Inflation and Rising Costs

Over the last 18 months, inflation and rising costs have been affecting everyone, and construction is no exception. It has become the focus of many clients, contractors and their supply chains with a global reach and effect.

It is not the first time this has happened, and it certainly won’t be the last, such is the law of supply and demand economics.

Whilst it will end eventually, the challenge now is charting a course through the stormy seas of rising prices, material shortages, contractual wranglings, site delays and ultimately, for many, not going out of business.

Businesses must ensure they do not become victims of this tide of rising costs, making sure not to agree contracts that could put future trading in jeopardy. One of the victims was the well-established and respected MIDAS Group [1]. Their downfall impacted a significant part of their regional supply chain.

There are some well written articles that have been produced on the subject of rising costs that are worth reading and show how it is affecting the industry.

What are real world experiences for Contractors and Supply Chains?

VOLOCO continue to work closely with their clients to try to mitigate and navigate these cost increases. Supplies of some raw materials are impacting universally, such as steel and timber. So, in many cases, simply rejecting supply chain quotes for further market testing is not working as no-one is immune from these worldwide cost hikes. Constantly seeking alternative prices to mitigate costs or reach budgets is causing procurement delays and a big headache for delivery teams on projects of all sizes.

Hinkley Point in Somerset announced an overspend of £3 Billion, albeit they cite COVID 19 has had a major impact too[2].

The inevitable conclusion that Contractors and supply chains are drawing is that their margins are going to be reduced and their Clients are unlikely to be sympathetic to the cost woes they are suffering, especially if they are on a fixed price contract. However, Client’s want their projects delivered on time, on quality and on budget. If you are struggling, then now may be the time to have an honest conversation with your Client about the issues you are having. There will be some Clients who are not interested, but there are many more Clients who understand and are willing to support the supply chain for the benefit of the project.

It is important to understand the contract conditions you will be operating under, identifying any clauses that may help with price increases. It seems likely that a shift to forms of contract that recognise price changes or such provisions being more commonplace is likely. The alternative is for contractors to attempt to price the risk, which may  not provide the best value for the client.

Much has been talked about Contractors and supply chains placing very early orders to secure services and supplies. No doubt this works, but VOLOCO have noticed that such early buying is choking supplies leading to the ‘toilet roll demand effect’ as we had in the Pandemic. Stockpiling goods long before they are needed is adding to acute shortages and it also leads to price increases.

The Building Industry has been here before and no doubt will be again, it’s up to all of us in the industry navigating through the inflation pressures, to try and work together, and understand each other’s financial predicaments.

VOLOCO are experienced in commercial and design aspects associated with project cost increases and mitigation measures. Feel free to contact us should you need assistance and support.

[1] Midas Group

[2] Hinkley Point

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