Managing the Risk of Cost Escalation, Labour and Material Shortages

Due to ever volatile market conditions, it is more important now than ever to have a robust cost and risk management plan in place. Careful cost planning, healthy supplier relationships and cost-effective design are the cornerstone of a robust risk mitigation plan.

Current market conditions

Construction costs have spiked in recent months, driven by inflation, economic stimulus, and supply chain challenges, with the country experiencing the fourth highest labour cost of any global region. However, price escalations should peak this year and moderate in 2023.

According to Turner & Townsend, price increases were recorded across all key material and staffing indicators between Q1 2021 and Q1 2022. The sharpest increase was structural steel which increased by 39.5 per cent per tonne followed by plasterboard which increased $35.3 per sqm.

Craig Smith of N&B Melbourne said “With material costs for timber and steel experiencing general price rises of up to 40% and 50% respectively, with some specific price rises being well above those, all market participants have been struggling to keep ahead of the constant changes, which unfortunately has seen some builders and subcontractors not survive.”

How to manage the risk

Cost-planning – Careful planning at the start of the project is the best way to manage cost escalation risk. Building a robust budget requires engagement with suppliers, contractors, and consultants before committing to the project. Be sure to include a contingency sum into your project budget to cover unforeseen costs. The contingency sum should be adequate for the duration of the project, including possible time delays. Ask yourself, what is the consequence of a 3-month delay at the end of my project? How does this impact my feasibility?

Procurement – Engage with suppliers to identify potential delays when ordering materials. If material supply shortages are forecast, you may need to order in advance to secure stock. This will likely have an impact your cash flow planning. Leveraging long-term supplier relationships, buying in bulk, or seeking alternate suppliers may also be an option.

Our recommendation is to specify multiple finishes on key risk items. The first, being the preferred solution for the build, the second, a backup solution should the preferred choice not be available due to supply constraints.

Redesign or Substitution –  Where certain parts of the project work are subject to constraints (being material or labour) or inflationary risk, you may be able to mitigate the risk by redesigning the plans or substituting materials.

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