prices-starting-drive-price-construction-projects-supply

3 https://www.reuters.com/business/us-housing-starts-fall-october-building-permits-increase-2021-11-17/

ABOUT THE AUTHORS

Scott Yandle
Senior Manager
Scott.Yandle@dhg.com

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