Rising Cost of Materials in Construction

In our last article, you could read about the reasons behind the construction material costs crisis. We walked you through the current situation on the market concerning the raw materials, such as timber, metal, concrete and plastics. On top of that, you could read the prognosis about future material costs up until the middle of 2022.

Today, we want to take it up a notch and advise you on how to deal with the material costs crisis. Just like every other challenge, it may not be easy at first, but once you get the hang of it, everything will start to make sense!

Impact on Your Business

The rise in prices for raw construction materials will undoubtedly have a massive impact on your company’s well-being. Which areas will then be hit the hardest? It’s not rocket science that the areas that require the use of raw materials will be in big trouble. Yep, you guessed it: construction projects!

According to some reports, it is predicted that towards the end of 2021, material supply constraints and commodity price increases, will add from 2% to 4% on total project costs. Plus, a further 1% to 3% could be added if we include logistics and transportation.

How to Deal with the Crisis?

Now, the fundamental question is what can be done to reduce cost risks on your projects caused by rising raw material prices? First of all, let’s be clear on one thing: increasing material costs are out of your control, so in this regard, there is really nothing you can do. What you can do though, is find smarter ways to manage construction materials within your own company - there are several strategies at your disposal, take a look:

• 01

  Better balance the budget for materials - you should definitely consider cutting on the expense of materials for your company. How? Here are our suggestions:

  • Embrace Prefabrication - your construction company should consider this step to reduce waste and operate with more efficacy. The use of a prefabricated component does not involve any waste since it is designed outside the construction site and by a different company. There is no excessive amount of material as everything is coordinated in advance and only what is needed is purchased and used. Also, it is far less expensive to transport some parts from a manufacturing company than to hire some workers to move raw materials to a construction site.

  • Go Lean - it turns out that by using lean construction you can reduce material waste by around 64%. Everyone is involved in the process of delivering a good-quality project while using the bare minimum of energy (including materials).

  • Plan with BIM - this technology gives you an overview of any construction project at every level in the process, which facilitates to estimate exactly how much materials you need in order to complete a project and sometimes even the exact material costs.

  • Construction Management Software - introducing construction management software to your company will make a huge difference. Its main advantage is keeping everyone informed about the progress of different projects, which encourages good communication in the completion process. Good coordination is key in reducing material waste - without it, all work must be redone and materials cannot be reused.

• 02

  Use a price escalation clause - mainly practiced in big infrastructure projects, makes it possible for contractors to pass on procurement price increases to the customer.

• 03

  Directly procure building materials - as soon as the building project deal is closed, contractors can directly procure necessary materials. This way the calculated procurement price of the moment of closing the deal will be secured.

• 04

  Use commodity futures - this is an option for those who cannot directly procure building materials or use a price escalation clause. Remember, however, that price futures may exist for some raw materials but not for the semi-finished products. Also, the amount and the duration of the future has to match.

Our Response to the Material Cost Crisis

Apart from the suggestions above, we might have a few more aces up our sleeves. First of all, try answering the following questions:

• Have you considered centralising the whole portfolio of projects to have a better view of your company’s financial situation?

• How do you track cash flow at your company?

• How do you control your minimum gross margin while estimating the project?

In order to spend less money on materials, you should consider applying several steps to your processes:

• Building up gateways of approval to control cash flow

• Taking control of material wastage with forms

• Ordering exactly the amount of material needed (not more!)

• Having a holistic view of quoted value vs ordered value

• Approval process on variations on BoQ / PO amendments

• Checking the history of spendings vs budget

Luckily for you, our cloud-based software can help you with all of the above. Thanks to our Reporting Dashboards that are built around your company’s financials, you gain an insight into a specific project and all the necessary information through detailed reports. On top of that, our software offers you a Financial Dashboard, which gives you control over budget spendings at each financial stage of the project. Sounds too good to be true? Schedule a demo with our specialists and find out yourself!

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