The Impact of Inflation on the Construction Industry: 5 Strategies for Navigating Uncertain Times

by Carmine Cimetti

Despite the prospect of growth thanks to the Infrastructure Investment and Jobs Act, the U.S. construction sector is still grappling with numerous challenges.

Persistent inflation, along with escalating labor, fuel and material costs, has led to significant budget increases, with some projects experiencing cost hikes of up to 20% overall. The rapid rise in interest rates further dampened the industry’s growth during the first half of 2023.

Acquiring the necessary construction materials and equipment results in limited inventories and, now with a significant shortage of expertise, potential project delays, contingencies, extended schedules and ultimately, added project costs. Even as the materials markets have appeared to stabilize, the cost of construction materials remains considerably elevated, upwards of 5% compared to 2022.

The construction industry’s ongoing challenges have led to tighter profit margins and an upswing in insurance costs. These challenges have been exacerbated by the record number of extreme weather events in recent years, resulting in catastrophic property losses. Builder’s risk insurance rates have surged by 30% over the past two years, with no clear indication of returning to pre-pandemic levels. Similarly, liability insurance costs for construction projects have nearly quadrupled during the same period.

For large-scale projects, particularly those in catastrophe-prone areas such as condominium construction, and construction conversion projects, insurance costs that previously accounted for approximately 2% of the total project cost recently surged to 8% or more. It has also been noted that high inflation and increased construction costs are also leaving some projects underinsured mid-build.

Supply chain disruptions and potential project delays have made some construction underwriters cautious, and some insurance carriers are now more reluctant to assume the entire risk for a project. Unlike the past, when a single insurer would underwrite a large-scale project, it now often requires multiple carriers to provide the same level of coverage.

Project managers and owners grappling with rising costs based on conceptual estimates schedules are now faced with significant delays and face an increased risk of being underinsured. While some seek to mitigate these exposures through insurance, carriers are increasingly hesitant to extend buffers for claims.

Economic forces have made it increasingly difficult to predict costs and timelines for building projects. In light of these uncertainties, contractors can no

• Integration: The software should seamlessly integrate with your other business systems, such as CRM, inventory management, and HR software.

• Customization: The software should be customizable to suit your unique business requirements.

• Cloud-based solution: A cloud-based solution allows you to access your data anywhere, anytime.

• Support and Training: Vendors should provide robust support and training, ensuring a smooth transition from QuickBooks or another basic program. Engage a Consultant longer rely solely on traditional project management approaches. To ensure the survival and success of your business in this dynamic environment, contractors should consider the following strategies: continued to page 43

Outgrowing your financial software is a sign that your construction business is flourishing. Embrace the change and equip your business with the tools it needs to continue to thrive. Engaging an integration consultant who is familiar with the construction industry and its requirements can guide you through the process, ensure data integrity, provide training, and help customize the software to your needs.

Bill Constantopoulos is a partner leading the Sage Intacct & Advisory Practice Group at Gray, Gray & Gray. He can be reached at (781) 407-0300 or powerofmore@gggllp.com.

1. Prioritize risk management. Given the prevailing market conditions, construction firms must prioritize risk management to position themselves as a bestin-class risk. Developing comprehensive risk management plans for jobsites and investing in mitigation technology can be instrumental. This includes the use of products designed to prevent common issues, such as treated wood to mitigate fire risk or environmental monitoring and alert systems to address water leakage, temperature fluctuations in addition to changes in relative humidity/moisture levels. The implementation of these measures has been viewed favorably by most carriers and can potentially lead to insurance rate discounts.