Construction companies have faced serious financial challenges in the last couple of years. The parallel rise in labor costs and material costs have put pressure on profit margins. As a result, general contractors and trade contractors alike are having to focus on material cost management while keeping projects on track.
Below, we’ll explore some of the key factors driving materials costs higher and offer tips for managing these costs to ensure successful construction projects.
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What Impacts Are Material Costs Having on Businesses?
During 2022, the costs of almost all materials rose by varying levels.
No. 2 diesel fuel, particleboard and fiberboard, and plywood saw some of the most dramatic price increases, Rose Williams and Richard Wilson at Construction Executive write.
The end of 2022 saw a slight cooldown in the price of construction inputs, but as Associated General Contractors of America chief economist Ken Simonson noted in January, material costs rose faster than inflation. “Contractors are right to rank materials costs as a major concern for 2023.”
It’s unclear at this point whether the rising costs of construction inputs are impacting the number of projects available nationwide. On the one hand, industry backlog in January 2023 was higher than in January 2022, Sebastian Obando at Construction Dive reports. On the other, total construction starts for the month fell 27 percent, the publication’s senior editor Joe Bousquin writes.
As those trends shake out, one more thing for trade contractors to keep an eye on is the Build America, Buy America Act, for which the White House Office of Management and Budget has issued new guidance, Julie Strupp at Construction Dive writes. That guidance will require companies working on federally funded infrastructure projects to buy components that are mined, manufactured and produced in the United States.
There’s leeway to remove those restrictions in certain cases, but from March 23, when that guidance went into effect, industry analysts will be watching for what effects it could have on material costs.
3 Tips for Material Cost Management
When costs climb, there’s sometimes a tendency among contractors to think they can make up the difference elsewhere, says Tim Lynch, construction advisory services manager at Grant Thornton.
That’s a recipe for trouble. “This mindset can be dangerous in today’s economic environment, as the movement of future raw materials prices is unknown and could delay an important conversation with the owner on additional, unforeseen costs.”
Instead, here are three steps trade contractors can take now with new and ongoing work to manage rising materials costs.
Ensure Your Contracts Have Provisions for Material Escalation
“All construction projects need to have a material escalation clause,” attorneys Bryan Van Lenten and Danielle Meyer write. This is the mechanism that lets all parties adjust prices and payments for materials whenever those costs reach a certain figure.
Writing at Facility Executive, Roger McCarron and Andy Halik — respectively the president and CEO of Project Management Advisors Inc., and vice president and corporate interiors co-lead of Skender — advise developers and owners to budget for escalation contingencies of around 10 to 15 percent per year. The same advice would apply to trade contractors.
Stock Up If You Can
Material cost increases are especially pronounced on multi-year projects.
If a material costs $100 in Year 1 but is getting 5 percent more expensive each year, then that same material costs more than $110 in Year 3. If you have to buy 1000 units of that material in Year 1, that’s $100,000. If you have to buy 1000 units in Year 3, that’s $110,000-plus.
Here’s where the math suggests it might be a good idea to stock up on materials well in advance. As attorneys Kevin Walsh and Jonathan Pray at Brownstein Hyatt Farber Schreck write, it could be worth “securing space in warehouses or lay-down yards for storage of excess materials until they are scheduled for installation.”
In the example above, if the cost associated with storing those materials (warehouse costs, material degradation costs) is less than $10,000, then it would be prudent to stock up if you have the cash flow to do so.
Get Granular About Material Usage in Your Dailies
As materials get more and more expensive, tracking their use and potential waste becomes more and more important.
Daily reports are a great place to track this information. “Through constant monitoring, you will reduce the chances of nasty surprises when it comes time to review your budget at the end of the project,” says DP Taylor at The Ascent.
Taylor recommends going into detail in daily reports to account for things like the specific materials used for that day’s work and what quantities of those materials your team used.
Good Construction Project Data Helps You Budget for Rising Costs
Tracking material usage in your dailies is a good start, but a more complete way to get construction costs under control is with field management software.
These tools make it easier to capture the kind of granular materials data, as noted above, and they also let field and office teams work together more smoothly. This helps reduce reworking, which is costly both in terms of labor and materials — again, both of which have become more expensive.
By having all of your construction project documents easily accessible via cloud storage, and by making it easier for your field and office teams to communicate, you minimize construction project costs across the board. Labor costs, materials costs, everything becomes more manageable when you have a clear data-driven understanding of what’s going on at your worksite.
To learn more about how eSUB Cloud can help your material cost management efforts for more effective job costing, more efficient field communications and more effective construction project management, schedule a demo today.
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