How to Prepare for Inflation and Rising Costs in the Construction Industry
Rates of inflation are increasing rapidly. There is no escape from the impacts of inflation. Construction companies are feeling the effects - not only are essential materials and skilled labor significantly more expensive, but supply chain pressures and shortages are making it harder to secure needed construction materials. The cost of concrete production, delivery to job sites, and the price for for the finished product are on the rise.
Lumber, steel, and many other materials critical for construction projects have experienced skyrocketing increases in pricing. While the root of the problem was supply chain disruptions due to the COVID-19 pandemic, new challenges continue to put pressures on pricing. At the same time, the available workforce is shrinking.
As the saying goes, knowledge is power so here are a few tips to help prepare for the effects of inflation according to World of Concrete 360.
1. Inflation rates for consumer and producer price indexes continue to rise.
The U.S. Bureau of Labor Statistics (BLS) found the inflation rate for the consumer price index (CPI) to be 9.1% for the twelve (12) months ending in June - the most significant increase seen since November 1981.
"A more compelling number along with that is the producer price index (PPI) that went up 11.3%" said Dr. Martin R. Cantor, director of the Long Island Institute for Socio-Economic Policy. That index includes concrete. "The PPI for construction materials was up 51% since January 2019, pre-pandemic".
"Compared to January 2019, the latest numbers from April 2022 from the BLS and the Federal Reserve Bank of St. Louis show that gasoline went up 72% and crude oil went up to 76%, and both are involved in the cost of diesel delivery of the component parts of concrete to where it is manufactured and sites where it is used", Cantor said. "Unfortunately, there is little that producers and purchasers can do. The delivery cost has gone up because you have a supply chain issue that impels inflation, and you have fewer drivers to deliver the product where it is needed", said Cantor.
2. Wages are increasing due to related growth of minimum wage requirements and gas prices.
Cantor noted, "there is an increase in wages due to inflation and an increase in minimum wage and gasoline prices. There is nothing the businesses can do about it except pass it on unless they become more efficient. This is why there are increased costs in construction projects to pay for concrete. Concrete producers and general contractors are at the receiving end of goods and services."
3. The Fed is likely to continue increasing interest rates.
Cantor believes that the Federal Reserve System will increase interest rates by 75% and, at the same time, take $95 billion per month out of the economy in cash. "They are decreasing liquidity in the marketplace, which makes construction costs more expensive while decreasing the number of buyers for real estate - both commercial and residential", Cantor said.
4. Stay informed and ride out the storm.
Cantor stressed that purchasers of concrete are just as stuck as producers, nor does he see any relief soon.
"We are going to be in a recession, and right now, we are in a jobless recession because we still have plenty of jobs", he said. "Once the Federal Reserve interest rates and tightening of the money supply start taking hold, which will probably be felt in September, we will see some impacts. But I do not see things changing until 2023."
Cantor's analysis was backed up by New York-based Peter Scalamandre & Sons, Inc. - in addition to being a respected general contractor, produces concrete via Seville Concrete Mix, a ready-mix concrete business providing high quality service to the New York City metro area for over forty (40) years.
"Our hands are tied right now", said company president Peter Scalamandre. "Prices for materials and fuel have gone crazy. Cement is up 25% this year, aggregates - sand and stone - are probably up 20%, and fuel is up 100%". End-users for concrete have no choice but to pay the market price.