Protecting project costs amongst price volatility
Controlling costs in construction projects is always a challenge, with volatility in the price of materials often a key factor. Fluctuations in metal prices, for example, can have far-reaching impacts on project budgets, timelines and profitability. In this article, Nathaniel Watts, Finance Director at Selkent, explores some effective ways to mitigate these risks and control project costs.
The construction industry has experienced unprecedented price fluctuations in recent years. Civil engineering materials saw cost inflation peak at 30.6% in Q2 2022. While prices have stabilised in 2024, the construction industry should not forget how difficult it is to predict inflation, and the potentially serious consequences of underestimating the risk.
Higher prices, greater problems
Unexpected price rises can lead project managers to consider using different materials to those originally specified. Recent regulatory developments including the Building Safety Act, with its key components the Golden Thread and gateway systems, are designed to protect from any unintended safety issues that might arise when specifications change. But there can also be other impacts, such as increased maintenance liabilities throughout a building’s lifecycle.
The knock-on effects are huge
Cost hikes during construction can make it difficult to accurately budget and price projects, potentially leading to cost overruns or underbidding. This can have the most serious consequences, and the starkest example in recent times came in September 2024, with the collapse of ISG, the UK’s sixth largest construction firm.
ISG employed 3,000 people, contributing £2.2 billion to the UK economy and building essential infrastructure including prisons and schools. In explaining the collapse, ISG’s CEO Zoe Price highlighted cashflow problems after contracts agreed between 2018 and 2020 turned out to be unprofitable.
Uncertainty set to continue?
The ISG example highlights the precarious position of construction firms taking part in competitive bidding processes. The IMF notes that global inflation forecasts were five times less accurate in 2021-22 than they were in the previous 10 years. If top economists didn’t see the big price rises of the last few years coming, how were those tendering for construction contracts supposed to?
A time for common sense
With difficult economic conditions, where even marquee projects like HS2 are being scaled back, there is considerable pressure to go with the lowest bidder. Meanwhile, the construction industry currently has more firms in danger of going out of business than any other sector, with over 6,000 companies in critical financial distress. So, accurate, realistic pricing is more important than ever. Now would seem like a good time for a common-sense approach to pricing to be adopted across the industry.
Looking ahead: Price trends and industry outlook
While volatility remains a concern, there are some positive indicators. The Building Cost Information Service (BCIS) forecasts a 15% increase in building costs over the next five years, with tender prices expected to rise by 20% in the same period. This moderate growth suggests a potential stabilisation, but with unpredictable government plans and an industry-wide expectation for material cost increases over the next 12 months, strategising for cost fluctuations provides greater project security.
In this challenging environment, working with responsible suppliers who understand the impact of price volatility is crucial. Some suppliers, like Selkent, have implemented strategies to track metal costs closely and pass on any reductions directly to customers. This approach not only helps control costs but also builds trust and long-term partnerships within the industry. Such transparency and commitment to fair pricing practices are becoming increasingly valuable in an industry where cost predictability can make or break a project.
Controlling costs in times of material price volatility requires a multi-faceted approach. By diversifying suppliers, monitoring market trends, establishing long-term partnerships and leveraging fixed-price agreements, project managers and contractors can better navigate these challenges. As the industry continues to evolve, partnering with suppliers who offer fixed pricing and cost transparency will become increasingly valuable.
By implementing these strategies, construction professionals can better manage advantage in an ever-changing market. The key lies in proactive planning, strong partnerships and a willingness to embrace innovative approaches to cost management.
