It is undoubtedly very much apparent that the E&C firms have in them to ensure that they are more planned and also manage the cost volatility at different levels.
US construction firms have gone on to face significant cost pressures that are pushed in part by regular fluctuations when it comes to labor costs as well as material prices in the past few years. Cost fluctuations can make project planning more complex and, at the same time, prompt deliberations in terms of pausing or even terminating projects. Numerous firms have gone on to cancel or even change the scope of their projects because of increasing costs. 1 Cost volatility management is a top priority for firms and can even slow down construction starts if they are not managed closely. 2
The average wage rate when it comes to construction has been rising steadily. As per the BLS data, average hourly wages rose by 5.2% YoY to US$36.70 in August 2023 and almost 17% since the start of the pandemic lockdowns in March 2020. 3 Construction wages are most likely to experience upward pressure in 2024 as labor demand goes on to outpace supply. This situation may as well affect smaller firms more and be more vulnerable against their larger counterparts, which have the capacity to offer competitive salaries so as to attract talent. Increased wage rates can also have an effect on project execution along with profit margins, specifically if the elevated costs cannot be shifted to clients.
Price volatility went on to continue in 2023, irrespective of a moderate abatement in the prices of prominent raw materials within the first few months of 2023. The third quarter of 2023 has once again gone on to witness a surge in prices that have not gone back to pre-pandemic levels, thereby affecting the profitability of numerous projects. 4 As E&C firms go on to navigate cost volatility, they should also take into account a number of keys when it comes to pricing:
- The entire price of construction inputs surged 0.1% YoY in August 2023. 5 Furthermore, prices have also surged by 40.7% since February 2020. 6
- The raw material costs, such as iron and steel, lumber as well as wood products, softwood lumber, and also steel mill products, dipped in August but went on to remain well over the pre-pandemic prices. 7
- Construction machinery as well as equipment costs grew by 6% YoY in August and by more than 26% ever since February 2020. Likewise, the cost of concrete products grew by more than 8% YoY in August and by more than 32% ever since February 2020. 8
These price levels may very well surge the bid prices and project costs, thereby affecting profitability when it comes to E&C firms. As construction equipment prices rise and as tool manufacturers go on with their recovery from the recent supply chain issues, E&C companies may go on to turn to equipment as well as tool leasing and financing in 2024. Although the costs of raw materials could balance within the coming few months, machinery and equipment costs are most likely to be high as lead times go on to extend deliveries.
Apparently, in the next year, E&C companies could also consider the following functional strategies so as to help recover cost increases:
- Discussing as well as establishing fixed payment terms along with customers, as irregular or inconsistent payment terms can affect the company’s financial performance.
- Executing supply chain strategies like category management, strategic supplier contract negotiations, and strategic procurement
- Application of disciplined cost/overhead, such as operations not charged to customers management approach, like backlogs, may not be sustainable.
- Interacting with customers early in the project life cycle for decision-making and planning that’s better, thereby speeding the design choices and also helping advanced procurement when it comes to raw materials
- Tracking as well as analyzing the cost data so as to streamline operations and also pinpoint optimal project types
- Making utmost use of prefab as well as modular construction methods in order to help keep costs of material down, lessen labor costs, and also curtail project schedules, hence also cutting budget overruns.
REFERENCES
1. Associated General Contractors of America, 2023 workforce survey results – https://www.agc.org/sites/default/files/Files/Communications/2023_Workforce_Survey_National_Final.pdf, 2023.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-41
2. Emell Adolphus and Jonathan Keller, “ENR’s 2023 top 400 contractors: Uncertainty looms over market, – https://www.enr.com/articles/56502-enrs-2023-top-400-contractors-uncertainty-looms-over-market” Engineering News Record, June 5, 2023.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-42
3. Deloitte analysis of data from U.S. Bureau of Labor Statistics.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-43
4. Deloitte, Global powers of construction 2022 – https://www.deloitte.com/global/en/Industries/energy/perspectives/deloitte-global-powers-of-construction.html, July 2023.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-44
5. S. Bureau of Labor Statistics, PPI detailed report – https://www.bls.gov/ppi/detailed-report/ppi-detailed-report-july-2023.pdf, August 11, 2023.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-45
6. Ibid.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-46
7. Ibid.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-47
8. Ibid.
View in Article – https://www2.deloitte.com/us/en/insights/industry/engineering-and-construction/engineering-and-construction-industry-outlook.html#endnote-sup-48
