Just when there was light at the end of the proverbial tunnel and it looked like COVID-spurred commodity price swings were settling down, in comes inflation and a war, driving prices and uncertainties in the construction industry to unprecedented heights once again.
As reported on Nasdaq.com regarding the war in Ukraine, “The latest developments can slow down production activities and impact the export of commodities and goods. This is true as the tensions have led to supply disruption fears in an already-tight commodity market. A surge in prices of crude, natural gas, grains and metals has already been witnessed. The surging commodity prices can have a far-reaching impact on global economies like the United States and U.K., recovering from the pandemic-led slowdown and witnessing high inflation levels.”
What are construction companies supposed to do now to mitigate risks tied to sky high commodity costs? Here’s a few recommendations we’ve come across from the experts:
- Evaluate your procurement plan and contracts with suppliers. According to consulting firm McKinsey & Company, cross-company collaboration for proactive decision-making (rather than reactive firefighting) and supplier negotiation strategies can make a big impact.
- Update client contracts and proposals to include language and clauses that limit risk. For example, a price acceleration clause allows a contractor to revise a price based on the actual cost of labor and materials even after a contract is signed. A material substitution clause allows a contractor to substitute one material for another (should the original become unavailable). There are others: force majeure, material delay, mutual or bilateral material escalation clause, termination clause, risk splitting and thresshold approach, to name a few.
- Embed risk mitigation tactics into all stages of a project, from bidding and contract to design, procurement and construction (according to com). For example, consider linking bids to cost indexes (i.e., ENR Materials Cost Index or AIQS Building Cost Index). Also, state the time-period that bids are valid. According to TradeLineInc.com, avoiding delays by being prepared for shovel-ready projects and just in time purchasing may help, while other sources say to buy in bulk for several projects and store materials (if possible).
In truth, despite commodity price swings and growing labor costs, industry experts remain optimistic about the opportunities the lay ahead, with good reason when you consider the construction boom expected as a result of the Infrastructure Investment and Jobs Act. Some predict there is going to be more work than construction companies, which will increase competition for their services.
With everything else going on, one thing you don’t need to worry about is accounting and taxes. Let RBT CPAs focus on what we do best (accounting and taxes) so you can focus on what you do best (construction). Give us a call.
Please note: The information in this post should in no way be construed as legal advice. If you need assistance with anything legal-related, please contact a legal expert for direction.