Controlling Cost Creep amid Construction Industry Challenges

Most construction companies are familiar with scope creep and know how to adapt their internal strategies to reduce the effects of a project that has evolved beyond the original agreement. Otherwise, construction firms risk damage to their brand, bottom line, and their ability to land future projects. Construction companies must evaluate each bid carefully to assess whether they can do the work properly and complete the project within budget and time specifications.

Retaining Talent Isn't Going Away

While the construction industry has been dealing with labor shortages and the aging out of key positions like senior estimators and project managers, a recent study by the Home Builders Institute reveals that talent wars are going to get worse before they get better. According to the study, the construction industry needs over two million more workers over the next three years to keep up with demand1.

The Great Resignation—the burnout phenomenon that has prompted workers across all industries to quit their jobs—has impacted the construction industry as well. Construction companies have long relied on crews remaining loyal, but top talent, seeking a better work-life balance and compensation, know which markets value their skills more and are leaving. In addition, mandates from Occupational Safety and Health Administration (OSHA) regarding pandemic/health requirements are putting a strain on the resources of large organizations, and talent is leaving for smaller firms with more flexibility.

Now is the right time to review recruiting strategies and communicate the benefits of working at your firm versus a competitor. Before bidding on a project, construction companies should expand their partnerships so the network of top talent and subs have the ability to perform the required work—or risk becoming the source of project creep.

Materials Stuck in the Supply Chain

Even if you are fortunate enough to employ a solid crew invested in sticking with you, there will be no work if raw materials get stuck in transit. The continued breaks in the supply chain mean that construction companies are paying more for materials—or more for warehousing materials once they are received. According to a recent article by Associated General Contractors, material prices have jumped 21.1% in 12 months, out-pacing what firms can charge to complete the project (12.6%)2. Often, to remain competitive, contractors do not pass the increases on to buyers, so contractors see less profit.

To help mitigate supply chain challenges, contractors must understand the full scope of the supply chain and develop strategies for maintaining proper inventory materials. Experienced risk management is also needed to monitor whether a firm is taking on too much risk and financing aspects beyond the scope of the project agreement. Supply chain managers and construction leaders should maintain clear communication with general contractors, subs, and project owners on the evolving environment to set expectations and create strategies for negotiating cost increases.

The Impact of Inflation

When contractors have to pay more for materials and labor, a higher rate of inflation results, affecting industry at every sector. It should come as no surprise that the stock of single-family housing under construction increased 1.4% to a rate of 726,000 units in October of 2021—the highest since May 2007. Multi-family homes under construction rose to the highest level in more than 47 years3. Contractors must remain hyper aware of how capital is deployed to help maintain funding for crews and materials without incurring too much debt, negatively impacting future growth. Various economic pundits see the supply chain constraints easing toward the end of 2022 along with a potential decrease in inflation. However, according to Kiplinger’s economic forecast, gas prices will remain high (over $4 per gallon)4, decreasing the demand for some construction projects.

How FORVIS Can Help

As labor and supply chain challenges continue to expand and evolve, look to the professionals at FORVIS to help develop proactive strategies to keep your organization on pace. By working with consultants across the construction industry, our tax, advisory, and assurance professionals understand the nuances of your business and can provide the guidance and strategies to help achieve your goals.

Reach out to a professional at FORVIS or submit the Contact Us form below if you have questions.

Related FORsights