Inflation in construction what you need to know

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Managing costs during construction is vital. But, when inflation hits suddenly, it can be difficult to anticipate what expenses will be. Additionally, some construction projects are planned years in advance; while it is possible to write a budget using today’s costs, there is a large chance of winding up well over budget when costs on materials increase.

Many events can lead to dramatic increases in the cost of construction supplies. Tariffs may mean that goods coming from overseas now have hefty fees associated with them. Disasters like the COVID-19 pandemic have, more recently, sent the cost of softwood lumber soaring. According to the National Association of Home Builders, the cost of an average-size new single-family home has increased by nearly $16,000 because of the pandemic.

Cost increases are felt even more sharply on larger commercial construction projects. For instance, prices on many steel products have increased by 20 to 25% in recent months. If a company was paying $750 for each short ton of rebar and now must pay $900, that can mean an increase of $200,000 on a commercial concrete job.

Cost-savings with Substitute Materials

In some cases, prices surge suddenly, making a formerly economical choice far more expensive. For instance, builders who previously planned to install steel roof panels may find themselves looking at options like thermoplastic polyolefin roofing panels instead. Make plans with multiple alternatives when costs are uncertain.

Use Indexes to Project Future Costs

No one likes to be caught by surprise by unexpected costs. While no one can predict the future with 100% accuracy, using pricing indexes can help builders and planners estimate where and how prices will move.

There are two main indexes that are used to predict inflation. The first is the Consumer Price Index. This index, compiled by the Bureau of Labor Statistics, tracks prices for a representative basket of services in a number of metro areas. It then uses those records to project future costs in areas that include food, housing transportation, medical care and other areas.

In construction, there are a pair of more niche-oriented cost indexes calculated by Engineering News-Record (ENR). ENR tracks construction industry costs in twenty cities to create a national average for their Building Cost Index and their Construction Cost Index. By tracking these costs, they can detect trends and, in many cases, give those in the construction industry an idea of what to expect in the future.

While no one can see the future, keeping an eye on where costs are going can give builders some advance warning when prices are set to increase. Build some flexibility into budgets to ensure that supply costs are covered to keep organizations sustainable and profitable.